Internal Control Spot Checks

In addition to overseeing the annual audit, a key role of the Audit Committee is to provide oversight of the organization’s internal controls to ensure they are designed properly and operating effectively. Although the annual audit may provide insight about the internal control structure, the audit itself cannot solely be relied upon to serve this oversight function. The Audit Committee should perform its own monitoring of internal controls. One way to accomplish this is for Audit Committee members (or those tasked with that function) to perform internal control spot checks periodically.  

Designing Internal Control Spot Checks

Many times we are asked for guidance to help the Audit Committee understand its role in this area. Here are some simple steps you might consider:

Step 1: Read and understand the controls that are in place now

Management may already have some written policies and procedures to review. Update your understanding by asking staff to walk through some of the procedures.

Step 2: Identify the highest risk areas to test

This is an opportunity to look at the organization holistically. After you’ve got a good idea of how the internal controls work, think about where fraud or errors could occur. Maybe it’s in the credit card statement controls or in the grants management controls. It’s up to you to identify which areas you want to focus on. Some other examples of key areas are receipts coming into the organization, disbursements going out of the organization, payroll, and bank reconciliations. 

Step 3: Design a procedure to test the areas where risk is higher

It can be simple, such as, “We will select 2 credit card statements over the past 6 months and review each for complete documentation, accuracy and authorization.”

Step 4: Perform the procedure

Be sure to write down the steps you’ve taken, which samples you selected and your findings.

Step 5: Report your procedures and findings to the board

Basically the board will want to know what you did. That you read and understood the current internal controls, identified the riskiest areas, designed and performed procedures to test the controls, and found no concerns or identified certain issues.

Step 6: Monitor and re-check the area

If you find issues, be sure to monitor and re-check the area in the future and report back to the board.

The Audit Committee can also delegate this responsibility to others, including staff and volunteers, as long as there is no conflict of interest. For example, you would not want a staff member evaluating and testing controls in an area in which they work or are responsible for.

Spot checks do not have to be elaborate, and you can set a schedule to do checks on various areas throughout the year. Best practices suggest rotating through different control areas for better coverage.

Example Monitoring Checklist

Here are some things to consider when performing a spot check. You should tailor the checklist to your organization’s specific procedures and identified risks.


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About the author:

Doug Brownlow joined the Jacobson Jarvis team in 2022 as part of the merger with Jones and Associates. As an Audit Partner, Doug has several experience assisting clients with their financial statement audit and review needs, as well as serving as a resource on nonprofit financial topics.

Author

  • Jacobson Jarvis was founded in 1991 as the only certified public accounting firm in the Northwest to focus its nonprofit audit, tax, and consulting capacity on the not-for-profit community.