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CMA Intermediate · Corporate Accounting and Auditing · Report on Internal Financial Control over Financial Reporting

Which of the following is an example of 'observation' as a test of controls?

Watching warehouse staff count stock against the count instructions is observation, because the auditor looks at a control being performed by others. Examining signed documents is inspection, recalculating depreciation is recomputation, and debtor confirmations are external confirmation procedures.

  1. AExamining signed goods received notes for authorisation
  2. BWatching warehouse staff count stock against the count instructions during a physical verificationCorrect
  3. CRecalculating depreciation on fixed assets
  4. DSending confirmation requests to debtors

Explanation

Observation involves looking at a process or procedure being performed by others, such as stock counting. Examining signed notes is inspection, recalculating is re-performance or recomputation, and debtor confirmations are external confirmation.

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