What Is an Observation Test?

So in the context of a sales audit, an observation test is kind of what it sounds like. You're observing something or more specifically the auditor's observing something. So an observation test is when an auditor visits a client's business to verify the total sales and the taxable sales that the client is conducting during a period of time. The most common example is with a restaurant. So let's say they send an auditor into a restaurant between ten o'clock in the morning and four o'clock in the afternoon. The order is sitting over there in a corner recording every sale that comes through the place and then at the end of the day the auditor is taking their notes and they're taking the POS system reports and they're making sure that all sales are being recorded properly. They're doing this on an aggregate basis. So they're looking at what total sales are, what taxable sales are but they can also do observation tests for the purposes of doing a cash to credit card ratio or establishing a frequency count or a variety of different things. So an observation test is just a method for the sales tax auditor to use and verifying the information that they're being presented in the POS system report is accurate and that it's telling a consistent story. If the observation test doesn't go well, then it really creates problems with the audit because the auditor is left to rely on the data that they've gathered with their own two eyes versus records that they're not able to verify.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law