Question

An internal auditor must weigh the cost of an engagement procedure against the persuasiveness of the evidence to be gathered. Observation is one engagement procedure that involves cost-benefit trade-offs. Which of the following statements regarding observation as an engagement technique is (are) true?

1.Observation is limited because individuals may react differently when being observed.

2.When testing financial statement balances, observation is more persuasive for the completeness assertion than it is for the existence assertion.

3.Observation is effective in providing information about how the organization's processes differ from those specified by written policies.


A. 1 only.
B. 2 only.
C. 1 and 3 only.
D. 1, 2, and 3.

Answer 1

Statements 1 and 3 regarding observation as an audit engagement technique are true, making option C (1 and 3 only) the correct answer.

Step-by-step explanation:

Regarding observation as an engagement technique, the true statements are that it is limited because individuals may alter their behavior when being observed, and it is effective in providing information about how processes differ from written policies. The statement that observation is more persuasive for the completeness assertion than the existence assertion in testing financial statement balances is incorrect. Observation provides direct evidence of the existence rather than completeness. Hence, the correct statements are the first and the third.

1. Observation is limited because individuals may react differently when being observed.
2. Observation is effective in providing information about how the organization's processes differ from those specified by written policies.

Therefore, the answer is C. 1 and 3 only.