This is an appropriate way to obtain evidence if there is no documentation of the operation of a control, like segregation of duties. Observation is also useful for physical controls, e.g., seeing that the warehouse door is locked, or that blank checks are safeguarded. Generally, evidence we obtain directly, such as through observation, provides more assurance than that obtained indirectly or by inference, such as through inquiry. We need to consider, however, that the control we observe might not be performed in the same manner when we are not present.
Assigning different people the responsibilities of authorizing transactions, recording transactions and maintaining custody of assets is intended to reduce the opportunities to allow any person to be in a position to both perpetrate and conceal errors or fraud in the normal course of the person's duties. It is part of the foundation of internal controls to achieve the validity and restricted access information processing objectives at both the control environment and control activities component levels. Segregation of duties should be enabled by the information system as well as manual controls to restrict access to physical assets to ensure the separation of role s and responsibilities throughout the organization.
Observation can provide audit evidence about the performance of a process or procedure, but the evidence is limited to the point in time at which the observation takes place and also is limited by the fact that the act of being observed may affect how the process or procedure is performed.