An auditor decides that it is important and necessary to observe a client's distribution of payroll cheques on a particular audit. The client organisation is so large that the auditor cannot conveniently observe the distribution of the entire payroll. In these circumstances, which of the following is most acceptable to the auditor?
A) Observation should be made for all departments regardless of the inconvenience.
B) Observation should be limited to one or more selected departments.
C) Observation should be limited to those departments where employees are readily available.
D) Observation should be eliminated and other alternative auditing procedures should be utilised to obtain satisfaction.

Question

Quizplus · Accepted Answer

The auditor should limit observation to one or more selected departments that are representative of the entire payroll distribution. This approach is known as sampling and is an acceptable practice when the population is too large to observe entirely. Option A is not practical as it may cause an unreasonable delay in the completion of the audit. Option C may reduce the risk of error, but it may not be representative of the entire distribution. Option D is not desirable as observation provides firsthand evidence of the controls over payroll distribution.

An Auditor Decides That It Is Important and Necessary to Observe