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ObservationObservation is a form of audit evidence.
Observation consists of looking at a process or procedure being performed by others. Examples include observation of the counting of inventories by the entity's personnel and observation of the performance of control activities. Observation is limited in the evidence it provides because client personnel may act differently when the auditor is not observing them.
People often confuse the technical definition of observation with the common usage of the word. The technical definition of observation deals with looking at a process or procedure being performed by others, rather than merely observing someone counting inventory.