What is an Inventory Observation?

An inventory observation is the oversight of a client's inventory counting process by an outside auditor. This oversight work includes a number of tasks, including the following:

Verifying that all inventory was counted
Physically inspecting inventory items. This is an examination of their condition, to see if any items have been damaged or are obsolete. This could be grounds for creating a larger reserve for obsolete inventory.
Testing a sample of the counts made by client employees
Reviewing the client's counting policies and procedures
Reviewing the extended cost calculations made by employees