Audits of States, Local Governments, and Non-Profit Organizations
AGENCY: Office
of Management and Budget
ACTION: Final
Revision of OMB Circular No. A-133, Final Rescission of OMB Circular
No. A-128, and Notice of Document Availability of the Provisional Circular
A-133 Compliance Supplement.
SUMMARY: This
revision of Office of Management and Budget (OMB) Circular No. A-133,
re-titled "Audits of States, Local Governments, and Non-Profit
Organizations," establishes uniform audit requirements for non-Federal
entities that administer Federal awards and implements the Single Audit
Act Amendments of 1996, which were signed into law on July 5, 1996
(Public Law 104-156). OMB Circular No. A-128, "Audits of States
and Local Governments," issued in 1985, is rescinded, as a result
of the consolidation of audit requirements under Circular A-133.
One of the more
significant revisions is that the threshold for when an entity is required
to have an audit is raised from $25,000 to $300,000. This will significantly
reduce audit costs for many small entities. Other significant changes
are: a report submission due date which is shortened from 13 to nine
months and a report submission process that includes a data collection
form and streamlined filing requirements (§___.320);
a new risk-based approach for major program determination (§___.520);
and, additional guidance for program-specific audits (§___.235),
audit findings (§___.510), and audit findings
follow-up (§___.315).
This Notice also
offers interested parties an opportunity to comment on the provisional "Circular
A-133 Compliance Supplement," provided as Appendix B to Circular
A-133. However, due to its length, the provisional
"Circular A-133 Compliance Supplement" is not included in this
Notice. See "ADDRESSES" for information about how to obtain
a copy.
DATES: The
revised Circular is effective [30 days after publication]. Federal
agencies shall adopt the standards set forth in this revised Circular
in codified regulations not later than [insert 60 days after publication
of this revised Circular in the Federal Register].
The standards set
forth in §___.400, which apply directly to Federal
agencies, shall apply to audits of fiscal years beginning after June
30, 1996, except as otherwise specified in §___.400(a).
The standards set forth in this Circular which Federal agencies shall
apply to non-Federal entities shall apply to audits of fiscal years
beginning after June 30, 1996, with the exception that §___.305(b) applies
to audits of fiscal years beginning after June 30, 1998. The requirements
of Circular A-128, although the Circular is rescinded, and the 1990
version of Circular A-133 continue to apply for audits of fiscal years
beginning on or before June 30, 1996.
All comments on
the provisional "Circular A-133 Compliance Supplement" should
be in writing, and must be received by November 30, 1997. Late comments
will be considered to the extent practicable.
ADDRESSES: A
copy of the Circular may be obtained from the OMB fax information line,
202-395-9068, document number 1133; OMB home page on the Internet which
is currently located at /OMB, under the captions "OMB Documents,"
and then "Grants Management;" or by writing or calling the
Office of Administration, Publications Office, room 2200, New Executive
Office Building, Washington, DC 20503, telephone (202) 395-7332. A single
copy of the provisional "Circular A-133 Compliance Supplement"
may be obtained from EOP Publications, Office of Administration, 2200
NEOB, Washington, DC 20503 (telephone 202-395-7332). The provisional
"Circular A-133 Compliance Supplement"
is also available from the OMB home page.
Comments on the
provisional "Circular A-133 Compliance Supplement" should
be mailed to the Office of Management and Budget, Office of Federal
Financial Management, Financial Standards and Reporting Branch, Room
6025, New Executive Office Building, Washington, DC 20503. Where possible,
comments should reference the applicable page numbers. When comments
of five pages or less are sent in by facsimile (fax), they should be
faxed to (202) 395-4915. Electronic mail comments may be submitted
via the Internet to RAMSEY_T@A1.EOP.GOV. Please include the full body
of electronic mail comments in the text of the message and not as an
attachment. Please include the name, title, organization, postal address,
and E-mail address in the text of the message.
To facilitate conversion
of the comments into a computer format for analysis, it would be helpful
if respondents would send a copy of comments on either a 3.5 or 5.25
inch diskette in either WordPerfect 5.1 or 6.0, WordPerfect for Windows,
or ASCII format. When a diskette cannot be provided, it would be helpful
if the comments were printed in pica or an equivalent 10 characters
per inch type on white paper so the document can be easily scanned
into a computer format.
FOR FURTHER
INFORMATION CONTACT: Recipients should contact their cognizant
or oversight agency for audit, or Federal awarding agency, as may
be appropriate in the circumstances. Subrecipients should contact
their pass-through entity. Federal agencies should contact Sheila
O. Conley, Office of Management and Budget, Office of Federal Financial
Management, Financial Standards and Reporting Branch, telephone (202)
395-3993.
SUPPLEMENTARY
INFORMATION:
A. Background
The Office of Management
and Budget (OMB) received approximately 80 letters providing approximately
600 individual comments in response to its Federal Register proposal
of November 5, 1996 (61 FR
57232-57249). Letters came from Federal agencies (including Offices
of Inspectors General), State governments (including State auditors),
certified public accountants (CPAs), internal auditors, non-profit
organizations (including colleges and universities), professional organizations,
and others. All comments were considered in developing this final revision.
The November 5,
1996, Federal Register notice, requested public comment on the
proposed revision and retitling of Circular A-133, "Audits of
States, Local Governments, and Non-Profit Organizations," and
proposed rescission of Circular A-128, "Audits of States and Local
Governments." Section B presents a summary of the major public
comments grouped by subject and a response to each comment. Other technical
amendments were made to conform to professional auditing standards
and to increase clarity and readability.
The November 5,
1996, Federal Register notice also requested comment on two
proposed information collection requirements contained in the proposed
revision to Circular A-133. A summary of the comments received relating
to the proposed information collection requirements and response to
each comment is published in a companion Notice in this Part in today's Federal
Register.
Interested parties
may wish to refer to this Notice for a detailed discussion of the following
information collection matters: estimates of reporting burden; necessity
of the data collection form; data collection form duplicates other
reported information; data elements in the data collection form; suggested
additional data elements for inclusion in the form; who should sign
the data collection form for the auditee; level of form's specificity
provided in the Circular and supplemental forms; data collection form
sent only to the Federal clearinghouse; applicability of Freedom of
Information Act and other Federal laws; report copies; report submission
and distribution; Federal clearinghouse responsibilities; requirement
for the auditor to prepare and sign the data collection form; increased
costs for auditors to prepare and sign form; retention of audit workpapers;
schedule of expenditures of Federal awards; summary schedule of prior
audit findings; summary of the auditor's results; auditor's schedule
of findings and questioned costs; report due date; and effective date
for the data collection form requirement.
Readers of this
Notice should especially note the discussion of the requirement for
the auditor to prepare and sign the data collection form due to its
impact on the text of the Circular. Other matters addressed in the
accompanying Notice also resulted in revisions to the text of the Circular
but are not repeated in this Notice.
B. Public
Comments and Responses
Overall
Reaction to the Proposed Revision to Circular A-133
Comment:
Most commenters overwhelmingly supported the proposed revisions and
believe that the revisions will greatly increase the efficiency and
effectiveness of the single audit process. Several State auditors commented
that the proposed revision to Circular A-133 was similar to what they
expected, particularly in light of the changes included in the Single
Audit Act Amendments of 1996 (1996 Amendments), which were signed into
law on July 5, 1996 (Public Law 104-156). Many commenters were pleased
with some of the most significant changes, such as: (a) the increased
threshold that triggers an audit requirement from $25,000 to $300,000;
(b) the risk-based approach to determining major programs; (c) the
uniformity of audit requirements for States, local governments, and
non-profit organizations; and, (d) the removal of the current requirement
to report virtually all audit findings and questioned costs. A few
commenters requested that the audit threshold remain at $25,000. Although
most commenters supported these significant revisions, many commenters
expressed concern about other proposals included in the proposed revision,
on which OMB specifically requested public comment, such as the audit
coverage for the allowability of charges to cost pools, and whether
the auditor should prepare and sign the data collection form.
Response:
The most significant provisions included in the proposed revision to
Circular A-133 that commenters strongly supported are included in the
final revision to Circular A-133. Several proposals, such as the audit
threshold of $300,000, are based in the 1996 Amendments and, therefore,
are adopted in the final Circular. Each of the proposals on which OMB
requested public comment are addressed in the following sections or
accompanying Notice. Some of the comments resulted in changes to the
final revision.
Consolidation
of Circular A-128 into Circular A-133
Comment:
All but one commenter strongly supported the proposal to consolidate
Circular A-128 into Circular A-133, and rescind Circular A-128. Reasons
cited include less confusion for auditees and auditors, uniformity
of audit requirements for non-Federal entities that administer Federal
awards, and consistency with concepts included in the 1996 Amendments.
One Federal agency that oversees Indian tribal governments expressed
concern about rescinding Circular A-128 because many Indian tribal
governments have not yet submitted audit reports required by Circular
A-128 for audits of fiscal years beginning on or before June 30, 1996.
Response:
Pursuant to the 1996 Amendments, which establish uniform audit requirements
for non-Federal entities that administer Federal awards, the final
revision to Circular A-133 extends its coverage to include State and
local governments. In response to the Federal agency's concern about
Indian tribal governments, it should be noted that States, including
Indian tribal governments for purposes of the Circular, and local governments
are subject to the requirements of Circular A-128, issued April 12,
1985, for audits of fiscal years beginning on or before June 30, 1996.
Sanctions are provided in Circular A-128 and are available for use
by Federal agencies, as considered necessary, in instances of continued
inability or unwillingness to comply with the requirements of Circular
A-128. The rescission of Circular A-128 applies to audits of State
and local governments for fiscal years beginning after June 30, 1996.
Comment:
In light of the proposed rescission of Circular A-128, several commenters
requested that the title of Circular A-133 be expanded to also include
Indian tribal governments.
Response:
No change was made as a result of these comments. For single audit
purposes, Indian tribal governments are included under the definition
of "State" in Circular A-133 based on the statutory definition
of
"State" in the Single Audit Act of 1984 and the 1996 Amendments.
Effective
Date
Comment:
Several Federal agencies questioned which audit requirements are effective
prior to codification of the revised Circular in a Federal agency's
regulations. Paragraph ten of the proposed revision states that the
standards set forth in the revised Circular shall be adopted by Federal
agencies in codified regulations not later than six months after publication "in
the Federal Register, so that they apply to audits of fiscal
years beginning after June 30, 1996 ... In the interim period, until
the standards in this Circular are adopted and become applicable, the
audit provisions of Circular A-128, issued April 12, 1985, and Circular
A-133, issued April 22, 1996, shall continue in effect." Several
Federal agencies also requested clarification about how the requirements
of Circular A-133 should be codified in Federal agency regulations.
Response:
The sentence regarding the interim period was removed from the revised
Circular. The 1996 Amendments (31 U.S.C. 7505(a)) require that "each
Federal agency shall promulgate such amendments to its regulations
as may be necessary to conform such regulations to the requirements
of this chapter and of such guidance [provided by the Director of OMB
to implement the 1996 Amendments]." Federal agencies shall adopt
the provisions of the revised Circular not later than 60 days after
publication of the revised Circular in the Federal Register.
OMB is coordinating an effort to facilitate Federal agency compliance
with this adoption requirement.
Limited
Scope Audits for Subrecipients With Federal Awards Expended of Less
Than $300,000 Annually
Comment:
Many commenters requested that further guidance be provided in the
Circular to assist in determining what types of procedures would qualify
as "limited scope audits to monitor subrecipients."
Response:
The 1996 Amendments (31 U.S.C. 7505(b)(1)(A)(ii)) prohibit a non-Federal
entity from charging to a Federal award the cost of a Circular A-133
audit when the amount of Federal awards expended is less than $300,000
per year, except that OMB may allow the cost of limited scope audits
to monitor subrecipients. A sentence was added to the final revision
of Circular A-133 (§___.230(b)(2)) which defines limited scope
audits to include only agreed-upon procedures engagements conducted
in accordance with either the American Institute of Certified Public
Accountants' (AICPA) generally accepted auditing standards (GAAS) or
attestation standards, that are paid for and arranged by a pass-through
entity and only address one or more of the following types of compliance
requirements: activities allowed or unallowed; allowable costs/cost
principles; eligibility; matching, level of effort, earmarking; and,
reporting.
For subrecipients
that expend less than $300,000 in Federal awards annually, the cost
of any audits or attestation engagements, other than limited scope
audits described in the previous paragraph, are not allowable costs
and, therefore, cannot be charged to any Federal award. This provision
would prohibit the cost of a financial statement audit conducted in
accordance with GAAS or generally accepted government auditing standards
(GAGAS) issued by the Comptroller General of the United States from
being charged (by either a pass-through entity or subrecipient) to
Federal awards for a subrecipient that expends less than $300,000 in
Federal awards annually.
Subrecipient
Monitoring
Comment:
One State agency recommended that pass-through entities no longer be
required to monitor subrecipients expending less than $300,000 in Federal
awards. Some pass-through entities expressed concern that they might
be expected to perform audit procedures for each of their subrecipients
not covered by Circular A-133. Some subrecipients stated concern that
the requirement to monitor subrecipients expending under $300,000 in
Federal awards could result in a return to grant-by-grant auditing
of such entities.
Response:
The 1996 Amendments (31 U.S.C. 7502(f)(2)(B)) require pass-through
entities to monitor a subrecipient's use of Federal awards through
site visits, limited scope audits, or other means. In light of the
increased threshold that triggers an audit requirement under the Circular
to $300,000 or more in Federal awards expended per year, pass-through
entities will need to make appropriate changes in their agreements
with subrecipients to reflect that Circular A-133 audits will no longer
be required for non-Federal entities with total Federal awards expended
of less than $300,000 annually.
Since pass-through
entities are held accountable for Federal awards administered by their
subrecipients, they will also need to review their overall subrecipient
monitoring process, and decide what, if any, additional monitoring
procedures may be necessary to ensure subrecipient compliance. Monitoring
procedures, such as on-site visits, reviews of documentation supporting
requests for reimbursement, and limited scope audits (e.g., agreed-upon
procedures performed over eligibility determinations made by subrecipients),
can be more targeted and less costly than a full Circular A-133 audit.
OMB expects pass-through entities to consider various risk factors
in developing subrecipient monitoring procedures, such as the relative
size and complexity of the Federal awards administered by subrecipients,
prior experience with each subrecipient, and the cost-effectiveness
of various monitoring procedures.
For example, if
a pass-through entity provides a large percentage of the only Federal
award it expends to 10 subrecipients that each expend less than $300,000
in Federal awards annually, then the pass-through entity should carefully
consider the most cost-effective method of monitoring these Federal
awards. Perhaps the majority of this Federal award is provided to two
subrecipients. The pass-through entity might consider conducting site
visits at these two subrecipients and simply reviewing the documentation
supporting requests for reimbursement from the other eight subrecipients.
Conversely, if a small percentage of a Federal award is provided to
subrecipients that each expend less than $300,000 in Federal awards,
the risk to the pass-through entity is most likely low and, therefore,
the monitoring procedures could be minimal.
OMB believes that
this approach to designing subrecipient monitoring procedures should
result in cost-effective monitoring and minimize the return to grant-by-grant
auditing. This is a matter of particular importance to OMB and small
recipients of Federal awards. Over the next few years, OMB and Federal
agencies will review implementation of subrecipient monitoring procedures
by pass-through entities to determine whether additional guidance or
subsequent revisions to the Circular is warranted in this area.
Audit Coverage
for the Allowability of Charges to Cost Pools
Comment:
Several Federal auditors and Federal agencies supported the proposed
treatment of costs charged to cost pools used to support an indirect
cost rate or allocated through a State/local-wide central service cost
allocation plan (CAP). Most State auditors, State agencies, CPAs, and
college and university commenters strongly opposed the proposal stating
that the proposed revision appears to: (1) elevate coverage of indirect
costs and CAPs to major program status, which would exceed the requirements
of the 1996 Amendments; (2) require coverage regardless of materiality;
(3) violate the risk-based approach to determining major programs;
and, (4) single out indirect costs for extensive coverage beyond other
elements of cost charged to Federal awards. Some commenters noted logistical
difficulties that may result from the timing differences between when
costs are charged to pools used to support an indirect cost rate or
CAP; when the plans are submitted and negotiated; and when indirect
costs are actually charged to Federal awards. Several college and university
commenters opposed any additional requirements in this area because
they believe that Federal cost negotiators perform some sort of audit
of costs charged to cost pools under Circular A-21, "Cost Principles
for Educational Institutions." Most commenters requested that
additional guidance, either in the Circular or the compliance supplement,
be provided to assist auditors in this area.
Response:
The proposed revision included certain phrases that were intended to
clarify the auditor's responsibility for testing and reporting on the
allowability of costs charged to cost pools: (1) used to support an
indirect cost rate, or (2) allocated through a State/local-wide central
service CAP (as fully described in Appendix C of Circular A-87, "Cost
Principles for State, Local and Indian Tribal Governments,"
issued May 4, 1995 (60 FR 26484)). The suggested language was included
in the proposed revision to address the timing of when costs charged
to cost pools used to support an indirect cost rate or allocated through
a CAP should be audited. This area presents unique timing considerations
due to the manner in which indirect cost rates and CAPs are developed.
Indirect cost rates are usually based on costs incurred in a base period
and applied prospectively. Costs allocated through a CAP are typically
based on the actual costs incurred in the current year and also previous
years.
OMB did not intend
for costs charged to cost pools used to support an indirect cost rate
or allocated through a CAP to be audited every year as a major program
regardless of materiality. As a result of the comments received, the
suggested language relating to the treatment of indirect costs and
costs allocated through a CAP was removed from §___.500,
§___.505, and §___.510 of the final revision of Circular A-133.
Although specific
mention of indirect costs and costs allocated through a CAP was removed
from the Circular, this removal does not diminish the auditor's responsibility
for such costs. Accordingly, when indirect costs or allocated costs
have a direct and material effect on any major program, the auditor
is responsible for determining the propriety of costs charged to cost
pools that are used to calculate an indirect cost rate or allocated
through a CAP in the year in which the charges affect a major program.
Because it may not be practical to perform such tests retroactively
(e.g., when there is a change in auditors), OMB encourages the auditor
to perform tests of costs charged to cost pools during the period when
the actual costs were incurred or during the period when the proposal
or plan is finalized, rather than waiting until the period when the
rate was applied or in which the costs were allocated. Further guidance
relating to audit coverage of indirect costs is provided in the provisional "Circular
A-133 Compliance Supplement."
To illustrate the
unique timing considerations relating to indirect costs and the impact
on the audit process, assume that the actual costs charged to cost
pools for 1997 form the basis for the indirect cost proposal to be
submitted in 1998, and the final negotiated indirect cost rate that
will be applied in 1999. Also, assume that indirect costs charged to
a major program in 1999 are material. In this situation, the auditor
is strongly encouraged to test actual costs charged to cost pools during
1997 as part of the 1997 audit, since 1997 is the base year, or as
part of the 1998 audit, since 1998 is the year when the proposal will
be finalized, submitted, and negotiated. If the auditor tests the actual
costs charged to the cost pools as part of either the 1997 or 1998
audit (or can appropriately rely on the work performed by other auditors
in these years), then the auditor's responsibility in 1999 will relate
primarily to determining whether the appropriate rate was applied in
1999. However, if no prior audit work was done relating to the actual
costs charged to cost pools used to support the rate used to charge
a major program in 1999, then the auditor conducting the 1999 audit
would be expected to test such costs, in addition to determining whether
the appropriate rate was applied in 1999.
This area is of
particular concern to OMB and Federal cost negotiators. Contrary to
the views expressed by several commenters, Federal cost negotiators
do not typically audit costs charged to cost pools used to support
an indirect cost rate or allocated through a CAP. In the next few years,
OMB and Federal agencies will monitor the coverage of indirect costs
under Circular A-133 audits to determine whether additional guidance
or subsequent revisions to the Circular are warranted. OMB may also
consider if the coverage of indirect costs should be addressed separately
from Circular A-133 audits in the future, possibly as separate engagements
using the AICPA's attestation standards.
Audit Cognizance
Comment:
One Federal auditor requested that OMB delay the effective date for
the new method of determining the cognizant agency for audit for State
and local governments because guidance relating to changing from one
cognizant agency to another has not yet been provided. Another Federal
auditor requested that the Circular name that agency as the cognizant
agency for audit for every State based on the large amount of Federal
funding provided by that Federal agency to States. Another Federal
auditor opposed having one Federal agency responsible for audit cognizance
for all States. Several State auditors and State agencies requested
that they be permitted to retain their current cognizant agency for
audit, and that they have input into future changes, if any, in audit
cognizance.
Response:
The primary reason for revising the approach to determining audit cognizance
is to provide a straightforward method that can be used by the majority
of auditees without the involvement of OMB. The previous policy whereby
OMB was responsible for assigning audit cognizance did not work well,
particularly for non-profit organizations. The proposed revision includes
an approach whereby the auditee could readily determine its cognizant
or oversight agency for audit based on which Federal agency provided
the predominance of funding. However, several commenters noted that
the proposal may have unintended consequences on some State and local
governments that, under Circular A-128, were previously assigned cognizant
agencies for audit by OMB in 1986 and have developed strong working
relationships with their cognizant agencies.
In response to the
comments received, the Circular was modified to reflect that current
cognizant agency assignments shall continue in effect for States (including
Indian tribal governments) and local governments that expend more than
$25 million a year in Federal awards until fiscal years beginning after
June 30, 2000. Thereafter, the method prescribed in §___.400(a)
shall be used by State and local governments for determining audit
cognizance. This delay should provide sufficient time to smoothly transition
from one Federal agency to another, or to request that OMB designate
a specific cognizant agency for audit assignment, as circumstances
warrant. However, for State and local governments that expend more
than $25 million a year in Federal awards but do not have a currently
assigned cognizant agency for audit, §___.400(a) shall be used
to determine audit cognizance upon the effective date of the Circular.
OMB expects to designate
specific audit cognizance assignments for only a limited number of
entities. However, if a change in audit cognizance is desired, then
auditees are expected to first work through their Federal awarding
agencies to obtain a reassignment. If the request cannot be adequately
resolved among the Federal agencies, then the Federal agencies may
contact OMB to resolve the matter. In response to several commenters,
this process will permit auditees to be involved in future changes
in audit cognizance.
The proposal indicates
that, in instances in which OMB makes a specific cognizant agency for
audit assignment, the assignment would be published in the Federal
Register. OMB reconsidered the necessity of performing this procedure
and removed this provision from the final Circular. However, when specific
assignments are made by OMB, OMB will inform the parties involved (e.g.,
the auditee and the Federal agencies involved) of the assignment.
Comment:
Several Federal agencies and numerous college and university commenters
expressed strong concern that the cognizant agency determination included
in Circular A-133 is not consistent with Circular A-21,
"Cost Principles for Educational Institutions," and could result
in an entity having one cognizant agency for audit purposes and another
for indirect cost negotiation.
Response:
No change was made as a result of these comments. Under Circular A-21,
cost negotiation cognizance for the majority of colleges and universities
is currently assigned to either the Department of Health and Human
Services (HHS) or the Office of Naval Research (ONR) in the Department
of Defense. OMB believes that it is unnecessary to require these two
Federal agencies to also assume responsibility for audit cognizance
for each of the colleges and universities for which they serve as cost
negotiation cognizance. This additional responsibility for audit cognizance
may impede HHS' or ONR's ability to fulfill their cost negotiation
duties. Cost negotiation cognizance requires a high degree of specialized
skills. However, any Federal agency is capable of performing audit
cognizance duties. The responsibilities for audit cognizance (§___.400(a))
and indirect cost negotiation are different and, therefore, the same
Federal agency need not be cognizant for both. While OMB expects that
the Federal agency responsible for audit cognizance and cost negotiation
cognizance will be the same in many instances, when they are different,
the Federal agencies involved will be expected to coordinate their
efforts to avoid duplication and disruption to the auditee.
Comment:
Clarification was requested by many commenters on how to determine
the predominant amount of direct funding for purposes of determining
the cognizant agency for audit. One Federal auditor questioned whether
loans and loan guarantees should be considered in the calculation.
Several college and university commenters expressed concern that the
term "direct funding" could be misinterpreted to mean the
amount of "awards," rather than "expenditures."
Response:
No change was made as a result of these comments. The Circular states
that the predominant amount of direct funding shall be based upon direct "Federal
awards expended" in the recipient's fiscal year.
§___.205 of the final revision addresses the basis for determining
the amount of Federal awards expended and specifically discusses the
treatment of loans and loan guarantees. §___.205 shall also be followed
for purposes of determining the cognizant agency for audit.
Required
Level of Internal Control Testing
Comment:
Four State auditors and one CPA commenter opposed the proposed requirement
for the auditor to plan the testing of internal control over major
programs to support a low assessed level of control risk. One commenter
stated that the Circular assumes that control risk is always either
low or high and that it "does not recognize that control risk
may be anywhere on a continuum from low to high (with "high" indicating
ineffective control). When an auditor gains an understanding of an
entity's internal control and determines that the controls are not
ineffective, but are also not sufficient to support a low assessed
level of control risk, then no amount of planning or testing will support
a low assessed level of control risk." Two commenters recommended
that OMB allow the assessment of control risk at a moderate level,
unless internal control is determined to be ineffective.
Response:
No change was made as a result of these comments. Many Federal agencies
are concerned that not enough testing of internal control over major
programs is performed as part of single audits. The President's Council
on Integrity and Efficiency's (PCIE) "Study on Improving the Single
Audit Process," issued in September 1993, highlighted the disparity
between Federal agencies' expectations relating to the extent of internal
control testing and the actual testing of internal control performed
by auditors. The study identified the lack of clear requirements as
a cause for this deficiency. The study recommended that the Circular "Require
the auditor to plan the internal control testing to perform sufficient
tests to support an assessed level of control risk of low for each
program tested as major."
OMB believes that the Circular clearly describes the Federal Government's
expectations relating to the coverage of internal control under single
audits, in terminology that is consistent with professional auditing
standards.
It has been a longstanding
Federal policy that the recipient of Federal funds is required to establish
a system of internal control to provide reasonable assurance that it
is managing Federal funds in compliance with applicable laws and regulations.
Also, the 1996 Amendments (31 U.S.C. 7502(e)(3)) require the auditor
to test controls unless they are deemed to be ineffective. Therefore,
it is reasonable to require the auditor to plan the audit consistent
with the level of internal control which the recipient of Federal funds
is required to maintain. Also, the Circular permits the auditor to
not test internal controls which are inadequate and, instead, disclose
a reportable condition (including whether any such condition is a material
weakness) and perform additional tests of compliance as necessary in
the auditor's judgment.
Compliance
Supplement
Comment:
Several State auditors and CPA commenters stated that, while significant
progress was made to improve the single audit process, it is critically
important for OMB to move swiftly to issue a revised compliance supplement,
which is needed to conduct single audits. They emphasized the importance
of finalizing and publishing this document as quickly as possible to
facilitate audits of fiscal years beginning after June 30, 1996 (i.e.,
the first audits to be conducted using the revised Circular).
Response:
OMB agrees that the compliance supplement is vital to successful implementation.
In response to these comments, OMB is including a provisional compliance
supplement as Appendix B to the final revision to Circular A-133. It
is being issued at this time in provisional form so that it can be
used as part of the first audits conducted in accordance with the revised
Circular A-133. However, the provisional status also provides interested
parties with the opportunity to comment on the document and permits
OMB to include additional Federal programs in the document in the coming
months.
The provisional
"Circular A-133 Compliance Supplement" is effective for audits
of fiscal years beginning after June 30, 1996, and supersedes the previously
issued compliance supplements entitled "Compliance Supplement for
Single Audits of State and Local Governments," issued in 1990, and
"Compliance Supplement for Audits of Institutions of Higher Learning
and Other Non-Profit Institutions," issued in 1991. The definition
of the term "compliance supplement" in §___.105 of the
final revision was revised to reflect the compliance supplement included
as Appendix B to this revised Circular.
Comment:
Several State auditors and one CPA requested removal of the requirement
for the auditor to determine the current compliance requirements when
changes were made to the compliance requirements and the changes are
not yet reflected in the compliance supplement.
Response:
No change was made as a result of these comments. However, minor modifications
were made to §___.500(d) to conform the language used in the Circular
to the compliance supplement.
The requirement
in §___.500(d)(3) for auditors to consider whether changes were
made in the compliance requirements included in the compliance supplement
reflects current practice, which is based on two documents: (1) the
PCIE's Position Statement No. 6, titled "Questions and Answers
on Circular A-133," and (2) the AICPA's Audit and Accounting Guide,
entitled, "Audits of State and Local Governmental Units," dated
May 1, 1995.
The PCIE document
includes a statement that "If there have been changes [to the
compliance requirements included in the compliance supplement], then
the auditor should follow the provisions of the compliance supplements
as modified by the changes" (page 14). The AICPA's Accounting
and Auditing Guide (paragraph 23.37) alerts auditors to the fact that
compliance requirements may change over time and that this should be
considered in planning tests of compliance. The provisional "Circular
A-133 Compliance Supplement" provides guidance to auditors regarding
the Federal Government's expectations for auditors to perform reasonable
procedures (e.g., inquiry of auditee management, review of applicable
contract and grant agreements) to determine currency of the compliance
requirements included in the compliance supplement.
Transitional
Guidance to Implementing the Risk-Based Approach to Determining Major
Programs
Comment:
OMB received several inquiries about whether a Type A program may be
considered low-risk when it was audited as a major program in accordance
with the prior Circular A-133, issued March 8, 1990, or Circular A-128,
issued April 12, 1985, and otherwise met the requirements in §___.520(c)
to be considered as low-risk. Similar inquiries were received regarding
whether single audits performed in accordance with the prior Circular
A-133 or Circular A-128 would satisfy the requirements of §___.530
for an auditee to qualify as a low-risk auditee.
Response:
The reference in §___.520(c)(1) to the two most recent audit periods
includes audit periods in which the audit was performed under either
Circular A-128 or the 1990 version of Circular A-133. Therefore, a
Type A program which meets the criteria for low-risk under §___.520(c)(1),
based on the results of an audit performed under Circular A-128 or
the 1990 version of Circular A-133, may be considered low-risk. Similarly,
the requirement in §___.530 that an auditee meet specified criteria
for the preceding two years to be considered a low-risk auditee applies
to audits performed under Circular A-128 or the 1990 version of Circular
A-133.
Also, to provide
a transition into the risk-based approach, the provision for deviation
from use of risk criteria provided in §___.520(i) applies to the
first year this revision is applicable and permits auditors to defer
implementation of the risk-based approach for one year.
Risk-Based
Approach to Determining Major Programs
Comment:
Several State auditors and one State agency requested clarification
of the requirements for performing risk assessments of Type B programs
under §___.520(d) and §___.520(e)(2). Many commenters questioned
if the Circular requires the auditor to perform annual risk assessments
of each Type B program (above an amount specified in the Circular)
and expressed concern that such a requirement would significantly increase
audit costs.
Response:
Minor modifications were made to the Circular. Reference to the percentage
of coverage rule was removed from §___.520(d)(2) of the final
revision because, as two commenters noted, program risk is not a consideration
in selecting programs to meet the percentage of coverage rule described
in §___.520(f). Also, editorial changes were made to §___.520(d)(2)
to emphasize when risk assessments should be performed.
The final revision
(§___.520(d)) requires the auditor to identify Type B programs
that are high-risk and §___.520(e)(2) provides two options for
identifying high-risk Type B programs.
Under Option 1,
the auditor would be expected to perform risk assessments of all Type
B programs that exceed the amount specified in §___.520(d)(2),
and audit at least one half of these high-risk Type B programs as major,
unless this number exceeds the number of low-risk Type A programs identified
under §___.520(c) (i.e., the "cap"). In this case, the
auditor would be required to audit as major the same number of high-risk
Type B programs as the cap. For example, a State has ten low-risk Type
A programs, and 50 Type B programs above the amount specified in §___.520(d)(2).
Under Option 1, the auditor would be required to perform risk assessments
of the 50 Type B programs. Assume that the auditor determines that
there are 25 high-risk Type B programs. One half of the 25 high-risk
Type B programs is 12.5, or 13, programs. Under Option 1, the auditor
would audit 13 of the high-risk Type B programs as major; however,
the cap in this example is ten (i.e., the number of low-risk Type A
programs); therefore, the auditor is only required to audit as major
10 high-risk Type B programs.
Under Option 2,
the auditor is only required to audit as major one high-risk Type B
program for each Type A program identified as low-risk under
§___.520(c). Under this option, the auditor would not be required
to perform risk assessments for any Type B programs when there are no
low-risk Type A programs (i.e., the cap is zero). Continuing with the
previous example, under Option 2, the auditor would perform risk assessments
of Type B programs until ten high-risk Type B programs are identified.
The auditor would be required to audit ten high-risk Type B programs
as major in this example. Depending on the order in which risk assessments
on Type B programs are performed, the auditor might only need to perform
risk assessments of ten Type B programs determined to be high-risk, or
the auditor may need to perform risk assessments until ten high-risk
programs are identified.
The auditor may
choose either Option 1 or 2. There is no requirement to justify the
reasons for selecting either option. The results under Options 1 and
2 may vary significantly, depending on the number of low-risk Type
A programs and high-risk Type B programs. The auditor is encouraged
to use an approach which provides an opportunity for different high-risk
Type B programs to be audited as major over a period of time.
Comment:
OMB received several inquiries about whether large loan and loan guarantee
programs (that affect the determination of other Type A programs under §___.520(b)(3))
audited as major programs may be used for purposes of meeting the percentage
of coverage rule (§___.520(f)).
Response:
The amount of Federal awards expended under such loan and loan guarantee
programs that are audited as major may be used for purposes of meeting
the percentage of coverage rule. In a related matter, programs audited
as major under §___.215(c), in which a Federal agency or pass-through
entity requests and pays for a program to be audited as major, may
also be used for purposes of meeting the percentage of coverage rule
(§___.520(f)).
Comment:
Several commenters questioned the difference in the number of days
of advance notice a Federal agency shall provide an auditee when a
particular program: (1) cannot be considered a low-risk Type A program
(at least 120 days prior to the auditee's fiscal year end under §___.520(c)(2)),
and (2) must be audited as major(at least 180 days prior to the auditee's
fiscal year end under §___.215(c)).
Response:
For consistency, a change was made to §___.520(c)(2) of the final
revision to require a Federal agency to inform an auditee at least
180 days prior to the auditee's fiscal year end when a Federal program
cannot be considered a low-risk Type A program.
Biennial
Audits
Comment:
All State auditors that commented on the proposal relating to biennial
audits strongly opposed the provision included in §___.530(a)
of the proposed revision that prohibits non-Federal entities that have
biennial audits from qualifying as low-risk auditees. Commenters stated
that this prohibition was not included in the 1996 Amendments and that
the frequency of the audit has no bearing on the administration of
Federal awards. One commenter suggested that, at a minimum, the cognizant
or oversight agency for audit be authorized to permit, on a case-by-case
basis, non-Federal entities that conduct biennial audits to qualify
as low-risk auditees.
Response:
A change was made to §___.530(a) to permit non-Federal entities
to qualify, on a case-by-case basis, as low-risk auditees with the
approval of the cognizant or oversight agency for audit. A change was
also made to §___.400(a) of the final revision to add this responsibility
to the list of cognizant agency for audit responsibilities.
Comment:
One commenter inquired about the effective date of the Circular for
biennial periods.
Response:
The 1996 Amendments do not specifically address the effective dates
for biennial audits. OMB interprets the 1996 Amendments to be effective
for any biennial periods which begin after June 30, 1996. As with annual
audits, the previously applicable Circulars are in effect until this
final revision is effective. Therefore, an auditee that conducts biennial
audits and has a biennial period beginning on or before June 30, 1996,
should apply the provisions of Circular A-128 (for a State or local
government) or Circular A-133, issued March 8, 1990 (for a non-profit
organization), as applicable. The requirements of this Circular apply
to any biennial periods beginning after June 30, 1996.
Credit Union
Loans
Comment:
OMB received inquiries about whether loans provided by the National
Credit Union Administration (NCUA) should be considered Federal awards
subject to the requirements of Circular A-133.
Response:
A new paragraph (§___.205(j)) was added to the Circular to address
certain loans provided by the NCUA. Specifically, loans made from the
National Credit Union Share Insurance Fund and the Central Liquidity
Facility are funded by contributions from insured institutions and
are not considered Federal awards expended under Circular A-133. However,
the NCUA provides loans under other programs, such as the Community
Development Revolving Loan Programs for Credit Unions, which are considered
Federal awards for purposes of applying Circular A-133.
Auditor
Communication Regarding Report Distribution
Comment:
Several commenters stated that, if the auditor prepares the data collection
form, then the communication required by §___.500(f) of the proposed
revision, whereby the auditor is required to notify the auditee of
which Federal agencies and pass-through entities are required to receive
a copy of the reporting package, will no longer be necessary.
Response:
The proposed revision of Circular A-133 included a requirement for
the auditor to communicate, preferably in writing, to the auditee which
Federal awarding agencies and pass-through entities are required to
receive a copy of the reporting package. This requirement was removed.
This separate communication is unnecessary because the final Circular
(§___.320(b)(3)) requires the auditor to prepare and sign the
portion of the data collection form that identifies which Federal agencies
are required to receive a copy of the reporting package.
Basis of
Accounting
Comment:
One State auditor requested that §___.310(a) and §___.500(b)
of the Circular be revised to include a statement, similar to a provision
(paragraph 2.4(a)) included in GAGAS, that "Financial statement
audits also include audits of financial statements prepared in conformity
with any of several other bases of accounting discussed in the auditing
standards issued by the AICPA." One Federal auditor requested
that the Circular require the auditee to use the same basis of accounting
in preparing the schedule of expenditures of Federal awards that is
used to prepare the auditee's financial statements, and noted that
this omission has resulted in significant unreconciled differences
on the schedule of expenditures of Federal awards.
Response:
No changes were made as a result of these comments. Circular A-133
does not prescribe the basis of accounting that must be used by auditees
to prepare their financial statements and schedule of expenditures
of Federal awards. However, auditees are required to disclose the basis
of accounting and significant accounting policies used in preparing
the financial statements and schedule of expenditures of Federal awards.
The auditor is required to report (§___.500(b)) whether the financial
statements are prepared in accordance with generally accepted accounting
principles (GAAP), and whether the schedule of expenditures of Federal
awards is presented fairly in all material respects in relation to
the auditee's financial statements taken as a whole. The auditee must
be able to reconcile amounts presented in the financial statements
to related amounts included in the schedule of expenditures of Federal
awards.
Financial
Statements
Comment:
Several CPAs commented that §___.310(a) of the Circular should
be modified to recognize that financial statements should reflect the
results of operations or changes in net assets. Financial statements
prepared in accordance with GAAP for certain types of non-Federal entities
reflect changes in net assets rather than results of operations. The
commenters suggested that some auditees and auditors may interpret
this section as imposing a requirement that is not consistent with
GAAP.
Response:
The Circular (§___.310(a)) was revised to state that financial
statements should reflect either the results of operations or changes
in net assets.
Comment:
Several CPAs commented that the requirement included in §___.310(a)
of the Circular that the financial statements shall be for the same
organizational unit that is chosen to meet the requirements of the
Circular, considered in conjunction with §___.500(a), could be
problematic for certain auditees and may have unintended consequences.
The commenters interpreted the Circular as requiring a direct match
between the reporting entity included in the financial statements and
the reporting entity covered by the Circular A-133 audit. The commenters
questioned whether an auditee, that chooses to meet the Circular's
requirements through a series of audits that cover separate departments,
agencies, and other organizational units which expended Federal awards,
would be required to issue non-GAAP financial statements that omitted
the portions of the reporting entity which were separately audited.
One commenter requested guidance in a situation where a local government
has its school districts separately audited. If the local government's
financial statements exclude the school districts (which is what the
commenters believe the Circular requires), then the auditor may need
to issue a qualified or adverse opinion on the local government's financial
statements, which could raise unnecessary red flags and prohibit the
auditee from qualifying as a low-risk auditee (§___.530). One
State manager noted that considerably more public entities are included
in that State's financial statement audit than in its state-wide single
audit, and that, if the Circular requires such entities to be included
in the state-wide single audit, this would result in additional audit
costs and complicate the audit process.
Response:
§___.310(a) was revised to clarify OMB's expectations in this area.
The revised Circular provides non-Federal entities an option to meet
the audit requirements of the Circular through a series of audits that
cover the non-Federal entity's departments, agencies, and other organizational
units which expended or otherwise administered Federal awards during
such fiscal year. If a non-Federal entity elects this option, then separate
financial statements and a schedule of expenditures of Federal awards
shall be prepared for each such department, agency, or other organizational
unit. In these circumstances, a non-Federal entity's organization-wide
financial statements may also include departments, agencies, or other
organizational units that have separate audits and prepare separate financial
statements.
In the example provided
by the commenter, it would be acceptable for the local government's
financial statements to include the school districts, even though the
school districts were not included in the local government's Circular
A-133 audit because a separate Circular A-133 audit is conducted of
the school districts. However, if separate financial statements were
not prepared for the school districts, it would be unacceptable for
a separate Circular A-133 audit to be conducted of the school districts
(i.e., the local government's organization-wide financial statements
could not be used as a substitute for separate financial statements
for the school districts).
Schedule
of Expenditures of Federal Awards
Comment:
One State auditor and one State manager commented that the Circular
should not prescribe requirements for the schedule of expenditures
of Federal awards beyond the current guidance.
Response:
The "current guidance" for presenting the schedule of expenditures
of Federal awards information was developed and promulgated by the
AICPA, and was not specifically prescribed in Circulars A-128 and A-133
(1990 original issuance). OMB believes that the minimum requirements
for the schedule should be specified in the Circular (§___.310(b)).
Most respondents to the April 1996 revision of Circular A-133 supported
the level of detail reflected in that revision. A few modifications
of the requirements were made in this final revision of Circular A-133,
in response to specific comments received, as described in the following
sections.
Comment:
Several CPAs and one State auditor commented that the Circular requires
the auditor to be responsible for determining major programs and the
threshold used to distinguish between Type A and Type B programs. However,
these items are required to be presented in the schedule of expenditures
of Federal awards prepared by the auditee and this requirement may
blur the distinction between information that is the responsibility
of the auditor versus the auditee.
Response:
The proposed requirements for the schedule of expenditures of Federal
awards to identify major programs and identify the threshold to distinguish
between Type A and Type B programs(§___.310(b)(3) and (b)(4) of
the proposed revision) were removed. However, the requirement to report
this information was added to §___.505(d) so that this information
is now required to be included in the auditor's report(s). While not
required, some auditees may find it useful to present this information
in the schedule of expenditures of Federal awards.
Comment:
Several CPAs recommended that the value of non-cash assistance, insurance
in effect, and loans and loans guarantees outstanding be required to
be included in the schedule of expenditures of Federal awards. They
stated that the option to present this information in a note to the
schedule should be eliminated and that the consistency achieved will
improve the usefulness of the schedule and facilitate OMB's data collection
efforts. One college and university commenter stated that the requirement
to provide this information (either in a note or in the schedule) was
excessive, and that the same information could be obtained from existing
Federal data banks.
Response:
A change was made to §___.310(b)(6) as a result of these comments.
The Circular permits the option of presenting this information either
in the schedule of expenditures of Federal awards or in a note to the
schedule; however, an additional sentence was included indicating that
it is preferable to present this information in the schedule. It is
important to note that, regardless of whether this information is presented
in a note or in the schedule, this information must be included in
the data collection form. While the requirement to provide such information
is not new, the Federal Government does not currently collect and account
for this information in a systematic manner or data bank (i.e., some
Federal agencies track this information and others do not). A minor
addition was made to §___.310(b)(6) to clarify that the amount
of insurance in effect during the year should be disclosed.
Report Due
Date
Comment:
Two Federal auditors commented that the requirement included in the
1996 Amendments to submit the reporting package to the Federal clearinghouse "within
the earlier of: 30 days after receipt of the auditor's report(s), or
... " is not clearly specified in the proposed revision.
Response:
§___.235(c) and §___.320(a) were modified to incorporate the
report due date requirements specified in the 1996 Amendments.
Summary
Schedule of Prior Audit Findings
Comment:
Several State auditors requested guidance on the auditor's responsibility
for deficiencies noted in prior audit findings for which a management
decision was not issued and which the auditee believes is no longer
valid. Specifically, the commenters asked whether the lack of a timely
management decision is evidence that the Federal awarding agency or
pass-through entity is not concerned about the finding and whether
future audits may exclude coverage of the deficiency that resulted
in an audit finding. One State auditor also commented that auditees
should not be given the authority to determine when an audit finding
is no longer valid or does not warrant further action.
Response:
§___.315(b) permits an auditee to determine whether a prior audit
finding is no longer valid or does not warrant further action. A valid
reason for such a determination is that all of the following have occurred:
(1) two years have passed since the audit report in which the finding
occurred was submitted to the Federal clearinghouse, (2) the Federal
agency or pass-through entity is not currently following up with the
auditee on the audit finding, and (3) a management decision was not issued.
OMB believes that it is appropriate for the auditee to make this determination.
In addition, the auditor is required by §___.500(e) of the Circular
to assess the fairness of management's representations in the schedule.
The lack of a management
decision for a prior audit finding may provide a basis for the auditee
to indicate in the summary schedule of prior audit findings that the
finding is no longer valid or does not warrant further action (provided
the two other conditions previously listed are met). However, the lack
of a management decision does not change the scope of audit work or
the auditor's reporting requirements. As an example, if the same deficiency
that resulted in a prior audit finding (for which a management decision
was not issued) is discovered by the auditor in the current period,
the auditor would be required to determine whether the matter met the
criteria provided in §___.510(a) for reporting an audit finding
in the auditor's schedule of findings and questioned costs.
For the first year
a non-Federal entity is audited under this revised Circular, the prior
year report may not have included the equivalent of a summary schedule
of prior audit findings. In these cases, the auditee may exercise judgment
and only include, to the extent practical, audit findings from before
the prior year. Also, the auditee is not expected to include prior
findings that would not have been reported under the criteria provided
in §___.510(a).
Auditor's
Schedule of Findings and Questioned Costs
Comment:
Several State auditors and CPA commenters noted that GAGAS does not
use the term "findings and questioned costs," and the concept
of questioned costs is not discussed in GAGAS. Commenters requested
that OMB clarify the requirement included in §___.505(d)(2) of
the proposed revision.
Response:
A change was made to §___.505(d)(2) to replace the term "findings
and questioned costs" with "findings" so that the final
revision requires the auditor's schedule of findings and questioned
costs to include a section that reports any findings relating to the
financial statements which are required to be reported in accordance
with GAGAS.
Comment:
One State auditor requested that §___.505(a) of the proposed revision
be revised to permit unqualified opinions on financial statements prepared
in accordance with an other comprehensive basis of accounting.
Response:
No change was made as a result of this comment. The 1996 Amendments
(31 U.S.C. 7502(e)(1)) require the auditor to "... determine whether
the financial statements are presented fairly in all material respects
in conformity with generally accepted accounting principles." However,
it should be noted that neither the 1996 Amendments nor Circular A-133
prescribe the basis of accounting that must be used by auditees to
prepare their financial statements and schedule of expenditures of
Federal awards (i.e., non-GAAP statements are acceptable).
Comment:
Two CPAs indicated that the reference to §___.505(d)(2) and (3)
that was included in §___.505(d)(3)(ii) of the proposed revision
is confusing because it refers to certain schedules that are supposed
to be included as part of the schedule of findings and questioned costs.
Response:
A change was made to §___.505(d)(3)(ii) to reflect that the schedule
of findings and questioned costs is comprised of several sections,
rather than multiple schedules.
Audit Findings
Comment:
Several Federal auditors, State auditors, and CPAs commented on the
requirement included in §___.510(a)(1) and (2) of the proposed
revision that, for reporting purposes, audit findings must be evaluated
in relation to a "type of compliance requirement" for a major
program or an audit objective identified in the compliance supplement.
Some commenters opposed requiring the evaluation of an audit finding
in relation to an audit objective because they believe this to be a
more constrictive requirement than the currently-used measurement standard,
and others requested clarification of the requirement. Two commenters
suggested that OMB revise this requirement to allow the auditor to
make the determination of reportable conditions and material noncompliance
based on the significance of the compliance requirement and the effect
on the program as a whole.
Response:
No change was made as a result of these comments. The scope of the
auditor's work described in §___.500(c) and (d) is required at
the major program level. However, for audit reporting purposes, the
results of the auditor's work must be evaluated against a lower measure.
Specifically, the revised Circular requires the auditor to consider
an audit finding in relation to a type of compliance requirement for
a major program or an audit objective identified in the compliance
supplement. The types of compliance requirements and related audit
objectives are included in the provisional "Circular A-133 Compliance
Supplement." The auditor is expected to determine the types of
compliance requirements that could have a direct and material effect
on each major program, and to design and conduct tests necessary to
render an opinion on compliance with respect to each major program.
Clearly, auditor judgment must be used in determining the nature, timing,
and extent of audit work to be performed, and in evaluating the audit
results. The purpose of the requirement included in §___.510(a)(1)
and (2) is to advise the auditor of the criteria against which to measure
or evaluate the impact of findings for reporting purposes.
It is important
to note that, under the existing requirements of Circular A-128, the
auditor is required to report all instances of noncompliance and, under
the 1990 version of Circular A-133, the auditor is required to report
all but nonmaterial instances of noncompliance. The requirements for
reporting audit findings included in the revised Circular are less
burdensome than the existing requirements with respect to instances
of noncompliance.
Comment:
Several commenters requested clarification of the requirement in
§___.510(a)(3) of the proposed revision to report as an audit finding
known questioned costs which are greater than $10,000 for a type of compliance
requirement, particularly with respect to determining the impact of multiple
instances of noncompliance relating to a type of compliance requirement.
Response:
No change was made as a result of these comments. However, the following
example is provided to illustrate the requirements of this provision.
Suppose an auditor: (1) determines that eligibility (which is one of
the types of compliance requirements listed in the compliance supplement)
could have a direct and material effect on a major program; (2) designs
and conducts tests over eligibility relative to this major program;
and, (3) discovers two separate instances of noncompliance, in the
amount of $9000 each, relating to eligibility. The findings involve
two different audit objectives relating to eligibility (which are listed
in the compliance supplement): one finding relates to an individual
participant's eligibility, and the other finding relates to the eligibility
of a subrecipient. Since §___.510(a)(3) requires the auditor to
report known questioned costs which are greater than $10,000 for a
type of compliance requirement (which is eligibility in this case),
the auditor would be expected to report these questioned costs of $18,000
as an audit finding. The auditor would also be expected to consider
the impact of these instances of noncompliance when reporting on compliance
on each major program.
Comment:
Some Federal agencies strongly object to not requiring known questioned
costs of $10,000 or less to be reported. Conversely, one State auditor
commented that the requirement to report known questioned costs greater
than $10,000 could result in auditors' reporting matters that are minimal
in relation to the size of a particular Federal program (e.g., a very
large State program in which questioned costs of $11,000 is considered
immaterial).
Response:
No change was made as a result of these comments. OMB believes that
the $10,000 threshold for reporting questioned costs provides an appropriate
balance between reporting all questioned costs (which was previously
required for State and local governments) and only reporting substantial
questioned costs.
Comment:
One Federal auditor requested that OMB require auditors to report an
estimate of likely questioned costs when a known or likely questioned
cost exceeds $10,000. The commenter stated that capturing the amount
of likely questioned costs should better enable Federal agencies to
assess the nature and magnitude of questioned costs on particular Federal
awards and assist in prioritizing the resolution of audit findings.
The commenter also suggested that OMB encourage auditors to use statistical
means to determine likely questioned costs.
Response:
No change was made as a result of this comment. §___.510(a)(3)
requires the auditor to report known questioned costs which are greater
than $10,000, and known questioned costs when likely questioned costs
are greater than $10,000, for a type of compliance requirement. GAAS
require the auditor to project the amount of known questioned costs
identified in a sample to the items in the major program and to consider
the best estimate of total questioned costs (both known and likely)
in determining an opinion on compliance. The auditor is required to
document this consideration in the audit working papers.
The revised Circular
does not require the auditor to report an exact amount or statistical
projection of likely questioned costs, but rather to include an audit
finding when the auditor's extrapolation of these likely questioned
costs is greater than $10,000. In reporting likely questioned costs,
it is important that the auditor follows the requirements of §___.510(b)
and provides appropriate information for judging the prevalence and
consequences of the finding. The use of statistical means of determining
likely questioned costs may be beneficial for auditors but it is not
required. During the next few years, OMB expects Federal agencies to
monitor auditor compliance in this area to assist OMB in determining
whether an expansion of these reporting requirements is necessary in
subsequent revisions.
Comment:
Two CPA commenters requested guidance regarding the treatment of audit
findings that cannot be quantified. The commenters cited as an example
a situation where an auditor discovers that a pass-through entity consistently
failed to provide its subrecipients with Federal award information,
including applicable compliance requirements. The commenters stated
that §___.510(a)(3) could be read to indicate that such nonmonetary
findings would not need to be reported.
Response:
No change was made as a result of these comments. In the example provided
by the commenters, this noncompliance would be required to be reported
as an audit finding. The auditor must consider a finding in relation
to the type of compliance requirement (subrecipient monitoring, in
this case) or an audit objective identified in the compliance supplement.
The pertinent audit objective included in the provisional "Circular
A-133 Compliance Supplement" relating to this example is for the
auditor to "determine whether the pass-through entity identifies
Federal award information and compliance requirements to the subrecipient." Because
the pass-through entity failed to provide Federal award information
to its subrecipients, this noncompliance is material in relation to
the audit objective and, therefore, must be reported as an audit finding.
In addition, the auditor must consider whether reportable conditions
(and possibly material weaknesses in internal control) exist and require
reporting with respect to subrecipient monitoring.
Audit Follow-up
Comment:
Several commenters requested guidance on whether the auditor is required
to follow up on all prior findings, particularly immaterial amounts
that were previously required to be reported. Two commenters opposed
the requirement for audit follow-up on prior audit findings, even when
a finding is unrelated to a major program in the current year.
Response:
In the first year audited under the revised Circular, the auditor should
use judgment in deciding which previously reported findings require
follow-up in the current year. Auditors are not expected to follow
up on prior year findings that are immaterial. The auditor should consider
the criteria for reporting audit findings, provided in §___.510(a),
in determining which prior audit findings require follow-up.
No change was made
to §___.500(e), which requires the auditor to perform follow-up
procedures regardless of whether a prior audit finding relates to a
major program in the current year. This requirement is consistent with
the requirement for management to report on the status of prior findings
in the summary schedule of prior audit findings.
Auditor
Selection
Comment:
Two State auditors requested a change to recognize that some auditees
(e.g., State and local governments) do not have the constitutional
or legal authority to arrange for audit services.
Response:
A clarification was made to §___.305(a) to indicate that, in procuring
(rather than arranging for) audit services, auditees shall follow the
provisions described in §___.305(a). If an auditee is not authorized
to procure audit services (e.g., State law may require that a State
auditor perform all required audits for that State), then the provisions
of §___.305(a) do not apply.
Comment:
One State agency and one CPA commenter did not support the restriction
on auditors that perform Circular A-133 audits and also prepare indirect
cost proposal or CAPs. These commenters stated that the AICPA's professional
standards adequately address auditor independence.
Response:
No change was made as a result of these comments. §___.305(b)
precludes the same auditor from preparing the indirect cost proposal
or CAP when indirect costs exceeded $1 million in the prior year. This
restriction was developed based on comments relating to April 1996
revision of Circular A-133, in which all Federal agencies that responded
cited at least an appearance of a lack of independence when the same
auditor both performed the audit and prepared the indirect cost proposal
or CAP. The $1 million threshold was chosen to limit this restriction
to a relatively small number of entities, while still protecting the
Federal interest.
The implementation
date for this provision is delayed two years until audits of fiscal
years beginning after June 30, 1998, to minimize any effect this provision
could have on existing contracts for audit services. In the future,
OMB and Federal agencies will monitor this area to determine whether
additional guidance or further revision to the Circular is necessary.
Federal
Awarding Agency Responsibilities
Comment:
A commenter noted that the Circular does not list as a responsibility
of Federal awarding agencies the requirement included in the 1996 Amendments
(31 U.S.C. 7502(f)(1)(A)) to inform recipients of the Federal requirements
imposed on them by Federal laws, regulations, and the provisions of
contracts or grant agreements.
Response:
A change was made to add this responsibility to the list included in §___.400(c)
of the revised Circular.
Request
for a Program to be Audited as a Major Program
Comment:
Two State auditors opposed the provision included in §___.215(c)
in which a Federal agency or pass-through entity may request for a
program to be audited as a major program. Reasons cited include: (1)
that Federal agencies might use this provision excessively, and (2)
that specifying programs to be audited as major is contrary to the
risk-based approach to determining major programs.
Response:
No changes were made to the Circular as a result of these comments.
This process does not significantly change the authority Federal agencies
and pass-through entities now have to perform additional audits as
long as they pay for them. These audits may be incorporated within
the framework of the single audit and thereby eliminate duplicative
audit planning and reporting. Since the Federal agency or pass-through
entity must still pay the full incremental audit cost, OMB does not
expect a significant increase in major programs from this provision.
It should be pointed
out that any Type A program selected to be audited under this provision
must be low-risk. If it were not low-risk, it would have been audited
as a major program under the risk-based approach. Therefore, this provision
will not reduce the number of high-risk Type B programs audited as
major. Also, programs audited as major under this process count towards
meeting the percentage of coverage rule provided in §___.520(f).
Management
Decisions
Comment:
Several State auditors expressed concern about the provision permitting
Federal agencies and pass-through entities, prior to issuing a management
decision, to request additional information or documentation from an
auditee, including a request that the documentation be audited, as
a way of mitigating disallowed costs. Two CPAs requested that the term "audit" be
replaced by "auditor assurance" for clarity.
Response:
A minor change was made to §___.405(a) to clarify that the request
is for auditor assurance relating to the specified documentation. OMB
also expects Federal agencies and pass-through entities to use this
provision judiciously.
Comment:
One State auditor commented that it would be beneficial if auditors
could obtain copies of management decisions and suggested that the
Federal Government establish a centralized contact from which auditors
could request copies.
Response:
In the next few years, OMB will consider this and other suggestions
to improve the dissemination of management decision information.
Audit Working
Papers
Comment:
Several auditors requested that the Circular reflect the wording included
in the 1996 Amendments (31 U.S.C. 7503(f)) that indicates the purpose
for which access to working papers is intended.
Response:
A change was made to §___.515(b) to reflect wording similar to
the 1996 Amendments relating to this matter.
Additional
OMB Guidance
Comment:
Several commenters requested additional information about various provisions
in the proposed revision and asked whether OMB will publish a "questions
and answers" document as implementation issues arise.
Response:
Interested parties may wish to refer to the April 30, 1996 (61
FR 19134) and November 5, 1996 (61 FR 57232) Federal Registers for
discussion of various provisions included in the Circular. Useful information
is provided in these Notices that is not necessarily repeated in this
Notice. In the future, if there are significant questions concerning
the revised Circular A-133, OMB will consider issuing a "questions
and answers" document relating to the revised Circular.
Franklin D. Raines
Director
Circular No.
A-133 - Revised June 24, 1997
Audits of States, Local Governments, and
Non-Profit Organizations
TO THE HEADS OF
EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
SUBJECT: Audits
of States, Local Governments, and Non-Profit Organizations
1. Purpose.
This Circular is issued pursuant to the Single Audit Act of 1984, P.L.
98-502, and the Single Audit Act Amendments of 1996, P.L. 104-156.
It sets forth standards for obtaining consistency and uniformity among
Federal agencies for the audit of States, local governments, and non-profit
organizations expending Federal awards.
2. Authority.
Circular A-133 is issued under the authority of sections 503, 1111,
and 7501 et seq. of title 31, United States Code, and Executive
Orders 8248 and 11541.
3. Rescission
and Supersession. This Circular rescinds Circular A-128, "Audits
of State and Local Governments," issued April 12, 1985, and
supersedes the prior Circular A-133, "Audits of Institutions
of Higher Education and Other Non-Profit Institutions," issued
April 22, 1996. For effective dates, see paragraph 10.
4. Policy.
Except as provided herein, the standards set forth in this Circular
shall be applied by all Federal agencies. If any statute specifically
prescribes policies or specific requirements that differ from the standards
provided herein, the provisions of the subsequent statute shall govern.
Federal agencies
shall apply the provisions of the sections of this Circular to non-Federal
entities, whether they are recipients expending Federal awards received
directly from Federal awarding agencies, or are subrecipients expending
Federal awards received from a pass-through entity (a recipient or
another subrecipient).
This Circular does
not apply to non-U.S. based entities expending Federal awards received
either directly as a recipient or indirectly as a subrecipient.
5. Definitions.
The definitions of key terms used in this Circular are contained in §___.105
in the Attachment to this Circular.
6. Required Action.
The specific requirements and responsibilities of Federal agencies
and non-Federal entities are set forth in the Attachment to this Circular.
Federal agencies making awards to non-Federal entities, either directly
or indirectly, shall adopt the language in the Circular in codified
regulations as provided in Section 10 (below), unless different provisions
are required by Federal statute or are approved by the Office of Management
and Budget (OMB).
7. OMB Responsibilities.
OMB will review Federal agency regulations and implementation of this
Circular, and will provide interpretations of policy requirements and
assistance to ensure uniform, effective and efficient implementation.
8. Information
Contact. Further information concerning Circular A-133 may be
obtained by contacting the Financial Standards and Reporting Branch,
Office of Federal Financial Management, Office of Management and
Budget, Washington, DC 20503, telephone (202) 395-3993.
9. Review Date.
This Circular will have a policy review three years from the date of
issuance.
10. Effective
Dates. The standards set forth in §___.400 of the Attachment
to this Circular, which apply directly to Federal agencies, shall
be effective July 1, 1996, and shall apply to audits of fiscal years
beginning after June 30, 1996, except as otherwise specified in
§___.400(a).
The standards set
forth in this Circular that Federal agencies shall apply to non-Federal
entities shall be adopted by Federal agencies in codified regulations
not later than 60 days after publication of this final revision in
the Federal Register, so that they will apply to audits of fiscal
years beginning after June 30, 1996, with the exception that §___.305(b)
of the Attachment applies to audits of fiscal years beginning after
June 30, 1998. The requirements of Circular A-128, although the Circular
is rescinded, and the 1990 version of Circular A-133 remain in effect
for audits of fiscal years beginning on or before June 30, 1996.
Franklin D. Raines
Director
Attachment
PART__ --AUDITS
OF STATES, LOCAL GOVERNMENTS, AND NON-PROFIT ORGANIZATIONS
Subpart
A--General
Sec.
__.100 Purpose.
__.105 Definitions.
Subpart
B--Audits
__.200 Audit requirements.
__.205 Basis for determining Federal awards expended.
__.210 Subrecipient and vendor determinations.
__.215 Relation to other audit requirements.
__.220 Frequency of audits.
__.225 Sanctions.
__.230 Audit costs.
__.235 Program-specific audits.
Subpart
C--Auditees
__.300 Auditee responsibilities.
__.305 Auditor selection.
__.310 Financial statements.
__.315 Audit findings follow-up.
__.320 Report submission.
Subpart
D--Federal Agencies and Pass-Through Entities
__.400 Responsibilities.
__.405 Management decision.
Subpart
E--Auditors
__.500 Scope of
audit.
__.505 Audit reporting.
__.510 Audit findings.
__.515 Audit working papers.
__.520 Major program determination.
__.525 Criteria for Federal program risk.
__.530 Criteria for a low-risk auditee.
Appendix A to Part
__ - Data Collection Form
(Form SF-SAC).
Appendix B to Part
__ - Circular A-133 Compliance Supplement.
Subpart
A--General
§___.100
Purpose.
This part sets forth
standards for obtaining consistency and uniformity among Federal agencies
for the audit of non-Federal entities expending Federal awards.
§___.105
Definitions.
Auditee means
any non-Federal entity that expends Federal awards which must be audited
under this part. Auditor means an auditor, that is a public
accountant or a Federal, State or local government audit organization,
which meets the general standards specified in generally accepted government
auditing standards (GAGAS). The term auditor does not include
internal auditors of non-profit organizations.
Audit finding means
deficiencies which the auditor is required by §___.510(a) to
report in the schedule of findings and questioned costs.
CFDA number means
the number assigned to a Federal program in the Catalog of Federal
Domestic Assistance (CFDA).
Cluster of programs means
a grouping of closely related programs that share common compliance
requirements. The types of clusters of programs are research and development
(R&D), student financial aid (SFA), and other clusters. "Other
clusters" are as defined by the Office of Management and Budget
(OMB) in the compliance supplement or as designated by a State for
Federal awards the State provides to its subrecipients that meet the
definition of a cluster of programs. When designating an "other
cluster," a State shall identify the Federal awards included in
the cluster and advise the subrecipients of compliance requirements
applicable to the cluster, consistent with §___.400(d)(1) and §___.400(d)(2),
respectively. A cluster of programs shall be considered as one program
for determining major programs, as described in §___.520,
and, with the exception of R&D as described in §___.200(c),
whether a program-specific audit may be elected.
Cognizant agency
for audit means the Federal agency designated to carry out the
responsibilities described in §___.400(a).
Compliance supplement refers
to the Circular A-133 Compliance Supplement, included as Appendix
B to Circular A-133, or such documents as OMB or its designee may issue
to replace it. This document is available from the Government Printing
Office, Superintendent of Documents, Washington, DC 20402-9325.
Corrective action means
action taken by the auditee that:
(1) Corrects identified
deficiencies;
(2) Produces recommended
improvements; or
(3) Demonstrates
that audit findings are either invalid or do not warrant auditee action.
Federal agency has
the same meaning as the term agency in Section 551(1) of title
5, United States Code.
Federal award means
Federal financial assistance and Federal cost-reimbursement contracts
that non-Federal entities receive directly from Federal awarding agencies
or indirectly from pass-through entities. It does not include procurement
contracts, under grants or contracts, used to buy goods or services
from vendors. Any audits of such vendors shall be covered by the terms
and conditions of the contract. Contracts to operate Federal Government
owned, contractor operated facilities (GOCOs) are excluded from the
requirements of this part.
Federal awarding
agency means the Federal agency that provides an award directly
to the recipient.
Federal financial
assistance means assistance that non-Federal entities receive
or administer in the form of grants, loans, loan guarantees, property
(including donated surplus property), cooperative agreements, interest
subsidies, insurance, food commodities, direct appropriations, and
other assistance, but does not include amounts received as reimbursement
for services rendered to individuals as described in §___.205(h) and §___.205(i).
Federal program means:
(1) All Federal
awards to a non-Federal entity assigned a single number in the CFDA.
(2) When no CFDA
number is assigned, all Federal awards from the same agency made for
the same purpose should be combined and considered one program.
(3) Notwithstanding
paragraphs (1) and (2) of this definition,
a cluster of programs. The types of clusters of programs are:
(i) Research and
development (R&D);
(ii) Student financial
aid (SFA); and
(iii) "Other
clusters," as described in the definition of cluster of programs
in this section.
GAGAS means
generally accepted government auditing standards issued by the Comptroller
General of the United States, which are applicable to financial audits.
Generally accepted
accounting principles has the meaning specified in generally
accepted auditing standards issued by the American Institute of Certified
Public Accountants (AICPA).
Indian tribe means
any Indian tribe, band, nation, or other organized group or community,
including any Alaskan Native village or regional or village corporation
(as defined in, or established under, the Alaskan Native Claims Settlement
Act) that is recognized by the United States as eligible for the special
programs and services provided by the United States to Indians because
of their status as Indians.
Internal control means
a process, effected by an entity's management and other personnel,
designed to provide reasonable assurance regarding the achievement
of objectives in the following categories:
(1) Effectiveness
and efficiency of operations;
(2) Reliability
of financial reporting; and
(3) Compliance with
applicable laws and regulations.
Internal control
pertaining to the compliance requirements for Federal programs (Internal
control over Federal programs) means a process--effected by an entity's
management and other personnel--designed to provide reasonable assurance
regarding the achievement of the following objectives for Federal
programs:
(1) Transactions
are properly recorded and accounted for to:
(i) Permit the preparation
of reliable financial statements and Federal reports;
(ii) Maintain accountability
over assets; and
(iii) Demonstrate
compliance with laws, regulations, and other compliance requirements;
(2) Transactions
are executed in compliance with:
(i) Laws, regulations,
and the provisions of contracts or grant agreements that could have
a direct and material effect on a Federal program; and
(ii) Any other laws
and regulations that are identified in the compliance supplement; and
(3) Funds, property,
and other assets are safeguarded against loss from unauthorized use
or disposition.
Loan means
a Federal loan or loan guarantee received or administered by a non-Federal
entity.
Local government means
any unit of local government within a State, including a county, borough,
municipality, city, town, township, parish, local public authority,
special district, school district, intrastate district, council of
governments, and any other instrumentality of local government.
Major program means
a Federal program determined by the auditor to be a major program in
accordance with §___.520 or a program identified
as a major program by a Federal agency or pass-through entity in accordance
with §___.215(c).
Management decision means
the evaluation by the Federal awarding agency or pass-through entity
of the audit findings and corrective action plan and the issuance of
a written decision as to what corrective action is necessary.
Non-Federal entity means
a State, local government, or non-profit organization.
Non-profit organization means:
(1) any corporation,
trust, association, cooperative, or other organization that:
(i) Is operated
primarily for scientific, educational, service, charitable, or similar
purposes in the public interest;
(ii) Is not organized
primarily for profit; and
(iii) Uses its net
proceeds to maintain, improve, or expand its operations; and
(2) The term non-profit
organization includes non-profit institutions of higher education
and hospitals.
OMB means
the Executive Office of the President, Office of Management and Budget.
Oversight agency
for audit means the Federal awarding agency that provides the
predominant amount of direct funding to a recipient not assigned
a cognizant agency for audit. When there is no direct funding, the
Federal agency with the predominant indirect funding shall assume
the oversight responsibilities. The duties of the oversight agency
for audit are described in §___.400(b).
Pass-through
entity means a non-Federal entity that provides a Federal award
to a subrecipient to carry out a Federal program.
Program-specific
audit means an audit of one Federal program as provided for in §___.200(c) and §___.235.
Questioned cost means
a cost that is questioned by the auditor because of an audit finding:
(1) Which resulted
from a violation or possible violation of a provision of a law, regulation,
contract, grant, cooperative agreement, or other agreement or document
governing the use of Federal funds, including funds used to match Federal
funds;
(2) Where the costs,
at the time of the audit, are not supported by adequate documentation;
or
(3) Where the costs
incurred appear unreasonable and do not reflect the actions a prudent
person would take in the circumstances.
Recipient means
a non-Federal entity that expends Federal awards received directly
from a Federal awarding agency to carry out a Federal program.
Research and
development (R&D) means all research activities, both basic
and applied, and all development activities that are performed by
a non-Federal entity. Research is defined as a systematic
study directed toward fuller scientific knowledge or understanding
of the subject studied. The term research also includes activities
involving the training of individuals in research techniques where
such activities utilize the same facilities as other research and
development activities and where such activities are not included
in the instruction function. Development is the systematic
use of knowledge and understanding gained from research directed
toward the production of useful materials, devices, systems, or methods,
including design and development of prototypes and processes.
Single audit means
an audit which includes both the entity's financial statements and
the Federal awards as described in §___.500.
State means
any State of the United States, the District of Columbia, the Commonwealth
of Puerto Rico, the Virgin Islands, Guam, American Samoa, the Commonwealth
of the Northern Mariana Islands, and the Trust Territory of the Pacific
Islands, any instrumentality thereof, any multi-State, regional, or
interstate entity which has governmental functions, and any Indian
tribe as defined in this section.
Student Financial
Aid (SFA) includes those programs of general student assistance,
such as those authorized by Title IV of the Higher Education Act
of 1965, as amended, (20 U.S.C. 1070 et seq.) which is administered
by the U.S. Department of Education, and similar programs provided
by other Federal agencies. It does not include programs which provide
fellowships or similar Federal awards to students on a competitive
basis, or for specified studies or research.
Subrecipient means
a non-Federal entity that expends Federal awards received from a pass-through
entity to carry out a Federal program, but does not include an individual
that is a beneficiary of such a program. A subrecipient may also be
a recipient of other Federal awards directly from a Federal awarding
agency. Guidance on distinguishing between a subrecipient and a vendor
is provided in §___.210.
Types of compliance
requirements refers to the types of compliance requirements listed
in the compliance supplement. Examples include: activities allowed
or unallowed; allowable costs/cost principles; cash management; eligibility;
matching, level of effort, earmarking; and, reporting.
Vendor means
a dealer, distributor, merchant, or other seller providing goods or
services that are required for the conduct of a Federal program. These
goods or services may be for an organization's own use or for the use
of beneficiaries of the Federal program. Additional guidance on distinguishing
between a subrecipient and a vendor is provided in §___.210.
Subpart
B--Audits
§___.200
Audit requirements.
(a) Audit required.
Non-Federal entities that expend $300,000 or more in a year in Federal
awards shall have a single or program-specific audit conducted for
that year in accordance with the provisions of this part. Guidance
on determining Federal awards expended is provided in §___.205.
(b) Single audit.
Non-Federal entities that expend $300,000 or more in a year in Federal
awards shall have a single audit conducted in accordance with §___.500 except
when they elect to have a program-specific audit conducted in accordance
with paragraph (c) of this section.
(c) Program-specific
audit election. When an auditee expends Federal awards under
only one Federal program (excluding R&D) and the Federal program's
laws, regulations, or grant agreements do not require a financial
statement audit of the auditee, the auditee may elect to have a program-specific
audit conducted in accordance with §___.235.
A program-specific audit may not be elected for R&D unless all
of the Federal awards expended were received from the same Federal
agency, or the same Federal agency and the same pass-through entity,
and that Federal agency, or pass-through entity in the case of a
subrecipient, approves in advance a program-specific audit.
(d) Exemption
when Federal awards expended are less than $300,000. Non-Federal
entities that expend less than $300,000 a year in Federal awards
are exempt from Federal audit requirements for that year, except
as noted in §___.215(a), but records must be
available for review or audit by appropriate officials of the Federal
agency, pass-through entity, and General Accounting Office (GAO).
(e) Federally
Funded Research and Development Centers (FFRDC). Management of
an auditee that owns or operates a FFRDC may elect to treat the FFRDC
as a separate entity for purposes of this part.
§___.205
Basis for determining Federal awards expended.
(a) Determining
Federal awards expended. The determination of when an award is
expended should be based on when the activity related to the award
occurs. Generally, the activity pertains to events that require the
non-Federal entity to comply with laws, regulations, and the provisions
of contracts or grant agreements, such as: expenditure/expense transactions
associated with grants, cost-reimbursement contracts, cooperative
agreements, and direct appropriations; the disbursement of funds
passed through to subrecipients; the use of loan proceeds under loan
and loan guarantee programs; the receipt of property; the receipt
of surplus property; the receipt or use of program income; the distribution
or consumption of food commodities; the disbursement of amounts entitling
the non-Federal entity to an interest subsidy; and, the period when
insurance is in force.
(b) Loan and
loan guarantees (loans). Since the Federal Government is at risk
for loans until the debt is repaid, the following guidelines shall
be used to calculate the value of Federal awards expended under loan
programs, except as noted in paragraphs (c) and (d) of
this section:
(1) Value of new
loans made or received during the fiscal year; plus
(2) Balance of loans
from previous years for which the Federal Government imposes continuing
compliance requirements; plus
(3) Any interest
subsidy, cash, or administrative cost allowance received.
(c) Loan and
loan guarantees (loans) at institutions of higher education.
When loans are made to students of an institution of higher education
but the institution does not make the loans, then only the value
of loans made during the year shall be considered Federal awards
expended in that year. The balance of loans for previous years is
not included as Federal awards expended because the lender accounts
for the prior balances.
(d) Prior loan
and loan guarantees (loans). Loans, the proceeds of which were
received and expended in prior-years, are not considered Federal
awards expended under this part when the laws, regulations, and the
provisions of contracts or grant agreements pertaining to such loans
impose no continuing compliance requirements other than to repay
the loans.
(e) Endowment
funds. The cumulative balance of Federal awards for endowment
funds which are federally restricted are considered awards expended
in each year in which the funds are still restricted.
(f) Free rent.
Free rent received by itself is not considered a Federal award expended
under this part. However, free rent received as part of an award to
carry out a Federal program shall be included in determining Federal
awards expended and subject to audit under this part.
(g) Valuing non-cash
assistance. Federal non-cash assistance, such as free rent, food
stamps, food commodities, donated property, or donated surplus property,
shall be valued at fair market value at the time of receipt or the
assessed value provided by the Federal agency.
(h) Medicare.
Medicare payments to a non-Federal entity for providing patient care
services to Medicare eligible individuals are not considered Federal
awards expended under this part.
(i) Medicaid.
Medicaid payments to a subrecipient for providing patient care services
to Medicaid eligible individuals are not considered Federal awards
expended under this part unless a State requires the funds to be treated
as Federal awards expended because reimbursement is on a cost-reimbursement
basis.
(j) Certain loans
provided by the National Credit Union Administration. For purposes
of this part, loans made from the National Credit Union Share Insurance
Fund and the Central Liquidity Facility that are funded by contributions
from insured institutions are not considered Federal awards expended.
§___.210
Subrecipient and vendor determinations.
(a) General.
An auditee may be a recipient, a subrecipient, and a vendor. Federal
awards expended as a recipient or a subrecipient would be subject to
audit under this part. The payments received for goods or services
provided as a vendor would not be considered Federal awards. The guidance
in paragraphs (b) and (c) of this
section should be considered in determining whether payments constitute
a Federal award or a payment for goods and services.
(b) Federal award.
Characteristics indicative of a Federal award received by a subrecipient
are when the organization:
(1) Determines who
is eligible to receive what Federal financial assistance;
(2) Has its performance
measured against whether the objectives of the Federal program are
met;
(3) Has responsibility
for programmatic decision making;
(4) Has responsibility
for adherence to applicable Federal program compliance requirements;
and
(5) Uses the Federal
funds to carry out a program of the organization as compared to providing
goods or services for a program of the pass-through entity.
(c) Payment for
goods and services. Characteristics indicative of a payment for
goods and services received by a vendor are when the organization:
(1) Provides the
goods and services within normal business operations;
(2) Provides similar
goods or services to many different purchasers;
(3) Operates in
a competitive environment;
(4) Provides goods
or services that are ancillary to the operation of the Federal program;
and
(5) Is not subject
to compliance requirements of the Federal program.
(d) Use of judgment
in making determination. There may be unusual circumstances or
exceptions to the listed characteristics. In making the determination
of whether a subrecipient or vendor relationship exists, the substance
of the relationship is more important than the form of the agreement.
It is not expected that all of the characteristics will be present
and judgment should be used in determining whether an entity is a
subrecipient or vendor.
(e) For-profit
subrecipient. Since this part does not apply to for-profit subrecipients,
the pass-through entity is responsible for establishing requirements,
as necessary, to ensure compliance by for-profit subrecipients. The
contract with the for-profit subrecipient should describe applicable
compliance requirements and the for-profit subrecipient's compliance
responsibility. Methods to ensure compliance for Federal awards made
to for-profit subrecipients may include pre-award audits, monitoring
during the contract, and post-award audits.
(f) Compliance
responsibility for vendors. In most cases, the auditee's compliance
responsibility for vendors is only to ensure that the procurement,
receipt, and payment for goods and services comply with laws, regulations,
and the provisions of contracts or grant agreements. Program compliance
requirements normally do not pass through to vendors. However, the
auditee is responsible for ensuring compliance for vendor transactions
which are structured such that the vendor is responsible for program
compliance or the vendor's records must be reviewed to determine
program compliance. Also, when these vendor transactions relate to
a major program, the scope of the audit shall include determining
whether these transactions are in compliance with laws, regulations,
and the provisions of contracts or grant agreements.
§___.215
Relation to other audit requirements.
(a) Audit under
this part in lieu of other audits. An audit made in accordance
with this part shall be in lieu of any financial audit required under
individual Federal awards. To the extent this audit meets a Federal
agency's needs, it shall rely upon and use such audits. The provisions
of this part neither limit the authority of Federal agencies, including
their Inspectors General, or GAO to conduct or arrange for additional
audits (e.g., financial audits, performance audits, evaluations,
inspections, or reviews) nor authorize any auditee to constrain Federal
agencies from carrying out additional audits. Any additional audits
shall be planned and performed in such a way as to build upon work
performed by other auditors.
(b) Federal agency
to pay for additional audits. A Federal agency that conducts
or contracts for additional audits shall, consistent with other applicable
laws and regulations, arrange for funding the full cost of such additional
audits.
(c) Request for
a program to be audited as a major program. A Federal agency
may request an auditee to have a particular Federal program audited
as a major program in lieu of the Federal agency conducting or arranging
for the additional audits. To allow for planning, such requests should
be made at least 180 days prior to the end of the fiscal year to
be audited. The auditee, after consultation with its auditor, should
promptly respond to such request by informing the Federal agency
whether the program would otherwise be audited as a major program
using the risk-based audit approach described in §___.520 and,
if not, the estimated incremental cost. The Federal agency shall
then promptly confirm to the auditee whether it wants the program
audited as a major program. If the program is to be audited as a
major program based upon this Federal agency request, and the Federal
agency agrees to pay the full incremental costs, then the auditee
shall have the program audited as a major program. A pass-through
entity may use the provisions of this paragraph for a subrecipient.
§___.220
Frequency of audits.
Except for the provisions
for biennial audits provided in paragraphs (a) and (b) of
this section, audits required by this part shall be performed annually.
Any biennial audit shall cover both years within the biennial period.
(a) A State or local
government that is required by constitution or statute, in effect on
January 1, 1987, to undergo its audits less frequently than annually,
is permitted to undergo its audits pursuant to this part biennially.
This requirement must still be in effect for the biennial period under
audit.
(b) Any non-profit
organization that had biennial audits for all biennial periods ending
between July 1, 1992, and January 1, 1995, is permitted to undergo
its audits pursuant to this part biennially.
§___.225
Sanctions.
No audit costs may
be charged to Federal awards when audits required by this part have
not been made or have been made but not in accordance with this part.
In cases of continued inability or unwillingness to have an audit conducted
in accordance with this part, Federal agencies and pass-through entities
shall take appropriate action using sanctions such as:
(a) Withholding
a percentage of Federal awards until the audit is completed satisfactorily;
(b) Withholding
or disallowing overhead costs;
(c) Suspending Federal
awards until the audit is conducted; or
(d) Terminating
the Federal award.
§___.230
Audit costs.
(a) Allowable
costs. Unless prohibited by law, the cost of audits made in accordance
with the provisions of this part are allowable charges to Federal
awards. The charges may be considered a direct cost or an allocated
indirect cost, as determined in accordance with the provisions of
applicable OMB cost principles circulars, the Federal Acquisition
Regulation (FAR) (48 CFR parts 30 and 31), or other applicable cost
principles or regulations.
(b) Unallowable
costs. A non-Federal entity shall not charge the following to
a Federal award:
(1) The cost of
any audit under the Single Audit Act Amendments of 1996 (31 U.S.C.
7501 et seq.) not conducted in accordance with this part.
(2) The cost of
auditing a non-Federal entity which has Federal awards expended of
less than $300,000 per year and is thereby exempted under §___.200(d) from
having an audit conducted under this part. However, this does not prohibit
a pass-through entity from charging Federal awards for the cost of
limited scope audits to monitor its subrecipients in accordance with §___.400(d)(3),
provided the subrecipient does not have a single audit. For purposes
of this part, limited scope audits only include agreed-upon procedures
engagements conducted in accordance with either the AICPA's generally
accepted auditing standards or attestation standards, that are paid
for and arranged by a pass-through entity and address only one or more
of the following types of compliance requirements: activities allowed
or unallowed; allowable costs/cost principles; eligibility; matching,
level of effort, earmarking; and, reporting.
§___.235
Program-specific audits.
(a) Program-specific
audit guide available. In many cases, a program-specific audit
guide will be available to provide specific guidance to the auditor
with respect to internal control, compliance requirements, suggested
audit procedures, and audit reporting requirements. The auditor should
contact the Office of Inspector General of the Federal agency to
determine whether such a guide is available. When a current program-specific
audit guide is available, the auditor shall follow GAGAS and the
guide when performing a program-specific audit.
(b) Program-specific
audit guide not available.
(1) When a program-specific audit
guide is not available, the auditee and auditor shall have basically
the same responsibilities for the Federal program as they would have
for an audit of a major program in a single audit.
(2) The auditee
shall prepare the financial statement(s) for the Federal program that
includes, at a minimum, a schedule of expenditures of Federal awards
for the program and notes that describe the significant accounting
policies used in preparing the schedule, a summary schedule of prior
audit findings consistent with the requirements of §___.315(b),
and a corrective action plan consistent with the requirements of §___.315(c).
(3) The auditor
shall:
(i) Perform an audit
of the financial statement(s) for the Federal program in accordance
with GAGAS;
(ii) Obtain an understanding
of internal control and perform tests of internal control over the
Federal program consistent with the requirements of §___.500(c) for
a major program;
(iii) Perform procedures
to determine whether the auditee has complied with laws, regulations,
and the provisions of contracts or grant agreements that could have
a direct and material effect on the Federal program consistent with
the requirements of §___.500(d) for a major program;
and
(iv) Follow up on
prior audit findings, perform procedures to assess the reasonableness
of the summary schedule of prior audit findings prepared by the auditee,
and report, as a current year audit finding, when the auditor concludes
that the summary schedule of prior audit findings materially misrepresents
the status of any prior audit finding in accordance with the requirements
of §___.500(e).
(4) The auditor's
report(s) may be in the form of either combined or separate reports
and may be organized differently from the manner presented in this
section. The auditor's report(s) shall state that the audit was conducted
in accordance with this part and include the following:
(i) An opinion (or
disclaimer of opinion) as to whether the financial statement(s) of
the Federal program is presented fairly in all material respects in
conformity with the stated accounting policies;
(ii) A report on
internal control related to the Federal program, which shall describe
the scope of testing of internal control and the results of the tests;
(iii) A report on
compliance which includes an opinion (or disclaimer of opinion) as
to whether the auditee complied with laws, regulations, and the provisions
of contracts or grant agreements which could have a direct and material
effect on the Federal program; and
(iv) A schedule
of findings and questioned costs for the Federal program that includes
a summary of the auditor's results relative to the Federal program
in a format consistent with §___.505(d)(1) and
findings and questioned costs consistent with the requirements of §___.505(d)(3).
(c) Report submission
for program-specific audits.
(1) The audit shall
be completed and the reporting required by paragraph (c)(2) or (c)(3) of
this section submitted within the earlier of 30 days after receipt
of the auditor's report(s), or nine months after the end of the audit
period, unless a longer period is agreed to in advance by the Federal
agency that provided the funding or a different period is specified
in a program-specific audit guide. (However, for fiscal years beginning
on or before June 30, 1998, the audit shall be completed and the required
reporting shall be submitted within the earlier of 30 days after receipt
of the auditor's report(s), or 13 months after the end of the audit
period, unless a different period is specified in a program-specific
audit guide.) Unless restricted by law or regulation, the auditee shall
make report copies available for public inspection.
(2) When a program-specific
audit guide is available, the auditee shall submit to the Federal clearinghouse
designated by OMB the data collection form prepared in accordance with §___.320(b),
as applicable to a program-specific audit, and the reporting required
by the program-specific audit guide to be retained as an archival copy.
Also, the auditee shall submit to the Federal awarding agency or pass-through
entity the reporting required by the program-specific audit guide.
(3) When a program-specific
audit guide is not available, the reporting package for a program-specific
audit shall consist of the financial statement(s) of the Federal program,
a summary schedule of prior audit findings, and a corrective action
plan as described in paragraph (b)(2) of this section,
and the auditor's report(s) described in paragraph (b)(4) of
this section. The data collection form prepared in accordance with §___.320(b),
as applicable to a program-specific audit, and one copy of this reporting
package shall be submitted to the Federal clearinghouse designated
by OMB to be retained as an archival copy. Also, when the schedule
of findings and questioned costs disclosed audit findings or the summary
schedule of prior audit findings reported the status of any audit findings,
the auditee shall submit one copy of the reporting package to the Federal
clearinghouse on behalf of the Federal awarding agency, or directly
to the pass-through entity in the case of a subrecipient. Instead of
submitting the reporting package to the pass-through entity, when a
subrecipient is not required to submit a reporting package to the pass-through
entity, the subrecipient shall provide written notification to the
pass-through entity, consistent with the requirements of §___.320(e)(2).
A subrecipient may submit a copy of the reporting package to the pass-through
entity to comply with this notification requirement.
(d) Other sections
of this part may apply. Program-specific audits are subject to §___.100 through §___.215(b), §___.220 through §___.230, §___.300 through §___.305, §___.315, §___.320(f) through §___.320(j), §___.400 through §___.405, §___.510 through §___.515,
and other referenced provisions of this part unless contrary to the
provisions of this section, a program-specific audit guide, or program
laws and regulations.
Subpart
C--Auditees
§___.300
Auditee responsibilities.
The auditee shall:
(a) Identify, in
its accounts, all Federal awards received and expended and the Federal
programs under which they were received. Federal program and award
identification shall include, as applicable, the CFDA title and number,
award number and year, name of the Federal agency, and name of the
pass-through entity.
(b) Maintain internal
control over Federal programs that provides reasonable assurance that
the auditee is managing Federal awards in compliance with laws, regulations,
and the provisions of contracts or grant agreements that could have
a material effect on each of its Federal programs.
(c) Comply with
laws, regulations, and the provisions of contracts or grant agreements
related to each of its Federal programs.
(d) Prepare appropriate
financial statements, including the schedule of expenditures of Federal
awards in accordance with §___.310.
(e) Ensure that
the audits required by this part are properly performed and submitted
when due. When extensions to the report submission due date required
by §___.320(a) are granted by the cognizant or
oversight agency for audit, promptly notify the Federal clearinghouse
designated by OMB and each pass-through entity providing Federal awards
of the extension.
(f) Follow up and
take corrective action on audit findings, including preparation of
a summary schedule of prior audit findings and a corrective action
plan in accordance with §___.315(b) and §___.315(c),
respectively.
§___.305
Auditor selection.
(a) Auditor procurement.
In procuring audit services, auditees shall follow the procurement
standards prescribed by the Grants Management Common Rule (hereinafter
referred to as the "A-102 Common Rule") published March 11,
1988 and amended April 19, 1995 [insert appropriate CFR citation],
Circular A-110, "Uniform Administrative Requirements for Grants
and Agreements with Institutions of Higher Education, Hospitals and
Other Non-Profit Organizations," or the FAR (48 CFR part 42),
as applicable (OMB Circulars are available from the Office of Administration,
Publications Office, room 2200, New Executive Office Building, Washington,
DC 20503). Whenever possible, auditees shall make positive efforts
to utilize small businesses, minority-owned firms, and women's business
enterprises, in procuring audit services as stated in the A-102 Common
Rule, OMB Circular A-110, or the FAR (48 CFR part 42), as applicable.
In requesting proposals for audit services, the objectives and scope
of the audit should be made clear. Factors to be considered in evaluating
each proposal for audit services include the responsiveness to the
request for proposal, relevant experience, availability of staff with
professional qualifications and technical abilities, the results of
external quality control reviews, and price.
(b) Restriction
on auditor preparing indirect cost proposals. An auditor who
prepares the indirect cost proposal or cost allocation plan may not
also be selected to perform the audit required by this part when
the indirect costs recovered by the auditee during the prior year
exceeded $1 million. This restriction applies to the base year used
in the preparation of the indirect cost proposal or cost allocation
plan and any subsequent years in which the resulting indirect cost
agreement or cost allocation plan is used to recover costs. To minimize
any disruption in existing contracts for audit services, this paragraph
applies to audits of fiscal years beginning after June 30, 1998.
(c) Use of Federal
auditors. Federal auditors may perform all or part of the work
required under this part if they comply fully with the requirements
of this part.
§___.310
Financial statements.
(a) Financial
statements. The auditee shall prepare financial statements that
reflect its financial position, results of operations or changes
in net assets, and, where appropriate, cash flows for the fiscal
year audited. The financial statements shall be for the same organizational
unit and fiscal year that is chosen to meet the requirements of this
part. However, organization-wide financial statements may also include
departments, agencies, and other organizational units that have separate
audits in accordance with §___.500(a) and prepare
separate financial statements.
(b) Schedule
of expenditures of Federal awards. The auditee shall also prepare
a schedule of expenditures of Federal awards for the period covered
by the auditee's financial statements. While not required, the auditee
may choose to provide information requested by Federal awarding agencies
and pass-through entities to make the schedule easier to use. For
example, when a Federal program has multiple award years, the auditee
may list the amount of Federal awards expended for each award year
separately. At a minimum, the schedule shall:
(1) List individual
Federal programs by Federal agency. For Federal programs included in
a cluster of programs, list individual Federal programs within a cluster
of programs. For R&D, total Federal awards expended shall be shown
either by individual award or by Federal agency and major subdivision
within the Federal agency. For example, the National Institutes of
Health is a major subdivision in the Department of Health and Human
Services.
(2) For Federal
awards received as a subrecipient, the name of the pass-through entity
and identifying number assigned by the pass-through entity shall be
included.
(3) Provide total
Federal awards expended for each individual Federal program and the
CFDA number or other identifying number when the CFDA information is
not available.
(4) Include notes
that describe the significant accounting policies used in preparing
the schedule.
(5) To the extent
practical, pass-through entities should identify in the schedule the
total amount provided to subrecipients from each Federal program.
(6) Include, in
either the schedule or a note to the schedule, the value of the Federal
awards expended in the form of non-cash assistance, the amount of insurance
in effect during the year, and loans or loan guarantees outstanding
at year end. While not required, it is preferable to present this information
in the schedule.
§___.315
Audit findings follow-up.
(a) General.
The auditee is responsible for follow-up and corrective action on all
audit findings. As part of this responsibility, the auditee shall prepare
a summary schedule of prior audit findings. The auditee shall also
prepare a corrective action plan for current year audit findings. The
summary schedule of prior audit findings and the corrective action
plan shall include the reference numbers the auditor assigns to audit
findings under §___.510(c). Since the summary
schedule may include audit findings from multiple years, it shall include
the fiscal year in which the finding initially occurred.
(b) Summary schedule
of prior audit findings. The summary schedule of prior audit
findings shall report the status of all audit findings included in
the prior audit's schedule of findings and questioned costs relative
to Federal awards. The summary schedule shall also include audit
findings reported in the prior audit's summary schedule of prior
audit findings except audit findings listed as corrected in accordance
with paragraph (b)(1) of this section, or no longer
valid or not warranting further action in accordance with paragraph (b)(4) of
this section.
(1) When audit findings
were fully corrected, the summary schedule need only list the audit
findings and state that corrective action was taken.
(2) When audit findings
were not corrected or were only partially corrected, the summary schedule
shall describe the planned corrective action as well as any partial
corrective action taken.
(3) When corrective
action taken is significantly different from corrective action previously
reported in a corrective action plan or in the Federal agency's or
pass-through entity's management decision, the summary schedule shall
provide an explanation.
(4) When the auditee
believes the audit findings are no longer valid or do not warrant further
action, the reasons for this position shall be described in the summary
schedule. A valid reason for considering an audit finding as not warranting
further action is that all of the following have occurred:
(i) Two years have
passed since the audit report in which the finding occurred was submitted
to the Federal clearinghouse;
(ii) The Federal
agency or pass-through entity is not currently following up with the
auditee on the audit finding; and
(iii) A management
decision was not issued.
(c) Corrective
action plan. At the completion of the audit, the auditee shall
prepare a corrective action plan to address each audit finding included
in the current year auditor's reports. The corrective action plan
shall provide the name(s) of the contact person(s) responsible for
corrective action, the corrective action planned, and the anticipated
completion date. If the auditee does not agree with the audit findings
or believes corrective action is not required, then the corrective
action plan shall include an explanation and specific reasons.
§___.320
Report submission.
(a) General.
The audit shall be completed and the data collection form described
in paragraph (b) of this section and reporting package
described in paragraph (c) of this section shall be
submitted within the earlier of 30 days after receipt of the auditor's
report(s), or nine months after the end of the audit period, unless
a longer period is agreed to in advance by the cognizant or oversight
agency for audit. (However, for fiscal years beginning on or before
June 30, 1998, the audit shall be completed and the data collection
form and reporting package shall be submitted within the earlier of
30 days after receipt of the auditor's report(s), or 13 months after
the end of the audit period.) Unless restricted by law or regulation,
the auditee shall make copies available for public inspection.
(b) Data Collection.
(1) The auditee shall submit a data collection form which states whether
the audit was completed in accordance with this part and provides information
about the auditee, its Federal programs, and the results of the audit.
The form shall be approved by OMB, available from the Federal clearinghouse
designated by OMB, and include data elements similar to those presented
in this paragraph. A senior level representative of the auditee (e.g.,
State controller, director of finance, chief executive officer, or
chief financial officer) shall sign a statement to be included as part
of the form certifying that: the auditee complied with the requirements
of this part, the form was prepared in accordance with this part (and
the instructions accompanying the form), and the information included
in the form, in its entirety, are accurate and complete.
(2) The data collection
form shall include the following data elements:
(i) The type of
report the auditor issued on the financial statements of the auditee
(i.e., unqualified opinion, qualified opinion, adverse opinion, or
disclaimer of opinion).
(ii) Where applicable,
a statement that reportable conditions in internal control were disclosed
by the audit of the financial statements and whether any such conditions
were material weaknesses.
(iii) A statement
as to whether the audit disclosed any noncompliance which is material
to the financial statements of the auditee.
(iv) Where applicable,
a statement that reportable conditions in internal control over major
programs were disclosed by the audit and whether any such conditions
were material weaknesses.
(v) The type of
report the auditor issued on compliance for major programs (i.e., unqualified
opinion, qualified opinion, adverse opinion, or disclaimer of opinion).
(vi) A list of the
Federal awarding agencies which will receive a copy of the reporting
package pursuant to §___.320(d)(2) of OMB Circular
A-133.
(vii) A yes or no
statement as to whether the auditee qualified as a low-risk auditee
under §___.530 of OMB Circular A-133.
(viii) The dollar
threshold used to distinguish between Type A and Type B programs as
defined in §___.520(b) of OMB Circular A-133.
(ix) The Catalog
of Federal Domestic Assistance (CFDA) number for each Federal
program, as applicable.
(x) The name of
each Federal program and identification of each major program. Individual
programs within a cluster of programs should be listed in the same
level of detail as they are listed in the schedule of expenditures
of Federal awards.
(xi) The amount
of expenditures in the schedule of expenditures of Federal awards associated
with each Federal program.
(xii) For each Federal
program, a yes or no statement as to whether there are audit findings
in each of the following types of compliance requirements and the total
amount of any questioned costs:
(A) Activities allowed
or unallowed.
(B) Allowable costs/cost
principles.
(C) Cash management.
(D) Davis-Bacon
Act.
(E) Eligibility.
(F) Equipment and
real property management.
(G) Matching, level
of effort, earmarking.
(H) Period of availability
of Federal funds.
(I) Procurement
and suspension and debarment.
(J) Program income.
(K) Real property
acquisition and relocation assistance.
(L) Reporting.
(M) Subrecipient
monitoring.
(N) Special tests
and provisions.
(xiii) Auditee Name,
Employer Identification Number(s), Name and Title of Certifying Official,
Telephone Number, Signature, and Date.
(xiv) Auditor Name,
Name and Title of Contact Person, Auditor Address, Auditor Telephone
Number, Signature, and Date.
(xv) Whether the
auditee has either a cognizant or oversight agency for audit.
(xvi) The name of
the cognizant or oversight agency for audit determined in accordance
with §___.400(a) and §___.400(b),
respectively.
(3) Using the information
included in the reporting package described in paragraph (c) of
this section, the auditor shall complete the applicable sections of
the form. The auditor shall sign a statement to be included as part
of the data collection form that indicates, at a minimum, the source
of the information included in the form, the auditor's responsibility
for the information, that the form is not a substitute for the reporting
package described in paragraph (c) of this section,
and that the content of the form is limited to the data elements prescribed
by OMB.
(c) Reporting
package. The reporting package shall include the:
(1) Financial statements
and schedule of expenditures of Federal awards discussed in §___.310(a) and §___.310(b),
respectively;
(2) Summary schedule
of prior audit findings discussed in §___.315(b);
(3) Auditor's report(s)
discussed in §___.505; and
(4) Corrective action
plan discussed in §___.315(c).
(d) Submission
to clearinghouse. All auditees shall submit to the Federal clearinghouse
designated by OMB the data collection form described in paragraph (b) of
this section and one copy of the reporting package described in paragraph (c) of
this section for:
(1) The Federal
clearinghouse to retain as an archival copy; and
(2) Each Federal
awarding agency when the schedule of findings and questioned costs
disclosed audit findings relating to Federal awards that the Federal
awarding agency provided directly or the summary schedule of prior
audit findings reported the status of any audit findings relating to
Federal awards that the Federal awarding agency provided directly.
(e) Additional
submission by subrecipients.
(1) In addition to the requirements
discussed in paragraph (d) of this section, auditees
that are also subrecipients shall submit to each pass-through entity
one copy of the reporting package described in paragraph (c) of
this section for each pass-through entity when the schedule of findings
and questioned costs disclosed audit findings relating to Federal
awards that the pass-through entity provided or the summary schedule
of prior audit findings reported the status of any audit findings
relating to Federal awards that the pass-through entity provided.
(2) Instead of submitting
the reporting package to a pass-through entity, when a subrecipient
is not required to submit a reporting package to a pass-through entity
pursuant to paragraph (e)(1) of this section, the
subrecipient shall provide written notification to the pass-through
entity that: an audit of the subrecipient was conducted in accordance
with this part (including the period covered by the audit and the name,
amount, and CFDA number of the Federal award(s) provided by the pass-through
entity); the schedule of findings and questioned costs disclosed no
audit findings relating to the Federal award(s) that the pass-through
entity provided; and, the summary schedule of prior audit findings
did not report on the status of any audit findings relating to the
Federal award(s) that the pass-through entity provided. A subrecipient
may submit a copy of the reporting package described in paragraph (c) of
this section to a pass-through entity to comply with this notification
requirement.
(f) Requests
for report copies. In response to requests by a Federal agency
or pass-through entity, auditees shall submit the appropriate copies
of the reporting package described in paragraph (c) of
this section and, if requested, a copy of any management letters
issued by the auditor.
(g) Report retention
requirements. Auditees shall keep one copy of the data collection
form described in paragraph (b) of this section
and one copy of the reporting package described in paragraph (c) of
this section on file for three years from the date of submission
to the Federal clearinghouse designated by OMB. Pass-through entities
shall keep subrecipients' submissions on file for three years from
date of receipt.
(h) Clearinghouse
responsibilities. The Federal clearinghouse designated by OMB
shall distribute the reporting packages received in accordance with
paragraph (d)(2) of this section and §___.235(c)(3) to
applicable Federal awarding agencies, maintain a data base of completed
audits, provide appropriate information to Federal agencies, and
follow up with known auditees which have not submitted the required
data collection forms and reporting packages.
(i) Clearinghouse
address. The address of the Federal clearinghouse currently designated
by OMB is Federal Audit Clearinghouse, Bureau of the Census, 1201
E. 10th Street, Jeffersonville, IN 47132.
(j) Electronic
filing. Nothing in this part shall preclude electronic submissions
to the Federal clearinghouse in such manner as may be approved by
OMB. With OMB approval, the Federal clearinghouse may pilot test
methods of electronic submissions.
Subpart
D--Federal Agencies and Pass-Through Entities
§___.400
Responsibilities.
(a) Cognizant
agency for audit responsibilities. Recipients expending more
than $25 million a year in Federal awards shall have a cognizant
agency for audit. The designated cognizant agency for audit shall
be the Federal awarding agency that provides the predominant amount
of direct funding to a recipient unless OMB makes a specific cognizant
agency for audit assignment. To provide for continuity of cognizance,
the determination of the predominant amount of direct funding shall
be based upon direct Federal awards expended in the recipient's fiscal
years ending in 1995, 2000, 2005, and every fifth year thereafter.
For example, audit cognizance for periods ending in 1997 through
2000 will be determined based on Federal awards expended in 1995.
(However, for States and local governments that expend more than
$25 million a year in Federal awards and have previously assigned
cognizant agencies for audit, the requirements of this paragraph
are not effective until fiscal years beginning after June 30, 2000.)
Notwithstanding the manner in which audit cognizance is determined,
a Federal awarding agency with cognizance for an auditee may reassign
cognizance to another Federal awarding agency which provides substantial
direct funding and agrees to be the cognizant agency for audit. Within
30 days after any reassignment, both the old and the new cognizant
agency for audit shall notify the auditee, and, if known, the auditor
of the reassignment. The cognizant agency for audit shall:
(1) Provide technical
audit advice and liaison to auditees and auditors.
(2) Consider auditee
requests for extensions to the report submission due date required
by §___.320(a). The cognizant agency for audit
may grant extensions for good cause.
(3) Obtain or conduct
quality control reviews of selected audits made by non-Federal auditors,
and provide the results, when appropriate, to other interested organizations.
(4) Promptly inform
other affected Federal agencies and appropriate Federal law enforcement
officials of any direct reporting by the auditee or its auditor of
irregularities or illegal acts, as required by GAGAS or laws and regulations.
(5) Advise the auditor
and, where appropriate, the auditee of any deficiencies found in the
audits when the deficiencies require corrective action by the auditor.
When advised of deficiencies, the auditee shall work with the auditor
to take corrective action. If corrective action is not taken, the cognizant
agency for audit shall notify the auditor, the auditee, and applicable
Federal awarding agencies and pass-through entities of the facts and
make recommendations for follow-up action. Major inadequacies or repetitive
substandard performance by auditors shall be referred to appropriate
State licensing agencies and professional bodies for disciplinary action.
(6) Coordinate,
to the extent practical, audits or reviews made by or for Federal agencies
that are in addition to the audits made pursuant to this part, so that
the additional audits or reviews build upon audits performed in accordance
with this part.
(7) Coordinate a
management decision for audit findings that affect the Federal programs
of more than one agency.
(8) Coordinate the
audit work and reporting responsibilities among auditors to achieve
the most cost-effective audit.
(9) For biennial
audits permitted under §___.220, consider auditee
requests to qualify as a low-risk auditee under §___.530(a).
(b) Oversight
agency for audit responsibilities. An auditee which does not
have a designated cognizant agency for audit will be under the general
oversight of the Federal agency determined in accordance with §___.105.
The oversight agency for audit:
(1) Shall provide
technical advice to auditees and auditors as requested.
(2) May assume all
or some of the responsibilities normally performed by a cognizant agency
for audit.
(c) Federal awarding
agency responsibilities. The Federal awarding agency shall perform
the following for the Federal awards it makes:
(1) Identify Federal
awards made by informing each recipient of the CFDA title and number,
award name and number, award year, and if the award is for R&D.
When some of this information is not available, the Federal agency
shall provide information necessary to clearly describe the Federal
award.
(2) Advise recipients
of requirements imposed on them by Federal laws, regulations, and the
provisions of contracts or grant agreements.
(3) Ensure that
audits are completed and reports are received in a timely manner and
in accordance with the requirements of this part.
(4) Provide technical
advice and counsel to auditees and auditors as requested.
(5) Issue a management
decision on audit findings within six months after receipt of the audit
report and ensure that the recipient takes appropriate and timely corrective
action.
(6) Assign a person
responsible for providing annual updates of the compliance supplement
to OMB.
(d) Pass-through
entity responsibilities. A pass-through entity shall perform
the following for the Federal awards it makes:
(1) Identify Federal
awards made by informing each subrecipient of CFDA title and number,
award name and number, award year, if the award is R&D, and name
of Federal agency. When some of this information is not available,
the pass-through entity shall provide the best information available
to describe the Federal award.
(2) Advise subrecipients
of requirements imposed on them by Federal laws, regulations, and the
provisions of contracts or grant agreements as well as any supplemental
requirements imposed by the pass-through entity.
(3) Monitor the
activities of subrecipients as necessary to ensure that Federal awards
are used for authorized purposes in compliance with laws, regulations,
and the provisions of contracts or grant agreements and that performance
goals are achieved.
(4) Ensure that
subrecipients expending $300,000 or more in Federal awards during the
subrecipient's fiscal year have met the audit requirements of this
part for that fiscal year.
(5) Issue a management
decision on audit findings within six months after receipt of the subrecipient's
audit report and ensure that the subrecipient takes appropriate and
timely corrective action.
(6) Consider whether
subrecipient audits necessitate adjustment of the pass-through entity's
own records.
(7) Require each
subrecipient to permit the pass-through entity and auditors to have
access to the records and financial statements as necessary for the
pass-through entity to comply with this part.
§___.405
Management decision.
(a) General.
The management decision shall clearly state whether or not the audit
finding is sustained, the reasons for the decision, and the expected
auditee action to repay disallowed costs, make financial adjustments,
or take other action. If the auditee has not completed corrective action,
a timetable for follow-up should be given. Prior to issuing the management
decision, the Federal agency or pass-through entity may request
additional information
or documentation from the auditee, including a request for auditor
assurance related to the documentation, as a way of mitigating disallowed
costs. The management decision should describe any appeal process available
to the auditee.
(b) Federal agency.
As provided in §___.400(a)(7), the cognizant
agency for audit shall be responsible for coordinating a management
decision for audit findings that affect the programs of more than one
Federal agency. As provided in §___.400(c)(5),
a Federal awarding agency is responsible for issuing a management decision
for findings that relate to Federal awards it makes to recipients.
Alternate arrangements may be made on a case-by-case basis by agreement
among the Federal agencies concerned.
(c) Pass-through
entity. As provided in §___.400(d)(5),
the pass-through entity shall be responsible for making the management
decision for audit findings that relate to Federal awards it makes
to subrecipients.
(d) Time requirements.
The entity responsible for making the management decision shall do
so within six months of receipt of the audit report. Corrective action
should be initiated within six months after receipt of the audit report
and proceed as rapidly as possible.
(e) Reference
numbers. Management decisions shall include the reference numbers
the auditor assigned to each audit finding in accordance with §___.510(c).
Subpart
E--Auditors
§___.500
Scope of audit.
(a) General.
The audit shall be conducted in accordance with GAGAS. The audit shall
cover the entire operations of the auditee; or, at the option of the
auditee, such audit shall include a series of audits that cover departments,
agencies, and other organizational units which expended or otherwise
administered Federal awards during such fiscal year, provided that
each such audit shall encompass the financial statements and schedule
of expenditures of Federal awards for each such department, agency,
and other organizational unit, which shall be considered to be a non-Federal
entity. The financial statements and schedule of expenditures of Federal
awards shall be for the same fiscal year.
(b) Financial
statements. The auditor shall determine whether the financial
statements of the auditee are presented fairly in all material respects
in conformity with generally accepted accounting principles. The
auditor shall also determine whether the schedule of expenditures
of Federal awards is presented fairly in all material respects in
relation to the auditee's financial statements taken as a whole.
(c) Internal
control.
(1) In addition to the requirements of GAGAS, the auditor
shall perform procedures to obtain an understanding of internal control
over Federal programs sufficient to plan the audit to support a low
assessed level of control risk for major programs.
(2) Except as provided
in paragraph (c)(3) of this section, the auditor shall:
(i) Plan the testing
of internal control over major programs to support a low assessed level
of control risk for the assertions relevant to the compliance requirements
for each major program; and
(ii) Perform testing
of internal control as planned in paragraph (c)(2)(i) of
this section.
(3) When internal
control over some or all of the compliance requirements for a major
program are likely to be ineffective in preventing or detecting noncompliance,
the planning and performing of testing described in paragraph (c)(2) of
this section are not required for those compliance requirements. However,
the auditor shall report a reportable condition (including whether
any such condition is a material weakness) in accordance with §___.510,
assess the related control risk at the maximum, and consider whether
additional compliance tests are required because of ineffective internal
control.
(d) Compliance.
(1) In addition to the requirements of GAGAS, the auditor shall determine
whether the auditee has complied with laws, regulations, and the provisions
of contracts or grant agreements that may have a direct and material
effect on each of its major programs.
(2) The principal
compliance requirements applicable to most Federal programs and the
compliance requirements of the largest Federal programs are included
in the compliance supplement.
(3) For the compliance
requirements related to Federal programs contained in the compliance
supplement, an audit of these compliance requirements will meet the
requirements of this part. Where there have been changes to the compliance
requirements and the changes are not reflected in the compliance supplement,
the auditor shall determine the current compliance requirements and
modify the audit procedures accordingly. For those Federal programs
not covered in the compliance supplement, the auditor should use the
types of compliance requirements contained in the compliance supplement
as guidance for identifying the types of compliance requirements to
test, and determine the requirements governing the Federal program
by reviewing the provisions of contracts and grant agreements and the
laws and regulations referred to in such contracts and grant agreements.
(4) The compliance
testing shall include tests of transactions and such other auditing
procedures necessary to provide the auditor sufficient evidence to
support an opinion on compliance.
(e) Audit follow-up.
The auditor shall follow-up on prior audit findings, perform procedures
to assess the reasonableness of the summary schedule of prior audit
findings prepared by the auditee in accordance with §___.315(b),
and report, as a current year audit finding, when the auditor concludes
that the summary schedule of prior audit findings materially misrepresents
the status of any prior audit finding. The auditor shall perform audit
follow-up procedures regardless of whether a prior audit finding relates
to a major program in the current year.
(f) Data Collection
Form. As required in §___.320(b)(3), the
auditor shall complete and sign specified sections of the data collection
form.
§___.505
Audit reporting.
The auditor's report(s)
may be in the form of either combined or separate reports and may be
organized differently from the manner presented in this section. The
auditor's report(s) shall state that the audit was conducted in accordance
with this part and include the following:
(a) An opinion (or
disclaimer of opinion) as to whether the financial statements are presented
fairly in all material respects in conformity with generally accepted
accounting principles and an opinion (or disclaimer of opinion) as
to whether the schedule of expenditures of Federal awards is presented
fairly in all material respects in relation to the financial statements
taken as a whole.
(b) A report on
internal control related to the financial statements and major programs.
This report shall describe the scope of testing of internal control
and the results of the tests, and, where applicable, refer to the separate
schedule of findings and questioned costs described in paragraph (d) of
this section.
(c) A report on
compliance with laws, regulations, and the provisions of contracts
or grant agreements, noncompliance with which could have a material
effect on the financial statements. This report shall also include
an opinion (or disclaimer of opinion) as to whether the auditee complied
with laws, regulations, and the provisions of contracts or grant agreements
which could have a direct and material effect on each major program,
and, where applicable, refer to the separate schedule of findings and
questioned costs described in paragraph (d) of this
section.
(d) A schedule of
findings and questioned costs which shall include the following three
components:
(1) A summary of
the auditor's results which shall include:
(i) The type of
report the auditor issued on the financial statements of the auditee
(i.e., unqualified opinion, qualified opinion, adverse opinion, or
disclaimer of opinion);
(ii) Where applicable,
a statement that reportable conditions in internal control were disclosed
by the audit of the financial statements and whether any such conditions
were material weaknesses;
(iii) A statement
as to whether the audit disclosed any noncompliance which is material
to the financial statements of the auditee;
(iv) Where applicable,
a statement that reportable conditions in internal control over major
programs were disclosed by the audit and whether any such conditions
were material weaknesses;
(v) The type of
report the auditor issued on compliance for major programs (i.e., unqualified
opinion, qualified opinion, adverse opinion, or disclaimer of opinion);
(vi) A statement
as to whether the audit disclosed any audit findings which the auditor
is required to report under §___.510(a);
(vii) An identification
of major programs;
(viii)The dollar
threshold used to distinguish between Type A and Type B programs, as
described in §___.520(b); and
(ix) A statement
as to whether the auditee qualified as a low-risk auditee under §___.530.
(2) Findings relating
to the financial statements which are required to be reported in accordance
with GAGAS.
(3) Findings and
questioned costs for Federal awards which shall include audit findings
as defined in §___.510(a).
(i) Audit findings
(e.g., internal control findings, compliance findings, questioned costs,
or fraud) which relate to the same issue should be presented as a single
audit finding. Where practical, audit findings should be organized
by Federal agency or pass-through entity.
(ii) Audit findings
which relate to both the financial statements and Federal awards, as
reported under paragraphs (d)(2) and (d)(3) of
this section, respectively, should be reported in both sections of
the schedule. However, the reporting in one section of the schedule
may be in summary form with a reference to a detailed reporting in
the other section of the schedule.
§___.510
Audit findings.
(a) Audit findings
reported. The auditor shall report the following as audit findings
in a schedule of findings and questioned costs:
(1) Reportable conditions
in internal control over major programs. The auditor's determination
of whether a deficiency in internal control is a reportable condition
for the purpose of reporting an audit finding is in relation to a type
of compliance requirement for a major program or an audit objective
identified in the compliance supplement. The auditor shall identify
reportable conditions which are individually or cumulatively material
weaknesses.
(2) Material noncompliance
with the provisions of laws, regulations, contracts, or grant agreements
related to a major program. The auditor's determination of whether
a noncompliance with the provisions of laws, regulations, contracts,
or grant agreements is material for the purpose of reporting an audit
finding is in relation to a type of compliance requirement for a major
program or an audit objective identified in the compliance supplement.
(3) Known questioned
costs which are greater than $10,000 for a type of compliance requirement
for a major program. Known questioned costs are those specifically
identified by the auditor. In evaluating the effect of questioned costs
on the opinion on compliance, the auditor considers the best estimate
of total costs questioned (likely questioned costs), not just the questioned
costs specifically identified (known questioned costs). The auditor
shall also report known questioned costs when likely questioned costs
are greater than $10,000 for a type of compliance requirement for a
major program. In reporting questioned costs, the auditor shall include
information to provide proper perspective for judging the prevalence
and consequences of the questioned costs.
(4) Known questioned
costs which are greater than $10,000 for a Federal program which is
not audited as a major program. Except for audit follow-up, the auditor
is not required under this part to perform audit procedures for such
a Federal program; therefore, the auditor will normally not find questioned
costs for a program which is not audited as a major program. However,
if the auditor does become aware of questioned costs for a Federal
program which is not audited as a major program (e.g., as part of audit
follow-up or other audit procedures) and the known questioned costs
are greater than $10,000, then the auditor shall report this as an
audit finding.
(5) The circumstances
concerning why the auditor's report on compliance for major programs
is other than an unqualified opinion, unless such circumstances are
otherwise reported as audit findings in the schedule of findings and
questioned costs for Federal awards.
(6) Known fraud
affecting a Federal award, unless such fraud is otherwise reported
as an audit finding in the schedule of findings and questioned costs
for Federal awards. This paragraph does not require the auditor to
make an additional reporting when the auditor confirms that the fraud
was reported outside of the auditor's reports under the direct reporting
requirements of GAGAS.
(7) Instances where
the results of audit follow-up procedures disclosed that the summary
schedule of prior audit findings prepared by the auditee in accordance
with §___.315(b) materially misrepresents the
status of any prior audit finding.
(b) Audit finding
detail. Audit findings shall be presented in sufficient detail
for the auditee to prepare a corrective action plan and take corrective
action and for Federal agencies and pass-through entities to arrive
at a management decision. The following specific information shall
be included, as applicable, in audit findings:
(1) Federal program
and specific Federal award identification including the CFDA title
and number, Federal award number and year, name of Federal agency,
and name of the applicable pass-through entity. When information, such
as the CFDA title and number or Federal award number, is not available,
the auditor shall provide the best information available to describe
the Federal award.
(2) The criteria
or specific requirement upon which the audit finding is based, including
statutory, regulatory, or other citation.
(3) The condition
found, including facts that support the deficiency identified in the
audit finding.
(4) Identification
of questioned costs and how they were computed.
(5) Information
to provide proper perspective for judging the prevalence and consequences
of the audit findings, such as whether the audit findings represent
an isolated instance or a systemic problem. Where appropriate, instances
identified shall be related to the universe and the number of cases
examined and be quantified in terms of dollar value.
(6) The possible
asserted effect to provide sufficient information to the auditee and
Federal agency, or pass-through entity in the case of a subrecipient,
to permit them to determine the cause and effect to facilitate prompt
and proper corrective action.
(7) Recommendations
to prevent future occurrences of the deficiency identified in the audit
finding.
(8) Views of responsible
officials of the auditee when there is disagreement with the audit
findings, to the extent practical.
(c) Reference
numbers. Each audit finding in the schedule of findings and questioned
costs shall include a reference number to allow for easy referencing
of the audit findings during follow-up.
§___.515
Audit working papers.
(a) Retention
of working papers. The auditor shall retain working papers and
reports for a minimum of three years after the date of issuance of
the auditor's report(s) to the auditee, unless the auditor is notified
in writing by the cognizant agency for audit, oversight agency for
audit, or pass-through entity to extend the retention period. When
the auditor is aware that the Federal awarding agency, pass-through
entity, or auditee is contesting an audit finding, the auditor shall
contact the parties contesting the audit finding for guidance prior
to destruction of the working papers and reports.
(b) Access to
working papers. Audit working papers shall be made available
upon request to the cognizant or oversight agency for audit or its
designee, a Federal agency providing direct or indirect funding,
or GAO at the completion of the audit, as part of a quality review,
to resolve audit findings, or to carry out oversight responsibilities
consistent with the purposes of this part. Access to working papers
includes the right of Federal agencies to obtain copies of working
papers, as is reasonable and necessary.
§___.520
Major program determination.
(a) General.
The auditor shall use a risk-based approach to determine which Federal
programs are major programs. This risk-based approach shall include
consideration of: Current and prior audit experience, oversight by
Federal agencies and pass-through entities, and the inherent risk of
the Federal program. The process in paragraphs (b) through (i) of
this section shall be followed.
(b) Step 1.
(1) The auditor shall identify the larger Federal programs, which shall
be labeled Type A programs. Type A programs are defined as Federal
programs with Federal awards expended during the audit period exceeding
the larger of:
(i) $300,000 or
three percent (.03) of total Federal awards expended in the case of
an auditee for which total Federal awards expended equal or exceed
$300,000 but are less than or equal to $100 million.
(ii) $3 million
or three-tenths of one percent (.003) of total Federal awards expended
in the case of an auditee for which total Federal awards expended exceed
$100 million but are less than or equal to $10 billion.
(iii) $30 million
or 15 hundredths of one percent (.0015) of total Federal awards expended
in the case of an auditee for which total Federal awards expended exceed
$10 billion.
(2) Federal programs
not labeled Type A under paragraph (b)(1) of this
section shall be labeled Type B programs.
(3) The inclusion
of large loan and loan guarantees (loans) should not result in the
exclusion of other programs as Type A programs. When a Federal program
providing loans significantly affects the number or size of Type A
programs, the auditor shall consider this Federal program as a Type
A program and exclude its values in determining other Type A programs.
(4) For biennial
audits permitted under §___.220, the determination
of Type A and Type B programs shall be based upon the Federal awards
expended during the two-year period.
(c) Step 2.
(1) The auditor shall identify Type A programs which are low-risk.
For a Type A program to be considered low-risk, it shall have been
audited as a major program in at least one of the two most recent audit
periods (in the most recent audit period in the case of a biennial
audit), and, in the most recent audit period, it shall have had no
audit findings under §___.510(a). However, the
auditor may use judgment and consider that audit findings from questioned
costs under §___.510(a)(3) and §___.510(a)(4),
fraud under §___.510(a)(6), and audit follow-up
for the summary schedule of prior audit findings under §___.510(a)(7) do
not preclude the Type A program from being low-risk. The auditor shall
consider: the criteria in §___.525(c), §___.525(d)(1), §___.525(d)(2),
and §___.525(d)(3); the results of audit follow-up;
whether any changes in personnel or systems affecting a Type A program
have significantly increased risk; and apply professional judgment
in determining whether a Type A program is low-risk.
(2) Notwithstanding
paragraph (c)(1) of this section, OMB may approve
a Federal awarding agency's request that a Type A program at certain
recipients may not be considered low-risk. For example, it may be necessary
for a large Type A program to be audited as major each year at particular
recipients to allow the Federal agency to comply with the Government
Management Reform Act of 1994 (31 U.S.C. 3515). The Federal agency
shall notify the recipient and, if known, the auditor at least 180
days prior to the end of the fiscal year to be audited of OMB's approval.
(d) Step 3.
(1) The auditor shall identify Type B programs which are high-risk
using professional judgment and the criteria in §___.525.
However, should the auditor select Option 2 under Step 4 (paragraph (e)(2)(i)(B) of
this section), the auditor is not required to identify more high-risk
Type B programs than the number of low-risk Type A programs. Except
for known reportable conditions in internal control or compliance problems
as discussed in §___.525(b)(1), §___.525(b)(2),
and §___.525(c)(1), a single criteria in §___.525 would
seldom cause a Type B program to be considered high-risk.
(2) The auditor
is not expected to perform risk assessments on relatively small Federal
programs. Therefore, the auditor is only required to perform risk assessments
on Type B programs that exceed the larger of:
(i) $100,000 or
three-tenths of one percent (.003) of total Federal awards expended
when the auditee has less than or equal to $100 million in total Federal
awards expended.
(ii) $300,000 or
three-hundredths of one percent (.0003) of total Federal awards expended
when the auditee has more than $100 million in total Federal awards
expended.
(e) Step 4.
At a minimum, the auditor shall audit all of the following as major
programs:
(1) All Type A programs,
except the auditor may exclude any Type A programs identified as low-risk
under Step 2 (paragraph (c)(1) of this section).
(2) (i) High-risk
Type B programs as identified under either of the following two options:
(A) Option 1.
At least one half of the Type B programs identified as high-risk under
Step 3 (paragraph (d) of this section), except this
paragraph (e)(2)(i)(A) does not require the auditor
to audit more high-risk Type B programs than the number of low-risk
Type A programs identified as low-risk under Step 2.
(B) Option 2.
One high-risk Type B program for each Type A program identified as
low-risk under Step 2.
(ii) When identifying
which high-risk Type B programs to audit as major under either Option
1 or 2 in paragraph (e)(2)(i)(A) or (B),
the auditor is encouraged to use an approach which provides an opportunity
for different high-risk Type B programs to be audited as major over
a period of time.
(3) Such additional
programs as may be necessary to comply with the percentage of coverage
rule discussed in paragraph (f) of this section. This
paragraph (e)(3) may require the auditor to audit
more programs as major than the number of Type A programs.
(f) Percentage
of coverage rule. The auditor shall audit as major programs Federal
programs with Federal awards expended that, in the aggregate, encompass
at least 50 percent of total Federal awards expended. If the auditee
meets the criteria in §___.530 for a low-risk
auditee, the auditor need only audit as major programs Federal programs
with Federal awards expended that, in the aggregate, encompass at
least 25 percent of total Federal awards expended.
(g) Documentation
of risk. The auditor shall document in the working papers the
risk analysis process used in determining major programs.
(h) Auditor's
judgment. When the major program determination was performed
and documented in accordance with this part, the auditor's judgment
in applying the risk-based approach to determine major programs shall
be presumed correct. Challenges by Federal agencies and pass-through
entities shall only be for clearly improper use of the guidance in
this part. However, Federal agencies and pass-through entities may
provide auditors guidance about the risk of a particular Federal
program and the auditor shall consider this guidance in determining
major programs in audits not yet completed.
(i) Deviation
from use of risk criteria. For first-year audits, the auditor
may elect to determine major programs as all Type A programs plus
any Type B programs as necessary to meet the percentage of coverage
rule discussed in paragraph (f) of this section.
Under this option, the auditor would not be required to perform the
procedures discussed in paragraphs (c), (d),
and (e) of this section.
(1) A first-year
audit is the first year the entity is audited under this part or the
first year of a change of auditors.
(2) To ensure that
a frequent change of auditors would not preclude audit of high-risk
Type B programs, this election for first-year audits may not be used
by an auditee more than once in every three years.
§___.525
Criteria for Federal program risk.
(a) General.
The auditor's determination should be based on an overall evaluation
of the risk of noncompliance occurring which could be material to the
Federal program. The auditor shall use auditor judgment and consider
criteria, such as described in paragraphs (b), (c),
and (d) of this section, to identify risk in Federal
programs. Also, as part of the risk analysis, the auditor may wish
to discuss a particular Federal program with auditee management and
the Federal agency or pass-through entity.
(b) Current and
prior audit experience.
(1) Weaknesses in internal control over
Federal programs would indicate higher risk. Consideration should
be given to the control environment over Federal programs and such
factors as the expectation of management's adherence to applicable
laws and regulations and the provisions of contracts and grant agreements
and the competence and experience of personnel who administer the
Federal programs.
(i) A Federal program
administered under multiple internal control structures may have higher
risk. When assessing risk in a large single audit, the auditor shall
consider whether weaknesses are isolated in a single operating unit
(e.g., one college campus) or pervasive throughout the entity.
(ii) When significant
parts of a Federal program are passed through to subrecipients, a weak
system for monitoring subrecipients would indicate higher risk.
(iii) The extent
to which computer processing is used to administer Federal programs,
as well as the complexity of that processing, should be considered
by the auditor in assessing risk. New and recently modified computer
systems may also indicate risk.
(2) Prior audit
findings would indicate higher risk, particularly when the situations
identified in the audit findings could have a significant impact on
a Federal program or have not been corrected.
(3) Federal programs
not recently audited as major programs may be of higher risk than Federal
programs recently audited as major programs without audit findings.
(c) Oversight
exercised by Federal agencies and pass-through entities.
(1)
Oversight exercised by Federal agencies or pass-through entities
could indicate risk. For example, recent monitoring or other reviews
performed by an oversight entity which disclosed no significant problems
would indicate lower risk. However, monitoring which disclosed significant
problems would indicate higher risk.
(2) Federal agencies,
with the concurrence of OMB, may identify Federal programs which are
higher risk. OMB plans to provide this identification in the compliance
supplement.
(d) Inherent
risk of the Federal program.
(1) The nature of a Federal program
may indicate risk. Consideration should be given to the complexity
of the program and the extent to which the Federal program contracts
for goods and services. For example, Federal programs that disburse
funds through third party contracts or have eligibility criteria
may be of higher risk. Federal programs primarily involving staff
payroll costs may have a high-risk for time and effort reporting,
but otherwise be at low-risk.
(2) The phase of
a Federal program in its life cycle at the Federal agency may indicate
risk. For example, a new Federal program with new or interim regulations
may have higher risk than an established program with time-tested regulations.
Also, significant changes in Federal programs, laws, regulations, or
the provisions of contracts or grant agreements may increase risk.
(3) The phase of
a Federal program in its life cycle at the auditee may indicate risk.
For example, during the first and last years that an auditee participates
in a Federal program, the risk may be higher due to start-up or closeout
of program activities and staff.
(4) Type B programs
with larger Federal awards expended would be of higher risk than programs
with substantially smaller Federal awards expended.
§___.530
Criteria for a low-risk auditee.
An auditee which
meets all of the following conditions for each of the preceding two
years (or, in the case of biennial audits, preceding two audit periods)
shall qualify as a low-risk auditee and be eligible for reduced audit
coverage in accordance with §___.520:
(a) Single audits
were performed on an annual basis in accordance with the provisions
of this part. A non-Federal entity that has biennial audits does not
qualify as a low-risk auditee, unless agreed to in advance by the cognizant
or oversight agency for audit.
(b) The auditor's
opinions on the financial statements and the schedule of expenditures
of Federal awards were unqualified. However, the cognizant or oversight
agency for audit may judge that an opinion qualification does not affect
the management of Federal awards and provide a waiver.
(c) There were no
deficiencies in internal control which were identified as material
weaknesses under the requirements of GAGAS. However, the cognizant
or oversight agency for audit may judge that any identified material
weaknesses do not affect the management of Federal awards and provide
a waiver.
(d) None of the
Federal programs had audit findings from any of the following in either
of the preceding two years (or, in the case of biennial audits, preceding
two audit periods) in which they were classified as Type A programs:
(1) Internal control
deficiencies which were identified as material weaknesses;
(2) Noncompliance
with the provisions of laws, regulations, contracts, or grant agreements
which have a material effect on the Type A program; or
(3) Known or likely
questioned costs that exceed five percent of the total Federal awards
expended for a Type A program during the year.
Appendix A to Part
__ - Data Collection Form (Form SF-SAC)
[insert SF-SAC after
finalized]
Appendix B to Part
__ - Circular A-133 Compliance Supplement
Note: The provisional
"Circular A-133 Compliance Supplement" is available from the
OMB Home Page under the "OMB
Documents", in the "Grants Management" section.
Return to Top