Page 186 - COSO Guidance

Observation and inspection

Observation and inspection, another risk assessment procedure, traditionally has encompassed the
following types of procedures:

 Observing entity activities and operations
 Inspecting documents, such as internal control manuals or other documentation evidencing the
design and implementation of controls
 Reading reports by management, those charged with governance, and internal audit
 Visiting the entity’s premises and plant facilities
 Performing walk-throughs of transactions relevant to financial reporting; many larger CPA firms state
that walk-through should be done by managers or partners (experienced auditors who should be able
to understand the transaction-processing systems and recognize deficiencies in internal control)

Some leaders in the profession express concern that if personnel know they are being observed that they
might tend to follow internal controls solely during the period of observation.

IT provides numerous aids to assist the auditor in observation. IT systems typically produce activity and
other reports (such as unsuccessful attempts to access restricted data) that the auditor can review.

Knowledge check

3. The use of statistical models to quantify expectations and incorporate risk and precision is known
as what?

a. Trend analysis.
b. Ratio analysis.
c. Regression analysis.
d. Reasonableness testing.

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