PART 3 - COMPLIANCE REQUIREMENTS
The objectives of most compliance requirements for Federal programs administered by States, local governments, Indian tribal governments, and non-profit organizations are generic in nature. For example, most programs have eligibility requirements for individuals or organizations. While the criteria for determining eligibility vary by program, the objective of the compliance requirement that only eligible individuals or organizations participate is consistent across all programs.
Rather than repeat these compliance requirements, audit objectives, and suggested audit procedures, for each of the programs contained in Part 4 - Agency Program Requirements and Part 5 - Clusters of Programs, they are provided once in this part. For each program in this Compliance Supplement (this Supplement), Part 4 or Part 5 contains additional information about the compliance requirements that arise from laws and regulations applicable to each program, including the requirements specific to each program that should be tested using the guidance in this part.
The administrative requirements that apply to most programs arise from two sources: the "Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments" (also known as the "A-102 Common Rule") and OMB Circular A-110, "Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations," and the agencies' codification of OMB Circular A-110. The applicable guidance followed depends on the type of organization undergoing audit. Other administrative compliance requirements unique to a single program or a cluster of programs, are provided in the Special Tests and Provisions sections of Parts 4 and 5.
State, Local, and Indian Tribal Governments
Governmentwide guidance for administering grants and cooperative agreements to States, local governments, and Indian tribal governments is contained in the A-102 Common Rule which was codified by each Federal funding agency in its volume of the Code of Federal Regulations. The A-102 Common Rule section numbers are referred to without the Federal agency's part number (e.g., §____.37 would refer to sections in all agency regulations). This allows auditors to refer to the same section numbers when discussing administrative issues with different Federal funding agencies.
These requirements apply to all grants and subgrants to governments, except where they are inconsistent with Federal statutes or with regulations authorized in accordance with the exception provision of the A-102 Common Rule. Block grants authorized by the Omnibus Budget Reconciliation Act of 1981 and several other specifically identified grants or payment programs are exempted from the A-102 Common Rule. Appendix I to this Compliance Supplement lists legislation and programs where exclusions exist.
In some cases the A-102 Common Rule permits States to follow their own laws and procedures, e.g., when addressing equipment management. These are noted in the sections that follow. The auditor will have to refer to an individual State's rules in those situations.
The major source of requirements applicable to non-profit organizations is OMB Circular A-110. The provisions of OMB Circular A-110 are codified in agency regulations, generally following the section numbers in the circular. The OMB Circular A-110 section numbers are referred to similar to the A-102 Common Rule references. However, unlike the A-102 Common Rule, agencies with OMB approval, could modify certain provisions of A-110 to meet their special needs. OMB Circular A-110 states "Federal agencies responsible for awarding and administering grants . . . shall adopt the language in the circular unless different provisions are required by Federal statute or are approved by OMB." Subpart A, §____.4, of OMB Circular A-110 states that "Federal awarding agencies may apply more restrictive requirements to a class of recipients when approved by OMB." Federal awarding agencies may apply less restrictive requirements when awarding small awards, except for those requirements which are statutory. Exceptions on a case-by-case basis may also be made by Federal awarding agencies.
Appendix II to this supplement contains a list of agencies that have codified OMB Circular A-110 and the CFR citations for these codifications.
Governmental subrecipients are subject to the provisions of the A-102 Common Rule. However, the A-102 Common Rule permits States to impose their own requirements on their governmental subrecipients, e.g., equipment management or procurement. Thus, in some circumstances, the auditor may need to refer to State rules and regulations rather than Federal requirements.
All non-profit subrecipients, regardless of the type of organization making the subaward, shall follow the provisions of OMB Circular A-110 as implemented by the agency when awarding or administering subgrants except under block grants authorized by the Omnibus Budget Reconciliation Act of 1981 and the Job Training Partnership Act where State rules apply instead.
Compliance Requirements, Audit Objectives, and Suggested Audit Procedures
Auditors shall consider the compliance requirements and related audit objectives in Part 3 and Part 4 or 5 (for programs included in this Supplement) in every audit of non-Federal entities conducted under OMB Circular A-133, with the exception of program-specific audits performed in accordance with a Federal agency's program-specific audit guide. In making a determination not to test a compliance requirement, the auditor must conclude that the requirement either does not apply to the particular non-Federal entity or that noncompliance with the requirement could not have a material effect on a major program (e.g., the auditor would not be expected to test Procurement if the non-Federal entity charges only small amounts of purchases to a major program). The descriptions of the compliance requirements in Parts 3, 4, and 5 are generally a summary of the actual compliance requirements. The auditor should refer to the referenced citations (e.g., laws and regulations) for the complete compliance requirements.
The suggested audit procedures are provided to assist auditors in planning and performing tests of non-Federal entity compliance with the requirements of Federal programs. Auditor judgment will be necessary to determine whether the suggested audit procedures are sufficient to achieve the stated audit objective and whether additional or alternative audit procedures are needed.
The suggested procedures are in lieu of specifying audit procedures for each of the programs included in this Supplement. This approach has several advantages. First, it provides guidelines to assist auditors in designing audit procedures that are appropriate in the circumstance. Second, it helps auditors develop audit procedures for programs that are not included in this Supplement. Finally, it simplifies future updates to this Supplement.
Because of the diversity of systems in place among non-Federal entities, Part 3 does not include suggested audit procedures to test internal control. The auditor must determine appropriate procedures to test internal control on a case by case basis considering factors such as the non-Federal entity's internal control, the compliance requirements, the audit objectives for compliance, the auditor's assessment of control risk, and the audit requirement to test internal control as prescribed in OMB Circular A-133.
A. ACTIVITIES ALLOWED OR UNALLOWED
The specific requirements for activities allowed or unallowed are unique to each Federal program and are found in the laws, regulations, and the provisions of contract or grant agreements pertaining to the program. For programs listed in the Compliance Supplement, these specific requirements are in Part 4 - Agency Program Requirements or Part 5 - Clusters of Programs, as applicable. This type of compliance requirement specifies the activities that can or cannot be funded under a specific program.
Determine whether Federal awards were expended only for allowable activities.
Suggested Audit Procedures
1. Identify the types of activities which are either specifically allowed or prohibited by the laws, regulations, and the provisions of contract or grant agreements pertaining to the program.
2. When allowability is determined based upon summary level data, perform procedures to verify that:
a. Activities were allowable.
b. Individual transactions were properly classified and accumulated into the activity total.
3. When allowability is determined based upon individual transactions, select a sample of transactions and perform procedures to verify that the transaction was for an allowable activity.
4. The auditor should be alert for large transfers of funds from program accounts which may have been used to fund unallowable activities.
B. ALLOWABLE COSTS/COST PRINCIPLES
Applicability of OMB Cost Principles Circulars
The following OMB cost principles circulars prescribe the cost accounting policies associated with the administration of Federal awards by non-profit organizations, States, local governments, and Indian tribal governments. However, for block grants authorized by the Omnibus Budget Reconciliation Act of 1981 and the Job Training Partnership Act, State rules for expenditures of State funds apply (Appendix 1). Federal awards include Federal programs and cost-type contracts and may be in the form of grants, contracts, and other agreements.
- OMB Circular A-87, "Cost Principles for State, Local and Indian Tribal Governments"
- OMB Circular A-21, "Cost Principles for Educational Institutions"
- OMB Circular A-122, "Cost Principles for Non-Profit Organizations"
States, local governments, and Indian tribal governments are subject to OMB Circular A-87. All institutions of higher education are subject to the cost principles contained in OMB Circular A-21 which incorporates the four Cost Accounting Standards Board (CASB) Standards and the Disclosure Statement (DS-2) requirements as described in paragraphs C.10 through C.14 and Appendices A and B of OMB Circular A-21. Non-profit organizations are subject to OMB Circular A-122, except those non-profit organizations listed in Attachment C of OMB Circular A-122. These non-profit organizations are not subject to OMB Circular A-122 but are subject to the commercial cost principles contained in the Federal Acquisition Regulation (FAR). Also, by contract terms and conditions, some non-profit organizations may be subject to the CASB's Standards and the Disclosure Statement (DS-1) requirements.
Federal awards administered by publicly-owned hospitals and other providers of medical care are exempt from OMB's cost principles circulars, but are subject to requirements promulgated by the sponsoring Federal agencies (45 CFR part 74, appendix E).
The cost principles applicable to a non-Federal entity apply to all Federal awards received by the entity, regardless of whether the awards are received directly from the Federal Government or indirectly through a pass-through entity.
The circulars describe selected cost items, allowable and unallowable costs, and standard methodologies for calculating indirect costs rates (e.g., methodologies used to recover facilities and administrative costs (F&A) at institutions of higher education).
The cost principles articulated in the three circulars are in most cases substantially identical but a few differences do exist. These differences are necessary because of the nature of the Federal/State/local/non-profit organization relationship, programs administered, and breadth of services offered by some grantees and not others. Exhibit 1, Selected Cost Items Not Treated the Same Among the Circulars, lists selected cost items for which treatment are not substantially identical among the cost principles circulars. Exhibit 2, Selected Unallowable Cost Items, lists selected items that are unallowable in one or more of the cost principles circulars.
Compliance Requirements - Allowability of Costs - General Criteria (applicable to both direct and indirect costs)
The general criteria affecting allowability of costs under Federal awards are:
- Costs must be reasonable and necessary for the performance and administration of Federal awards.
- Costs must be allocable to the Federal awards under the provisions of the cost principles or CASB Standards, as applicable. A cost is allocable to a particular cost objective (e.g., a specific function, program, project, department, or the like) if the goods or services involved are charged or assigned to such cost objective in accordance with relative benefits received.
- Costs must be given consistent treatment through application of those generally accepted accounting principles appropriate to the circumstances. A cost may not be assigned to a Federal award as a direct cost if any other cost incurred for the same purpose in like circumstances was allocated to the Federal award as an indirect cost.
- Costs must conform to any limitations or exclusions set forth in the circulars, Federal laws, State or local laws, sponsored agreements or other governing regulations as to types or amounts of cost items.
- Costs must be net of all applicable credits that result from transactions that reduce or offset direct or indirect costs. Examples of such transactions include purchase discounts, rebates or allowances, recoveries or indemnities on losses, insurance refunds or rebates, and adjustments for overpayments or erroneous charges.
- Costs must be documented in accordance with OMB Circular A-110 for non-profit organizations or the A-102 Common Rule for State, local and Indian Tribal governmental units.
Compliance Requirements - Indirect Costs
Indirect costs are those costs that benefit common activities and, therefore, cannot be readily assigned to a specific direct cost objective or project.
In order to recover indirect costs, organizations must prepare cost allocation plans (CAPs) which apply only to States, local and Indian tribal governments or indirect cost rate proposals (IDCRPs) in accordance with the guidelines provided in OMB's circulars. States, major local governments, Indian tribal governments, institutions of higher education, and non-profit organizations must submit CAPs or IDCRPs to the Federal cognizant agency for indirect cost negotiation for approval. Other organizations, such as smaller local governments, must prepare the appropriate CAPs or IDCRPs and maintain them on file for review. These other organizations may use the allocation methods and indirect cost rate maintained on file for cost recovery.
At institutions of higher education, indirect costs include the following categories: building and equipment depreciation or use allowance, operation and maintenance expenses, interest expenses, general administrative expenses, departmental administration expenses, library expenses, and student administration expenses.
At non-profit organizations, indirect costs generally include general administrative costs (e.g., the president's office, payroll, general accounting) and facility costs (e.g., rental costs, operations and maintenance, interest expense) that are not treated as direct costs.
The indirect cost proposals prepared by institutions of higher education and other non-profit organizations are based on the most current financial data supported by the organization's accounting system and audited financial statements. These indirect cost proposals can be used to either establish predetermined or fixed indirect cost rates, or to establish or finalize provisional rates.
There are three types of plans/proposals submitted by States, local governments, and Indian tribal governments:
1. State and Local Governmentwide CAPs - These plans are used to allocate service center costs (or Section I costs) to individual departments and agencies and describe the methods used for charging billed costs (or Section II costs) to individual user organizations or activities.
2. Department or Local IDCRP - These rate proposals combine the billed and allocated costs from the State-wide or local-wide plan with departmental or local level indirect costs and compute an indirect cost rate to be used in charging indirect costs to individual programs and activities.
3. Public Assistance CAPs - These CAPs describe the methods for allocating State-wide or local-wide allocated and/or billed indirect costs and departmental indirect, administrative, and operating costs of State or local welfare or human services organizations to the Medicaid, Food Stamps and welfare programs, etc. These plans are required by the terms of 45 CFR part 95, which incorporates OMB Circular A-87 by reference, and they must be revised and resubmitted to the Federal Government whenever an organizational or programmatic change invalidates the currently-approved allocation method.
At States, local governments, and Indian tribal governments, indirect costs are accumulated at two levels: the State/local-wide level and the department/agency level. At the State/local-wide level, indirect costs include: (1) central service costs that are allocated (referred to as Section I costs, which typically include general accounting, personnel, and purchasing); and, (2) central service costs that are billed (referred to as Section II costs, which typically include computer services, motor pool, insurance, and fringe benefits). Certain costs, such as facilities and operations and maintenance, can be classified as Section I or Section II costs by State/local governments.
At State or local governmental departments or agencies, where Federal awards are usually carried out, indirect costs normally include the facilities and administrative costs of each department or agency and the allocated central service costs distributed through the State/local-wide CAP. Additionally, Section II costs are direct charges to these departments or agencies. As such, these direct billings may be charged directly to Federal awards or be included in the department or agency indirect cost pools.
CAPs are comprised of two parts: a narrative section that describe the service cost center and allocation methodologies, and a mathematical allocation of these service center costs to the user departments using the described allocation methods. CAPs and IDCRPs prepared by States, local governments, and Indian tribal governments usually are prepared on a prospective basis using actual financial data for a prior year or budget data for the current year. When the actual costs for the year covered by the CAP (or a rate agreement with respect to a fixed rate) are determined, the difference between the costs recovered based on the CAP (or rate agreement) and the costs that would have been recovered had the CAP or rate agreement been based on actual results is either carried forward to a subsequent CAP or IDCRP or used to adjust individual awards on a retroactive basis, with the approval of the Federal cognizant agency for indirect cost negotiation.
Three different types of indirect cost rates can be used by the Federal cognizant agency for indirect cost negotiation: predetermined, fixed, and provisional/final. Predetermined rates are established for the current or multiple future period(s) based on current data (usually data from the most recently ended fiscal year, known as the base period). Predetermined rates are not subject to adjustment, except under very unusual circumstances. Fixed rates are based on current data in the same manner as predetermined rates, except that the difference between the costs of the base period used to establish the rate and the actual costs of the current period is carried forward as an adjustment to the rate computation for a subsequent period. Provisional rates are temporary rates used for funding and billing indirect costs, pending the establishment of a final rate for a period.
Special Compliance Requirements
OMB Circular A-21 requires institutions of higher education that receive more than $25 million in Federal funding in a fiscal year to prepare and submit a DS-2 that describes the institution's cost accounting practices. These institutions are required to submit a DS-2 within six months after the end of the institution's fiscal year that begins after May 8, 1996, unless the institution is required to submit a DS-2 earlier due to a receipt of a cost accounting standard covered contract in accordance with 48 CFR section 9903.202-1.
These institutions are responsible for maintaining an accurate DS-2 and complying with disclosed cost accounting practices. They are also responsible for filing amendments to the DS-2 when disclosed practices are changed or modified.
Also, by contract terms and conditions, some non-profit organizations may be subject to the CASB's Standards and the DS-1 requirements.
Large Research Facilities Construction Costs
OMB Circular A-21 requires that for large research facilities (those with construction costs of more than $10 million) of which 40 percent or more of total assignable space is expected for Federal use, an educational institution (institution) must maintain an adequate review and approval process to ensure that construction costs are reasonable. The review process shall address and document relevant factors affecting construction costs, such as:
- Life cycle costs
The approval process shall include review and approval of the projects by the institution's Board of Trustees or other independent entities.
OMB Circular A-21 also requires that for research facilities costing more than $25 million, of which 50 percent or more of total assignable space is expected for Federal use, the institution must document the review steps performed to assure that construction costs are reasonable. The review should include an analysis of construction costs and a comparison of these costs with relevant construction data, including the National Science Foundation data for research facilities based on its biennial survey, "Science and Engineering Facilities at Colleges and Universities."
Audit Objectives (Both Direct and Indirect Costs)
Determine whether the organization complied with the provisions of the applicable OMB cost principles circulars (OMB Circulars A-87, A-21, A-122) or CASB Standards as follows:
1. Direct charges to Federal awards were for allowable costs.
2. Charges to cost pools used in calculating indirect cost rates were for allowable costs.
3. For States, local governments, and Indian tribal governments, charges to cost pools allocated to Federal awards though CAPs were for allowable costs.
4. The methods of allocating the costs are in accordance with the applicable cost principles or CASB Standards and produce an equitable and consistent distribution of costs (e.g., cost allocation bases include all allowable and unallowable base costs to which allowable indirect costs are allocable and the cost allocation methodology complies with the applicable cost principles and provides equitable and consistent allocation of indirect costs to benefitting cost objectives).
5. Indirect cost rates were applied in accordance with approved rate agreements and associated billings were the result of applying the approved rate to the proper base amount(s).
6. For States, local governments, and Indian tribal governments, cost allocations were in accordance with CAPs approved by the Federal cognizant agency for indirect cost negotiation or, in cases where such plans are not subject to approval, in accordance with the plan on file.
7. Cost accounting practice disclosures, described in the DS-1 or DS-2 (including amendments), represented actual practice consistently applied. This objective only applies to non-Federal entities that are required to submit the DS-1 or DS-2.
8. The institution's review of large research facilities under construction was documented as required.
Suggested Audit Procedures (Both Direct and Indirect Costs)
1. The following procedures apply to direct charges to Federal awards as well as to charges to cost pools that are allocated wholly or partially to Federal awards or used in formulating indirect cost rates used for recovering indirect costs from Federal awards. If the auditor identifies unallowable costs, the auditor should be aware that "directly associated costs" may have been charged. Directly associated costs are costs incurred solely as a result of incurring another cost, and would not have been incurred if the other cost had not been incurred. For example, fringe benefits are "directly associated" with payroll costs. When an unallowable cost is incurred, directly associated costs are also unallowable.
Test a sample of transactions for conformance with the following criteria contained in the "Basic Guidelines" section of applicable OMB cost principles circulars.
a. For State and local governments, authorized or not prohibited under State or local laws or regulations.
b. Approved by the Federal awarding agency, if required.
c. Conform with the allowability of costs provisions of applicable cost principles, or limitations in the program agreement, program regulations, or program statute.
d. Conform with the allocability provisions of applicable cost principles or CASB Standards.
e. Represent charges for actual costs, not budgeted or projected amounts.
f. With respect to fringe benefit allocations, charges, or rates, such allocations, charges, or rates are based on the benefits received by different classes of employees within the organization.
g. Applied uniformly to Federal and non-Federal activities.
h. Given consistent accounting treatment within and between accounting periods. Consistency in accounting requires that costs incurred for the same purpose, in like circumstances, be treated as either direct costs only or indirect costs only with respect to final cost objectives.
i. Calculated in conformity with CASB Standards, generally accepted accounting principles, or another comprehensive basis of accounting, when required under the applicable cost principles or CASB Standards. Costs for post-employment benefits must be funded to be allowable.
j. Not included as a cost or used to meet cost sharing requirements of other federally-supported activities of the current or a prior period.
k. Net of all applicable credits, e.g., volume or cash discounts, insurance recoveries, refunds, rebates, trade-ins, adjustments for checks not cashed, and scrap sales.
l. Not included as both a direct billing and as a component of indirect costs, e.g., excluded from cost pools included in CAPs and/or IDCRPs, if charged directly to Federal awards.
m. Supported by appropriate documentation, such as approved purchase orders, receiving reports, vendor invoices, canceled checks, and time and attendance records, and correctly charged as to account, amount, and period. Documentation requirements for salaries and wages, and time and effort distribution are described in applicable cost principles. Documentation may be in an electronic form.
Internal service, central service, pension, or similar activities or funds
2. When material charges are made from internal service, central service, pension, or similar activities or funds, the auditor should verify that the charges from these activities or funds are in accordance with the applicable cost principles. The auditor should consider procedures, such as:
a. For activities accounted for in separate funds, ascertain if: (1) retained earnings/fund balances (including reserves) were computed in accordance with the applicable cost principles; (2) working capital was not excessive in amount (generally not greater than 60 days for cash expenses for normal operations incurred for the period exclusive of depreciation, capital costs and debt principal costs); and, (3) refunds were made to the Federal Government for its share of any amounts transferred or borrowed from internal service or central service funds for purposes other than to meet the operating liabilities, including interest on debt, of the fund.
b. Test that all users of services are billed in a consistent manner.
c. Test that billing rates exclude unallowable costs, in accordance with applicable cost principles.
d. Test, where activities are not accounted for in separate funds, that billing rates (or charges) are developed based on actual costs and were adjusted to eliminate profits.
e. For organizations that have self-insurance and a certain type of fringe benefit programs (e.g. pension funds), ascertain if independent actuarial studies appropriate for such activities are performed at least biennially and that current period costs were allocated based on an appropriate study which is not over two years old.
IDCRP (Testing of the proposal)
3. The IDCRP is based upon costs charged to cost pools representing costs of a base year. The base year often precedes the year in which the IDCRP is prepared and the year the resulting Indirect Cost Rate Agreement (IDCRA) is used to charge indirect costs. For example, a non-Federal entity may submit an IDCRP in January 1998, based upon costs incurred and charged to cost pools during fiscal year ending June 30, 1997 (1997), the base year. The resulting IDCRA negotiated during the year ending June 30, 1998 (1998) would be used as the basis for charging indirect costs to Federal awards in the year ended June 30, 1999 (1999). For this example, the term IDCRA will also include an IDCRP which is not required to be submitted to the Federal agency for indirect cost negotiation but is retained on file and is used to charge indirect costs to Federal awards the same as an approved plan resulting in an IDCRA.
An audit timing consideration is that the audit for 1997 (which covers the applicable cost pools) may be completed before the IDCRP is submitted. Therefore, as part of the 1997 audit, the auditor cannot complete testing of the IDCRP. Also, if the auditor waits to test the IDCRP until 1999 (the year when this IDCRP is first used to charge Federal awards), the auditor would be testing 1997 records, which would then be two years old.
Continuing this example, when the IDCRA is the basis for material charges to a major program in 1999, the auditor for 1999 is required to obtain appropriate assurance that the costs collected in the cost pools and allocation methods are in compliance with the applicable cost principles. The following are some acceptable options the auditor may use to obtain this assurance:
- Perform interim testing of the costs charged to cost pools (e.g., determine from management the cost pools that management expects to include in the IDCRP and test the costs charged to those pools for compliance with the cost principles circulars) during the 1997 audit. As part of the 1998 audit, complete testing and verify management's representation against the IDCRP finally submitted in 1998.
- Test costs charged to the cost pools underlying the IDCRP during the audit of 1998, the year immediately following the base year. This would require testing of 1997 transactions.
- Wait until 1999, the year in which charges from the IDCRA are material to a major program and test costs charged to cost pools (1997) used to prepare the IDCRP. This is a much more difficult approach because it requires going back two years to audit the cost charged to cost pools of the base year.
Advantages of the first two methods are that the testing of the costs charged to the cost pools occurs closer to the time when the transactions occur (which makes the testing easier to perform) and should there be audit exceptions, corrective action may be taken earlier to minimize questioned costs (which makes audit exceptions easier to resolve). When material indirect costs are charged to any Type A program (determined in accordance with Circular A-133), auditors are strongly encouraged to use one of the first two methods. This is because under the risk-based approach, described in OMB Circular A-133, all Type A programs are required to be considered major programs at least once in every three years and the IDCRA is usually used to charge Federal awards for at least three years.
When the auditee submits the IDCRP, the auditee provides written assurances to the Federal government that the plan includes only allowable costs. Accordingly, any material unallowable costs reflected in the IDCRP should be reported as an audit finding in the year in which they are first found by audit.
An IDCRP may result in an IDCRA that covers only one year, but most often results in a multi-year IDCRA. When an IDCRP has been tested in a prior year and this testing provides the auditor appropriate audit assurance, in subsequent years the auditor is only required to perform tests to ascertain if there have been material changes to the cost accounting practices, including practices that would affect either the cost pools or the allocation base and, if so, that the Federal cognizant agency for indirect cost negotiation has been informed.
The auditor should take appropriate steps to coordinate testing of costs charged to cost pools supporting an IDCRP with the auditee and, as appropriate, with the Federal cognizant agency for indirect cost negotiation. The auditor should consider consulting with the auditee in the base year and the year in which the IDCRP is submitted to determine the best (e.g., most efficient) alternative under the circumstances.
The following procedures are applicable when material charges are made to a major program based upon an IDCRP:
a. Ascertain if the IDCRP has been tested in a prior year.
(1) When the testing performed in a prior year provides appropriate audit assurance, further review of the IDCRP is not required unless there have been material changes to cost accounting practices supporting the IDCRP. To ascertain if there have been material changes, the auditor should inquire of auditee management as to whether any changes have been made to the cost accounting practices and the likely effect of these changes.
(2) When the auditor believes the changes in cost accounting practices are material, and the auditee is required the file the IDCRP with a Federal cognizant agency for indirect cost negotiation, the auditor should ascertain if the Federal cognizant agency for indirect cost negotiation has been appropriately notified of the changes in cost accounting practices. For non-Federal entities that are required to file a DS-1 or DS-2, this testing is performed in Step 6 "DS-1 and DS-2 Requirements."
When prior testing of the IDCRP does not provide appropriate audit assurance (e.g., was not performed).
b. Test the cost pools which form the basis of the IDCRP and the resulting charges to Federal awards to ascertain if they include only allowable costs in accordance with the cost principles or CASB Standards, as applicable. Suggested audit procedure number 1 provides guidance for specific tests.
c. Test the methods of allocating the costs to ascertain if they are in accordance with the provisions of the cost principles or CASB Standards, as applicable, and produce an equitable distribution of costs. Appropriate detailed tests may include:
(1) Test statistical data (e.g., square footage, case counts, salaries and wages) to ascertain if the proposed allocation or rate bases are reasonable, updated as necessary, and do not contain any material omissions.
(2) Review time studies or time and effort reports (where and if used) to ascertain if they are mathematically and statistically accurate, are implemented as approved, and are based on the actual effort devoted to the various functional and programmatic activities to which the salary and wage costs are charged.
(3) Review the allocation methodology for consistency and test the appropriateness of methods used to make changes.
CAP (Testing of the plan)
4. Since costs allocated through CAPs may include current year and prior year costs, the auditor should test the costs charged to cost pools supporting CAPs and the methods of allocating costs from CAPs in each year when these costs are material to a major program. The auditor should consider the following procedures:
a. Test the cost pools which form the basis of the CAP and the resulting charges to Federal awards to ascertain if they include only allowable costs in accordance with the applicable cost principles. Suggested audit procedure number 1 provides guidance for specific tests.
b. Test the methods of allocating the costs to ascertain if they are in accordance with the applicable provisions of the cost principles and produce an equitable distribution of costs. Appropriate detailed tests may include:
(1) Test statistical data (e.g., square footage, case counts, salaries and wages) to ascertain if the proposed allocation or rate bases are reasonable, updated as necessary, and do not contain any material omissions.
(2) Review time studies or time and effort reports (where and if used) to ascertain if they are mathematically and statistically accurate, are implemented as approved, and are based on the actual effort devoted to the various functional and programmatic activities to which the salary and wage costs are charged.
(3) Review the allocation methodology for consistency and test the appropriateness of methods use to make charges changes.
IDCRA and CAPs (Testing of charges based upon plans)
5. Perform the following procedures to test the application of charges to Federal awards based upon an IDCRA and a CAP.
a. Ascertain if material indirect costs or centralized or administrative services costs were allocated or charged to a major program. If not, the following suggested audit procedures b through e do not apply.
b. Obtain and read the current IDCRA and/or CAP and determine the terms in effect.
Indirect Cost Rate Agreements
c. Select a sample of claims for reimbursement and verify that the rates used are in accordance with the rate agreement, that rates were applied to the appropriate bases, and that the amounts claimed were the product of applying the rate to the applicable base. Verify that the costs included in the base(s) are consistent with the costs that were included in the base year (e.g., if the allocation base is total direct costs, verify that current year direct costs do not include costs items that were treated as indirect costs in the base year).
Public Assistance CAPs (for States, local governments, and Indian tribal governments only)
d. Verify that the methods of charging costs to Federal awards are in accordance with the provisions of the approved CAP or prepared CAP on file.
State and Local Government-Wide CAPs
e. Ascertain if the amounts used for reimbursement of central service costs for Federal awards were in accordance with the approved CAPs or plans on file, when approval is not required.
DS-1 and DS-2 Requirements (For applicable non-Federal entities)
6. Perform the following procedures for the DS-1 or DS-2, as applicable:
a. Read the DS-1 or DS-2 and its amendments and ascertain if the disclosures agree with the policies prescribed in the institution's policies and procedures documents.
b. Test that the disclosures agree with actual practices for the period covered by audit, including whether the practices were consistent throughout the period.
Large Research Facilities Construction Costs (For applicable educational institutions)
7. Perform the following procedures related to large research facilities:
a. Ascertain if the institution had large research facilities as defined in OMB Circular A-21 under construction. If not the following suggested audit procedures a and b do not apply.
b. For large research facilities under construction of which 40 percent or more of total assignable space is expected for Federal use, review the institution's approval process that should include board minutes or other documentation to ascertain if the institution's Board of Trustees or other independent entity reviewed and approved these construction projects.
c. For research facilities under construction costing more than $25 million of which 50 percent or more of total assignable space is expected for Federal use, ascertain if the institution documented the review steps performed to assure that construction costs are reasonable.
COMPARISON AMONG OMB COST PRINCIPLES CIRCULARS
The following two exhibits provide comparisons between the OMB cost principles circulars. Exhibit 1 lists selected cost items for which treatment are not substantially identical among the three circulars. Exhibit 2 lists selected items that are unallowable in one or more of the cost principles circulars.
Several cost items are unique to one type of entity and not to other entities (e.g., commencement & convocation costs are only applicable to universities). The numbers in parentheses refer to the cost item in the applicable circulars.
When entities are funded on a reimbursement basis, program costs must be paid for by entity funds before reimbursement is requested from the Federal Government. When funds are advanced, recipients must follow procedures to minimize the time elapsing between the transfer of funds from the U.S. Treasury and disbursement. When advance payment procedures are used, recipients must establish similar procedures for subrecipients.
Pass-through entities must establish reasonable procedures to ensure receipt of reports on subrecipients' cash balances and cash disbursements in sufficient time to enable the pass-through entities to submit complete and accurate cash transactions reports to the Federal awarding agency or pass-through entity. Pass-through entities must monitor cash drawdowns by their subrecipients to assure that subrecipients conform substantially to the same standards of timing and amount as apply to the pass-through entity.
Interest earned on advances by local government grantees and subgrantees is required to be submitted promptly, but at least quarterly, to the Federal agency. Up to $100 per year may be kept for administrative expenses. Interest earned by non-State nonprofit entities on Federal fund balances in excess of $250 is required to be remitted to Department of Health and Human Services, Payment Management System, P.O. Box 6021, Rockville, MD 20852.
Treasury regulations at 31 CFR part 205, which implement the Cash Management Improvement Act of 1990 (CMIA) (P.L. 101-453), require State recipients to enter into agreements which prescribe specific methods of drawing down Federal funds (funding techniques) for selected large programs. The agreements also specify the terms and conditions in which an interest liability would be incurred. Programs not covered by a Treasury-State Agreement are subject to procedures prescribed by Treasury in Subpart B of 31 CFR part 205 (Subpart B).
The requirements for cash management are contained in the OMB Circular 102 (Paragraph 2.a.), the A-102 Common Rule (§___.21), OMB Circular A-110 (§___.22), Treasury regulations at 31 CFR part 205, Federal awarding agency regulations, and the terms and conditions of the award.
Availability of Other Information
The U.S. Treasury, Financial Management Service maintains a Cash Management Improvement Act page on the Internet (http://www.fms.treas.gov/cmia/).
1. The recipient/subrecipient followed procedures to minimize the time elapsing between the transfer of funds from the U.S. Treasury, or pass-through entity, and their disbursement.
2. States have complied with the terms and conditions of the Treasury-State Agreement or Subpart B procedures prescribed by Treasury.
3. The pass-through entity implemented procedures to assure that subrecipients conformed substantially to the same timing requirements that apply to the pass-through entity.
4. Interest earned on advances was reported/remitted as required.
Suggested Audit Procedures
Note: The following procedures are intended to be applied to each program determined to be major. However, due to the nature of cash management and the system of cash management in place in a particular entity, it may be appropriate and more efficient to perform these procedures for all programs collectively rather than separately for each program.
1. For programs tested as major for States, verify which of those programs are covered by the Treasury-State Agreement in accordance with the materiality thresholds in Appendix A to subpart A of 31 CFR part 205 (31 CFR section 205.4).
2. For those programs identified in procedure 1, determine the funding techniques used for those programs. For those funding techniques that require clearance patterns to schedule the transfer of funds to the State, review documentation supporting the clearance pattern and verify that the clearance pattern conforms to the requirements for developing and maintaining clearance patterns as specified in the Treasury-State Agreement (31 CFR sections 205.8 and 205.9(b)(4)).
3. Select a sample of Federal cash draws and verify that:
a. The timing of the Federal cash draws were in compliance with the applicable funding techniques specified in the Treasury-State Agreement or Subpart B procedures, whichever is applicable (31 CFR sections 205.7 and 205.20).
c. To the extent available, program income, rebates, refunds, and other income and receipts were disbursed before requesting additional Federal cash draws as required by the A-102 Common Rule (§___.21) and OMB Circular A-110 (§___.22).
4. Where applicable, select a sample of reimbursement requests and trace to supporting documentation showing that the costs for which reimbursement was requested were paid prior to the date of the reimbursement request (31 CFR section 205.7(c)(5)).
5. Review the calculation of the interest obligation owed to or by the Federal Government, reported on the annual report submitted by the State to ascertain that the calculation was in accordance with Treasury regulations and the terms of the Treasury-State Agreement or Subpart B procedures. Trace amounts used in the calculation to supporting documentation.
States and Other Recipients
6. For those programs where Federal cash draws are passed through to subrecipients:
a. Select a representative sample of subrecipients and ascertain the procedures implemented to assure that subrecipients minimize the time elapsing between the transfer of Federal funds from the recipient and the pay out of funds for program purposes (A-102 Common Rule §___.37(a)(4)).
b. Select a representative sample of Federal cash draws by subrecipients and ascertain that they conformed to the procedures.
Other Recipients and Subrecipients
7. For those programs which received advances of Federal funds, ascertain the procedures established with the Federal agency or pass-through entity to minimize the time between the transfer of Federal funds and the pay out of funds for program purposes.
8. Select a sample of Federal cash draws and verify that:
a. Established procedures to minimize the time elapsing between drawdown and disbursement were followed.
b. To the extent available, program income, rebates, refunds, and other income and receipts were disbursed before requesting additional cash payments as required by the A-102 Common Rule (§___.21) and OMB Circular A-110 (§___.22).
9. Where applicable, select a sample of reimbursement requests and trace to supporting documentation showing that the costs for which reimbursement was requested were paid prior to the date of the reimbursement request.
10. Review records to determine if interest was earned on Federal cash draws. If so, review evidence to ascertain whether it was returned to the appropriate agency.
When required by the Davis Bacon Act, the Department of Labor's (DOL) governmentwide implementation of the Davis-Bacon Act, or by Federal program legislation, all laborers and mechanics employed by contractors or subcontractors to work on construction contracts in excess of $2000 financed by Federal assistance funds must be paid wages not less than those established for the locality of the project (prevailing wage rates) by the DOL (40 USC 276a to 276a-7).
Availability of Other Information
The U.S. Department of Labor, Employment Standards Administration, maintains a Davis-Bacon and Related Acts Internet page (http://www.dol.gov/dol/esa/public/programs/dbra/index.html).
Determine whether the non-Federal entity ensured that contractors and subcontractors paid prevailing wage rates for projects covered by the Davis-Bacon Act.
Suggested Audit Procedures
1. Ascertain if the non-Federal entity receives Federal funds for construction projects; if so, review program/project requirements to ascertain if the program/project is covered by the Davis-Bacon Act.
2. Select a sample of construction contracts and subcontracts and verify that the required prevailing wage rate clauses were included in contracts for construction which exceed $2000.
3. Determine the prevailing wage rates applicable at the time of the construction payroll. (DOL's Wage and Hour Division publishes a Register of Wage Determinations. Subscribers to the Davis-Bacon Wage Determination Database on FedWorld=s Website can obtain wage determinations online at www.fedworld.gov.)
4. Examine a sample of contractor or subcontractor payroll submissions and certifications and ascertain if such submissions indicate that laborers and mechanics were paid the prevailing wage rates established by the DOL for the locality at the time of the construction payroll.
The specific requirements for eligibility are unique to each Federal program and are found in the laws, regulations, and the provisions of contract or grant agreements pertaining to the program. For programs listed in the Compliance Supplement, these specific requirements are in Part 4 - Agency Program Requirements or Part 5 - Clusters of Programs, as applicable. This compliance requirement specifies the criteria for determining the individuals, groups of individuals, or subrecipients that can participate in the program and the amounts for which they qualify.
1. Required eligibility determinations were made, (including obtaining any required documentation/verifications) and that individual program participants or groups of participants (including area of service delivery) were determined to be eligible. Only eligible individuals or groups of individuals (including area of service delivery) participated in the program.
2. Subawards were made only to eligible subrecipients.
3. Amounts provided to or on behalf of eligibles were calculated in accordance with program requirements.
Suggested Audit Procedures
1. Eligibility for Individuals
a. For some Federal programs with a large number of people receiving benefits, the non-Federal entity may use a computer system for processing individual eligibility determinations and delivery of benefits. Often these computer systems are complex and will be separate from the non-Federal entity's regular financial accounting system. Typical functions a computer system for eligibility may perform are:
- Perform calculations to assist in determining who is eligible and the amount of benefits
- Pay benefits (e.g., write checks)
- Maintain eligibility records, including information about each individual and benefits paid to or on behalf of the individual (regular payments, refunds, and adjustments)
- Track the period of time an individual is eligible and stop benefits at the end of a predetermined period unless, there is a redetermination of eligibility
- Perform matches with other computer data bases to verify eligibility (e.g., matches to verify earnings or identify individuals who are deceased)
- Control who is authorized to approve benefits for eligibles (e.g., an employee may be approving benefits on-line and this process may be controlled by passwords or other access controls)
- Produce exception reports indicating likely errors which need follow-up (e.g., when benefits exceed a certain amount, would not be appropriate for a particular classification of individuals, or are paid more frequently than normal)
Because of the diversity of computer systems, both hardware and software, it is not practical for the Compliance Supplement to provide suggested audit procedures to address each system. However, generally accepted auditing standards provide guidance for the auditor when computer processing relates to accounting information that can materially effect the financial statements being audited. Similarly, when eligibility is material to a major program, and a computer system is integral to eligibility compliance, the auditor should follow this guidance and consider the non-Federal entity's computer processing. The auditor should perform audit procedures relative to the computer system for eligibility as necessary to support the opinion on compliance for the major program. Due to the nature and controls of computer systems, the auditor may choose to perform these tests of the computer systems as part of testing the internal controls for eligibility.
b. Perform procedures to ascertain if the non-Federal entity's records/database includes all individuals receiving benefits during the audit period (e.g., that the population of individuals receiving benefits is complete).
c. Select a sample of individuals receiving benefits and perform tests to ascertain if the:
(1) Non-federal entity performed the required eligibility determination, (including obtaining any required documentation/verifications) and the individual was determined to be eligible. Specific individuals were eligible in accordance with the compliance requirements of the program. (Note that some programs have both initial and continuing eligibility requirements and the auditor should design and perform appropriate tests for both.)
(2) Benefits paid to or on behalf of the individuals were calculated correctly and in compliance with the requirements of the program.
(3) Benefits were discontinued when the period of eligibility expired.
d. In some programs, the non-Federal entity is required to use a quality control process to obtain assurances about eligibility. Review the quality control process and perform tests to ascertain if it is operating to effectively meet the objectives of the process and in compliance with applicable program requirements.
2. Eligibility for Group of Individuals or Area of Service Delivery
a. In some cases, the non-Federal entity may be required to perform procedures to determine whether a population or area of service delivery is eligible. Test information used in determining eligibility and ascertain if the population or area of service delivery was eligible.
b. Perform tests to ascertain if :
(1) The population or area served was eligible.
(2) The benefits paid to or on behalf of the individuals or area of service delivery were calculated correctly.
3. Eligibility for Subrecipients
a. If the determination of eligibility is based upon an approved application or plan, obtain a copy of this document and identify the applicable eligibility requirements.
b. Select a sample of the awards to subrecipients and perform procedures to verify that the subrecipients were eligible and amounts awarded were within funding limits.
F. EQUIPMENT AND REAL PROPERTY MANAGEMENT
Title to equipment acquired by a non-Federal entity with Federal awards vests with the non-Federal entity. Equipment means tangible nonexpendable property, including exempt property, charged directly to the award having a useful life of more than one year and an acquisition cost of $5000 or more per unit. However, consistent with a non-Federal entity's policy, lower limits may be established.
A State shall use, manage, and dispose of equipment acquired under a Federal grant in accordance with State laws and procedures. Subrecipients of States who are local governments or Indian tribes shall use State laws and procedures for equipment acquired under a subgrant from a State.
Local governments and Indian tribes shall follow the A-102 Common Rule for equipment acquired under Federal awards received directly from a Federal awarding agency. Non-profit organizations and public institutions of higher education shall follow the provisions of OMB Circular A-110. Basically the A-102 Common Rule and OMB Circular A-110 require that equipment be used in the program which acquired it or, when appropriate, other Federal programs. Equipment records shall be maintained, a physical inventory of equipment shall be taken at least once every two years and reconciled to the equipment records, an appropriate control system shall be used to safeguard equipment, and equipment shall be adequately maintained. When equipment with a current per unit fair market value in excess of $5000, is no longer needed for a Federal program, it may be retained or sold with the Federal agency having a right to a proportionate (percent of Federal participation in the cost of the original project) amount of the current fair market value. Proper sales procedures shall be used that provide for competition to the extent practicable and result in the highest possible return.
The requirements for equipment are contained in the A-102 Common Rule (§___.32), OMB Circular A-110 (§___.34), Federal awarding agency program regulations, and the terms and conditions of the award.
Real Property Management
Title to real property acquired by non-Federal entities with Federal awards vests with the non-Federal entity. Real property shall be used for the originally authorized purpose as long as needed for that purpose. For non-Federal entities covered by OMB Circular A-110 and with written approval from the Federal awarding agency, the real property may be used in other federally-sponsored projects or programs that have purposes consistent with those authorized for support by the Federal awarding agency. The non-Federal entity may not dispose of or encumber the title to real property without the prior consent of the awarding agency.
When real property is no longer needed for the federally-supported programs or projects, the non-Federal entity shall request disposition instructions from the awarding agency. (For purposes of this compliance requirement, the awarding agency for recipients under OMB Circular A-110 or the A-102 Common Rule and subrecipients under OMB Circular A-110 is the Federal agency providing the funding. The awarding agency for subrecipients under the A-102 Common Rule is the pass-through entity.) When real property is sold, sales procedures should provide for competition to the extent practicable and result in the highest possible return. If sold, non-Federal entities are normally required to remit to the awarding agency the Federal portion (based on the Federal participation in the project) of net sales proceeds. If retained, the non-Federal entity shall normally compensate the awarding agency for the Federal portion of the current fair market value of the property. Disposition instructions may also provide for transfer of title in which case, the non-Federal entity is entitled to compensation for its percentage share of the current fair market value.
The requirements for real property are contained in the A-102 Common Rule (§___.31), OMB Circular A-110 (§___.32), Federal awarding agency regulations, and the terms and conditions of the award.
Determine whether the:
1. The non-Federal entity maintains proper records for equipment and adequately safeguards and maintains equipment.
2. Disposition or encumbrance of any equipment or real property acquired under Federal awards is in accordance with Federal requirements and that the awarding agency was compensated for its share of any property sold or converted to non-Federal use.
Suggested Audit Procedures
(Procedures 1 and 2 only apply to subrecipients of States that are local governments or Indian tribal governments.)
1. Obtain entity's policies and procedures for equipment management and ascertain if they comply with the State's policies and procedures.
2. Select a sample of equipment transactions and test for compliance with the State's policies and procedures for management and disposition of equipment.
(Procedures 3-4 only apply to non-profit organizations, public institutions of higher education, and Federal awards received directly from a Federal awarding agency by a local government or an Indian tribal government.)
3. Inventory Management of Equipment
a. Inquire if a required physical inventory of equipment acquired under Federal awards was taken within the last two years. Test whether any differences between the physical inventory and equipment records were resolved.
b. Identify equipment acquired under Federal awards during the audit period and trace selected purchases to the property records. Verify that the property records contain the following information about the equipment: description (including serial number or other identification number), source, who holds title, acquisition date and cost, percentage of Federal participation in the cost, location, condition, and any ultimate disposition data including, the date of disposal and sales price or method used to determine current fair market value.
c. Select a sample of equipment identified as acquired under Federal awards from the property records and physically inspect the equipment including whether the equipment is appropriately safeguarded and maintained.
4. Dispositions of Equipment
a. Determine the amount of equipment dispositions for the audit period and perform procedures to verify that dispositions were properly classified between equipment acquired under Federal awards and equipment otherwise acquired.
b. For dispositions of equipment acquired under Federal awards, perform procedures to verify that the dispositions were properly reflected in the property records.
c. For dispositions of equipment acquired under Federal awards with a current per-unit fair market value in excess of $5000, test whether the awarding agency was reimbursed for the appropriate Federal share.
(Procedure 5 applies to States, local governments, Indian tribal governments and non-profit organizations regardless of whether funding is received as a recipient or subrecipient.)
5. Dispositions of Real Property
a. Determine real property dispositions for the audit period and ascertain such real property acquired with Federal awards.
b. For dispositions of real property acquired under Federal awards, perform procedures to verify that the non-Federal entity followed the instructions of the awarding agency which will normally require reimbursement to the awarding agency for the Federal portion of net sales or fair market value at the time of disposition, as applicable.
G. MATCHING, LEVEL OF EFFORT, EARMARKING
The specific requirements for matching, level of effort, and earmarking are unique to each Federal program and are found in the laws, regulations, and the provisions of contract or grant agreements pertaining to the program. For programs listed in the Compliance Supplement, these specific requirements are in Part 4 - Agency Program Requirements or Part 5 - Clusters of Programs, as applicable.
However, for matching, the A-102 Common Rule (§____.24) and OMB Circular A-110 (§___.23) provide detailed criteria for acceptable costs and contributions. The following is a list of the basic criteria for acceptable matching:
- Are verifiable from the non-Federal entity's records.
- Are not included as contributions for any other federally-assisted project or program, unless specifically allowed by Federal program laws and regulations.
- Are necessary and reasonable for proper and efficient accomplishment of project or program objectives.
- Are allowed under the applicable cost principles.
- Are not paid by the Federal Government under another award, except where authorized by Federal statute to be allowable for cost sharing or matching.
- Are provided for in the approved budget when required by the Federal awarding agency.
- Conform to other applicable provisions of the A-102 Common Rule and OMB Circular A-110 and the laws, regulations, and provisions of contract or grant agreements applicable to the program.
Matching, level of effort and earmarking are defined as follows:
(1) Matching or cost sharing includes requirements to provide contributions (usually non-Federal) of a specified amount or percentage to match Federal awards. Matching may be in the form of allowable costs incurred or in-kind contributions (including third-party in-kind contributions).
(2) Level of effort includes requirements for (a) a specified level of service to be provided from period to period, (b) a specified level of expenditures from non-Federal or Federal sources for specified activities to be maintained from period to period, and (c) Federal funds to supplement and not supplant non-Federal funding of services.
(3) Earmarking includes requirements that specify the minimum and/or maximum amount or percentage of the program's funding that must/may be used for specified activities, including funds provided to subrecipients. Earmarking may also be specified in relation to the types of participants covered.
1. Matching - Determine whether the minimum amount or percentage of contributions or matching funds was provided.
2. Level of Effort - Determine whether specified service or expenditure levels were maintained.
3. Earmarking - Determine whether minimum or maximum limits for specified purposes or types of participants were met.
Suggested Audit Procedures
a. Perform tests to verify that the required matching contributions were met.
b. Ascertain the sources of matching contributions and perform tests to verify that they were from an allowable source.
c. Test records to corroborate that the values placed on in-kind contributions (including third party in-kind contributions) are in accordance with the OMB cost principles circulars, the A-102 Common Rule, OMB Circular A-110, program regulations, and the terms of the award.
d. Test transactions used to match for compliance with the allowable costs/cost principles requirement. This test may be performed in conjunction with the testing of the requirements related to allowable costs/cost principles.
2.1 Level of Effort - Maintenance of Effort
a. Identify the required level of effort and perform tests to verify that the level of effort requirement was met.
b. Perform test to verify that only allowable categories of expenditures or other effort indicators (e.g., hours, number of people served) were included in the computation and that the categories were consistent from year to year. For example, in some programs, capital expenditures may not be included in the computation.
c. Perform procedures to verify that the amounts used in the computation were derived from the books and records from which the audited financial statements were prepared.
d. Perform procedures to verify that non-monetary effort indicators were supported by official records.
2.2 Level of Effort - Supplement Not Supplant
a. Ascertain if the entity used Federal funds to provide services which they were required to make available under Federal, State, or local law and were also made available by funds subject to a supplement not supplant requirement.
b. Ascertain if the entity used Federal funds to provide services which were provided with non-Federal funds in the prior year.
(1) Identify the federally-funded services.
(2) Perform procedures to determine whether the Federal program funded services that were previously provided with non-Federal funds.
(3) Perform procedures to ascertain if the total level of services applicable to the requirement increased in proportion to the level of Federal contribution.
a. Identify the applicable percentage or dollar requirements for earmarking.
b. Perform procedures to verify that the amounts recorded in the financial records met the requirements (e.g., when a minimum amount is required to be spent for a specified type of service, perform procedures to verify that the financial records show that at least the minimum amount for this type of service was charged to the program; or, when the amount spent on a specified type of service may not exceed a maximum amount, perform procedures to verify that the financial records show no more than this maximum amount for the specified type of service was charged to the program).
c. When earmarking requirements specify a minimum percentage or amount, select a sample of transactions supporting the specified amount or percentage and perform tests to verify proper classification to meet the minimum percentage or amount.
d. When the earmarking requirements specify a maximum percentage or amount, review the financial records to identify transactions for the specified activity which were improperly classified in another account (e.g., if only 10 percent may be spent for administrative costs, review accounts for other than administrative costs to identify administrative costs which were improperly classified elsewhere and cause the maximum percentage or amount to be exceeded).
e. When earmarking requirements prescribe the minimum number or percentage of specified types of participants that can be served, select a sample of participants that are counted toward meeting the minimum requirement and perform tests to verify that they were properly classified.
f. When earmarking requirements prescribe the maximum number or percentage of specified types of participants that can be served, select a sample of other participants and perform tests to verify that they were not of the specified type.
H. PERIOD OF AVAILABILITY OF FEDERAL FUNDS
Federal awards may specify a time period during which the non-Federal entity may use the Federal funds. Where a funding period is specified, a non-Federal entity may charge to the award only costs resulting from obligations incurred during the funding period and any pre-award costs authorized by the Federal awarding agency . Also, if authorized by the Federal program, unobligated balances may be carried over and charged for obligations of the subsequent funding period. Obligations means the amounts of orders placed, contracts and subgrants awarded, goods and services received, and similar transactions during a given period that will require payment by the non-Federal entity during the same or a future period (A-102 Common Rule, §___.23; OMB Circular A-110, §___.28).
Non-Federal entities subject to the A-102 Common Rule shall liquidate all obligations incurred under the award not later than 90 days after the end of the funding period (or as specified in a program regulation) to coincide with the submission of the annual Financial Status report (SF-269). The Federal agency may extend this deadline upon request (A-102 Common Rule, §___.23).
An example used by a program to determine when an obligation occurs (is made) is found under Part 4, Department of Education, CFDA 84.000 (Cross-Cutting Section).
Determine whether Federal funds were obligated within the period of availability and obligations were liquidated within the required time period.
Suggested Audit Procedures
1. Review the award documents and regulations pertaining to the program and determine any award-specific requirements related to the period of availability and document the availability period.
2. Test a sample of transactions charged to the Federal award after the end of the period of availability and verify that the underlying obligations occurred within the period of availability and that the liquidation (payment) was made within the allowed time period.
3. Test a sample of transactions that were recorded during the period of availability and verify that the underlying obligations occurred within the period of availability.
4. Select a sample of adjustments to the Federal funds and verify that these adjustments were for transactions that occurred during the period of availability.
I. PROCUREMENT AND SUSPENSION AND DEBARMENT
States, and governmental subrecipients of States, shall use the same policies and procedures used for procurements from non-Federal funds. They also shall ensure that every purchase order or other contract includes any clauses required by Federal statutes and executive orders and their implementing regulations.
Local governments and Indian tribal governments which are not subrecipients of States will use their own procurement procedures provided that they conform to applicable Federal law and regulations and standards identified in the A-102 Common Rule.
Non-profit organizations and public institutions of higher education shall use procurement procedures that conform to applicable Federal law and regulations and standards identified in OMB Circular A-110. All non-Federal entities shall follow Federal laws and implementing regulations applicable to procurements, as noted in Federal agency implementation of the A-102 Common Rule and OMB Circular A-110.
Requirements for procurement are contained in the A-102 Common Rule (§____.36), OMB Circular A-110 (§____.40 through §____.48), Federal awarding agency regulations, and the terms of the award. The specific references for the A-102 Common Rule and OMB Circular A-110, respectively are given for each procedure. (The first number listed refers to the A-102 Common Rule and the second refers to A-110.)
Suspension and Debarment
Non-Federal entities are prohibited from contracting with or making subawards under covered transactions to parties that are suspended or debarred or whose principals are suspended or debarred. Covered transactions include procurement contracts for goods or services equal to or in excess of $100,000 and all nonprocurement transactions (e.g., subawards to subrecipients).
Contractors receiving individual awards for $100,000 or more and all subrecipients must certify that the organization and its principals are not suspended or debarred. The non-Federal entities may rely upon the certification unless it knows that the certification is erroneous. Non-Federal entities may, but are not required to, check for suspended and debarred parties which are listed in the List of Parties Excluded From Federal Procurement or Nonprocurement Programs, issued by the General Services Administration (GSA). The information contained on the list is available in printed and electronic formats. The printed version is published monthly. Copies may be obtained by purchasing a yearly subscription from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, or by calling the Government Printing Office Inquiry and Order Desk at (202) 783-3238. The electronic version can be accessed on the Internet (http://www.arnet.gov/epls). Please note that the user will be required to record their name and organization for purposes of the Computer Matching and Privacy Act of 1988.
Requirements for suspension and debarment are contained in the Federal agencies' codification of the governmentwide debarment and suspension common rule (see Appendix II for CFR cites) which implements Executive Orders 12549 and 12689, Debarment and Suspension, and the terms of the award.
1. Procurements were made in compliance with the provisions of the A-102 Common Rule, OMB Circular A-110, and other procurement requirements specific to an award.
2. The non-Federal entity obtained the required certifications for covered contracts and subawards.
Suggested Audit Procedures
(Procedures 1 - 4 apply only to non-profit organizations and Federal awards received directly from a Federal awarding agency by a local government or an Indian tribal government.)
1. Obtain entity's procurement policies. Verify that the policies comply with applicable Federal requirements (§____.36(b)(1) and §____.43).
2. Ascertain if the entity has a policy to use statutorily or administratively-imposed in-State or local geographical preferences in the evaluation of bids or proposals. If yes, verify that these limitations were not applied to Federal procurements except where applicable Federal statutes expressly mandate or encourage geographic preference (§____.36(c)(2) and §____.43).
3. Examine procurement policies and procedures and verify the following:
a. Written selection procedures require that solicitations incorporate a clear and accurate description of the technical requirements for the material, product, or service to be procured, identify all requirements that the offerors must fulfill, and include all other factors to be used in evaluating bids or proposals (§____.36(c)(3) and §____.44(a)(3)).
b. There is a written policy pertaining to ethical conduct (§____.36(b)(3) and §____.42).
4. Select a sample of procurements and perform the following:
a. Examine contract files and verify that they document the significant history of the procurement, including the rationale for the method of procurement, selection of contract type, contractor selection or rejection, and the basis of contract price (§____.36(b)(9) and §____.46).
b. Verify that procurements provide full and open competition (§____.36(c)(1) and §____.43).
c. Examine documentation in support of the rationale to limit competition in those cases where competition was limited and ascertain if the limitation was justified (§____.36(b)(1) and (d)(4); and §____.43 and §____.44(e)).
d. Verify that contract files exist and ascertain if appropriate cost or price analysis was performed in connection with procurement actions, including contract modifications and that this analysis supported the procurement action (§____.36(f) and §____.45).
e. Verify that the awarding Federal agency approved procurements exceeding $100,000 when such approval was required. Procurements (1) awarded by noncompetitive negotiation, (2) awarded when only a single bid or offer was received, (3) awarded to other than the apparent low bidder, or (4) specifying a "brand name" product (§____.36(g)(1) and §___.44(e)), may require prior Federal awarding agency approval.
f. Verify compliance with other procurement requirements specific to an award.
(Procedure 5 only applies to States and Federal awards subgranted by the State to a local government or Indian tribal government.)
5. Test a sample of procurements to ascertain if the State's laws and procedures were followed and that the policies and procedures used were the same as for State funds.
(Procedures 6 applies to all non-Federal entities)
6. Test a sample of procurements and subawards and ascertain if the required suspension and debarment certifications were received for subawards and covered contracts. Alternatively, the auditor may test a sample of procurements and subawards to the List of Parties Excluded From Federal Procurement or Nonprocurement Programs, issued by the General Services Administration (GSA) and ascertain if contracts were awarded to suspended or debarred parties.
Program income is gross income received that is directly generated by the federally-funded project during the grant period. If authorized by Federal regulations or the grant agreement, costs incident to the generation of program income may be deducted from gross income to determine program income. Program income includes, but is not limited to, income from: fees for services performed, the use or rental of real or personal property acquired with grant funds, the sale of commodities or items fabricated under a grant agreement, and payments of principal and interest on loans made with grant funds. Except as otherwise provided in the Federal awarding agency regulations or terms and conditions of the award, program income does not include interest on grant funds (covered under Cash Management), rebates, credits, discounts, refunds, etc. (covered under Allowable Costs/Cost Principles), or interest earned on any of them (covered under Cash Management). Program income does not include the proceeds from the sale of equipment or real property (covered under Equipment and Real Property Management).
Program income may be used in one of three methods: deducted from outlays, added to the project budget, or used to meet matching requirements. Unless specified in the Federal awarding agency regulations or the terms and conditions of the award, program income shall be deducted from program outlays. However, for research and development activities by colleges and universities and other non-profit organizations, the default method is to add program income to the project budget. Unless Federal awarding agency regulations or the terms and conditions of the award specify otherwise, non-Federal entities have no obligation to the Federal Government regarding program income earned after the end of the grant period.
The requirements for program income are found in the A-102 Common Rule (§___.21(payment) and §____.25), OMB Circular A-110 (§____.2 (program income definition), §____.22(payment), and §____.24), Federal awarding agency laws, program regulations, and the provisions of the contract or grant agreements pertaining to the program.
Determine whether program income is correctly recorded and used in accordance with the program requirements, A-102 Common Rule, and OMB Circular A-110, as applicable.
Suggested Audit Procedures
1. Identify Program Income
a. Review the laws, regulations, and the provisions of contract or grant agreements applicable to the program and ascertain if program income was anticipated and, if so, the requirements for recording and using program income.
b. Inquire of management and review accounting records to ascertain if program income was received.
2. Recording of Program Income - Perform tests to verify that all program income was properly recorded in the accounting records.
3. Use of Program Income - Perform tests to ascertain if program income was used in accordance with the program requirements, the A-102 Common Rule, and OMB Circular A-110.
K. REAL PROPERTY ACQUISITION AND RELOCATION ASSISTANCE
The Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, as amended, (URA) provides for uniform and equitable treatment of persons displaced by federally-assisted programs from their homes, businesses, or farms. Property acquired must be appraised by qualified independent appraisers. All appraisals must be examined by a review appraiser to assure acceptability. After acceptance, the review appraiser certifies the recommended or approved value of the property for establishment of the offer of just compensation to the owner. Federal requirements govern the determination of payments for replacement housing assistance, rental assistance, and down payment assistance for individuals displaced by federally-funded projects. The regulations also cover the payment of moving-related expenses and reestablishment expenses incurred by displaced businesses and farm operations.
Governmentwide requirements for real property acquisition and relocation assistance are contained in Department of Transportation's single governmentwide rule at 49 CFR part 24, Uniform Relocation Assistance and Real Property Acquisition Regulations for Federal and Federally-Assisted Programs.
Determine whether the non-Federal entity complied with the real property acquisition, appraisal, negotiation, and relocation requirements.
Suggested Audit Procedures
1. Inquire of management and review the records of Federal programs to ascertain if the non-Federal entity administers federally-assisted programs that involve the acquisition of real property or the displacement of households or businesses.
2. Property Acquisitions
For a sample of acquisitions:
a. Appraisal - Test records to ascertain if: (1) the just compensation amount offered the property owner was determined by an appraisal process; (2) the appraisal(s) was examined by a review appraiser; and, (3) the review appraiser prepared a signed statement which explains the basis for adjusting comparable sales to reach the review appraiser's determination of the fair market value.
b. Negotiations - Test supporting documentation to ascertain if: (1) a written offer of the appraised value was made to the property owner; and (2) a written justification was prepared if the purchase price for the property exceeded the amount offered and that the documentation (e.g., recent court awards, estimated trial costs, valuation problems) supports such administrative settlement as being reasonable, prudent, and in the public interest.
c. Residential Relocations - Test supporting documentation to ascertain if the non-Federal entity made available to the displaced persons one or more comparable replacement dwellings.
3. Replacement Housing Payments - For a sample, test the non-Federal entity's records to ascertain if there is documentation that supports the following;
a. The owner occupied the displacement dwelling for at least 180 days immediately prior to initiation of negotiations.
b. The non-Federal entity examined at least three comparable replacement dwellings available for sale and computed the payment on the basis of the price of the dwelling most representative of the displacement dwelling.
c. The asking price for the comparable dwelling was adjusted, to the extent justified by local market data, to recognize local area selling price reductions.
d. The allowance for increased mortgage cost "buy down" amount was computed based on the remaining principal balance, the interest rate, and the remaining term of the old mortgage on the displacement dwelling.
e. The non-Federal entity prepared written justification on the need to employ last resort housing provisions, if the total replacement housing payment exceeded $22,500.
4. Rental or Downpayment Assistance - For a sample, test the non-Federal entity's records to ascertain if there is documentation that supports the following:
a. The displacee occupied the displacement dwelling for at least 90 days immediately prior to initiation of negotiations.
b. The displacee rented, or purchased, and occupied a decent, safe, and sanitary replacement dwelling within one year.
c. The non-Federal entity prepared written justification if the payment exceeded $5250.
5. Business Relocations -
For a sample of business relocations:
a. Moving Expenses - Test that payments for moving and related expenses were for actual costs incurred or that fixed payments, in lieu of actual costs, were limited to a maximum of $20,000 and computed based on the average annual net earnings of the business, as evidenced by income tax returns, certified financial statements, or other reliable evidence.
b. Business Reestablishment Expense - Verify that (1) the displacee was eligible as a farm operation, a non-profit organization, or a small business to receive reestablishment assistance, and (2) the payment was for actual costs incurred and did not exceed $10,000.
Recipients should use the standard financial reporting forms or such other forms as may be authorized by OMB (approval is indicated by an OMB paperwork control number on the form). These other forms may include financial, performance, and special reporting. Each recipient must report program outlays and program income on a cash or accrual basis, as prescribed by the Federal awarding agency. If the Federal awarding agency requires accrual information and the recipient's accounting records are not normally maintained on the accrual basis, the recipient is not required to convert its accounting system to an accrual basis but may develop such accrual information through analysis. The awarding agency may accept identical information from the recipient in machine-readable format, computer printouts, or electronic outputs in lieu of the prescribed formats. (The open-ended entitlement programs (Appendix 1) require quarterly reports.)
The reporting requirements for subrecipients are as specified by the pass-through entity. In many cases, these will be the same as or similar to the following requirements for recipients.
The standard financial reporting forms are as follows:
1. Financial Status Report (FSR) (SF-269 (OMB No. 0348-0039) or SF-269A (OMB No. 0348-0038)). Recipients use the FSR to report the status of funds for all non-construction projects and for construction projects when the FSR is required in lieu of the SF-271.
2. Request for Advance or Reimbursement (SF-270 (OMB No. 0348-0004)). Recipients use the SF-270 to request Treasury advance payments and reimbursements under non-construction programs.
3. Outlay Report and Request for Reimbursement for Construction Programs (SF-271 (OMB No. 0348-0002)). Recipients use the SF-271 to request funds for construction projects unless advances or the SF-270 is used.
4. Federal Cash Transactions Report (SF-272 (OMB No. 0348-0003) or SF-272-A (OMB No. 0348-0003)). Recipients use the SF-272 when payment is by advances or reimbursements. The awarding agency may waive the requirement for an SF-272 when electronic payment mechanisms provide adequate data.
Electronic versions of these standard forms are located on the OMB's Internet home page (/OMB).
Reporting Under the Payment Management System
Many recipients utilize the Payment Management System (PMS) operated by the Division of Payment Management (DPM) within the Department of Health and Human Services. After a Federal agency awards a grant, DPM is responsible for controlling payments to the recipient; receiving collections for unexpended funds, duplicate payments, audit disallowances, and interest earned on Federal funds; accounting for disbursement information provided by the recipient; and reporting data equivalent to the SF-272, Federal Cash Transaction Report, to the recipient and Federal agency.
Federal awarding agencies enter authorization amounts in PMS to allow recipients to draw Federal funds. There are three methods by which recipients can request funds: (1) the PMS 270 cash request, (2) SMARTLINK II, or (3) CASHLINE systems. SMARTLINK II enables recipients to request Federal funds through computer link with DPM, while CASHLINE allows funds to be requested via a touch tone telephone. Once a quarter, using the authorization amounts provided by the Federal agency, payments requested by recipients, cash collection activity, and disbursement information provided by recipients, DPM generates PMS 272 reports.
The PMS 272 is a series of reports consisting of:
1. PMS 272, Federal Cash Transactions Report, Status of Federal Cash (OMB No. 0937-0200). This report provides a total accountability of all Federal cash received by the recipient. It is partially prepared by DPM based on data reported to DPM, and is completed and certified by the recipient.
2. PMS 272-A, Federal Cash Transactions Report (OMB No. 0937-0200). This report is a continuation of the PMS-272 and is used by the recipient to report cash disbursements back to DPM.
3. PMS 272-B, Statement of Cash Accountability (OMB No. 0937-0200). This report is furnished for the recipient's information and shows how the recipient's cash accountability was derived by DPM.
4. PMS 272-C, Error Correction Document (OMB No. 0937-0200). This report can be used by the recipient to report data reconciliation problems for awards on the PMS 272-A or the Advances to Payee portion in the PMS 272-B.
5. PMS 272-E, Major Program Statement (OMB No. 0937-0200). This report is furnished to States, Indian Tribes, and cross-serviced organizations for their information only. This report lists individual payments during the quarter among the various programs, and provides a cash accountability for all advances received through PMS by major program. All information provided is pre-printed by DPM.
6. PMS 272-F, Authorizations for Future Periods (OMB No. 0937-0200). This report is provided for information only and requires no action by the recipient. It represents all awards posted in the PMS database that have effective dates in future reporting periods.
7. PMS 272-G, Inactive Documents Report (OMB No. 0937-0200). This report lists all awards posted in the PMS database that have become inactive or fully disbursed during the current period or a previous period. In the event that disbursement adjustments are required, they should be reported via the PMS 272-A.
The reports are either mailed to the recipient or electronically downloaded by the recipient using DPM's Electronic 272 System. Recipients should verify the reported amounts. If discrepancies are noted, the report is annotated (or the PMS 272-C is completed) and returned to DPM. The recipient uses the PMS 272-A to report the amount of disbursements made; then signs, dates, and returns the report to DPM. Recipients may report disbursements data electronically using the Electronic 272 process. PMS 272 reporting requirements do not apply to block grant programs; however, DPM does provide block grant recipients with a PMS 272-E, Major Program Statement, quarterly. This report is provided solely for information and no action is required by the recipient.
Recipients shall submit performance reports at least annually but not more frequently than quarterly. Performance reports generally contain, for each award, brief information on each of the following:
1. A comparison of actual accomplishments with the goals and objectives established for the period.
2. Reasons why established goals were not met, if appropriate.
3. Other pertinent information including, when appropriate, analysis and explanation of cost overruns or high unit costs.
Non-Federal entities may be required to submit other reporting which may be used by the Federal agency for such purposes as allocating program funding.
Compliance testing of performance and special reporting are only required for data that are quantifiable and meet the following criteria:
1. Have a direct and material effect on the program.
2. Are capable of evaluation against objective criteria stated in the laws, regulations, contract or grant agreements pertaining to the program.
Performance and special reporting data specified in Part 4, Compliance Requirements, meet the above criteria.
Reporting requirements are contained in the following documents:
a. A-102 Common Rule -- Financial reporting, §____.41; Performance reporting, §____.40(b).
b. OMB Circular A-110 -- Financial reporting, §____.52; Performance reporting, §____.51.
c. The laws, regulations, and the provisions of contract or grant agreements pertaining to the program.
Determine whether required reports for Federal awards include all activity of the reporting period, are supported by applicable accounting or performance records, and are fairly presented in accordance with program requirements.
Suggested Audit Procedures
Note: For recipients using PMS to draw Federal funds, the auditor should consider the following steps numbered 1 through 5 as they pertain to the PMS 272, PMS 272-A, PMS 272-B, and PMS 272-E, regardless of the source of the data included in the PMS reports. Although certain data is supplied by the Federal awarding agency (i.e., award authorization amounts) and certain amounts are provided by DPM, the auditor should ensure that such amounts are in agreement with the recipient's records and are otherwise accurate.
1. Review applicable laws, regulations, and the provisions of contract or grant agreements pertaining to the program for reporting requirements. Determine the types and frequency of required reports. Obtain and review Federal awarding agency, or pass-through entity in the case of a subrecipient, instructions for completing the reports.
a. For financial reports, ascertain the accounting basis used in reporting the data (e.g., cash or accrual).
b. For performance and special reports, determine the criteria and methodology used in compiling and reporting the data.
2. Perform appropriate analytical procedures and ascertain the reason for any unexpected differences. Examples of analytical procedures include:
a. Comparing current period reports to prior period reports.
b. Comparing anticipated results to the data included in the reports.
c. Comparing information obtained during the audit of the financial statements to the reports.
Note: The results of the analytical procedures should be considered in determining the nature, timing, and extent of the other audit procedures for reporting.
3. Select a sample of each of the following report types.
a. Financial reports:
(1) Ascertain if the financial reports were prepared in accordance with the required accounting basis.
(2) Trace the amounts reported to accounting records that support the audited financial statements and the schedule of expenditures of Federal awards and verify agreement or perform alternative procedures to verify the accuracy and completeness of the reports and that they agree with the accounting records.
(3) For any discrepancies noted in PMS-272 reports, review subsequent PMS-272 reports to ascertain if the discrepancies were appropriately resolved with the Department of Health and Human Services' Division of Payment Management.
b. Performance and special reports:
(1) Trace the data to records that accumulate and summarize data.
(2) Perform tests of the underlying data to verify that the data were accumulated and summarized in accordance with the required or stated criteria and methodology, including the accuracy and completeness of the reports.
c. When intervening computations or calculations are required between the records and the reports, trace reported data elements to supporting worksheets or other documentation that link reports to the data.
d. Test mathematical accuracy of reports and supporting worksheets.
4. Test the selected reports for completeness.
a. For financial reports, review accounting records and ascertain if all applicable accounts were included in the sampled reports (e.g., program income, expenditure credits, loans, interest earned on Federal funds, and reserve funds).
b. For performance and special reports, review the supporting records and ascertain if all applicable data elements were included in the sampled reports.
5. Obtain written representation from management that the reports provided to the auditor are true copies of the reports submitted or electronically transmitted to the Federal awarding agency, the Department of Health and Human Services' Division of Payment Management for recipients using the Payment Management System, or pass-through entity in the case of a subrecipient.
A pass-through entity is responsible for:
- Identifying to the subrecipient the Federal award information (e.g., CFDA title and number, award name, name of Federal agency) and applicable compliance requirements.
- Monitoring the subrecipient's activities to provide reasonable assurance that the subrecipient administers Federal awards in compliance with Federal requirements.
- Ensuring required audits are performed and requiring the subrecipient to take prompt corrective action on any audit findings.
- Evaluating the impact of subrecipient activities on the pass-through entity's ability to comply with applicable Federal regulations.
Factors such as the size of awards, percentage of the total program's funds awarded to subrecipients, and the complexity of the compliance requirements may influence the extent of monitoring procedures.
Monitoring activities may take various forms, such as reviewing reports submitted by the subrecipient, performing site visits to the subrecipient to review financial and programmatic records and observe operations, arranging for agreed-upon procedures engagements for certain aspects of subrecipient activities, such as eligibility determinations, reviewing the subrecipient's single audit or program-specific audit results and evaluating audit findings and the subrecipient's corrective action plan.
The requirements for subrecipient monitoring are contained in the A-102 Common Rule (§___.37 and §___.40(a)), OMB Circular A-110 (§___.50(a), Federal awarding agency program regulations, and the terms and conditions of the award.
Determine whether the pass-through entity:
1. Identified Federal award information and compliance requirements to the subrecipient, and approved only allowable activities in the award documents.
2. Monitored subrecipient activities to provide reasonable assurance that the subrecipient administers Federal awards in compliance with Federal requirements.
3. Ensured required audits are performed and requires appropriate corrective action on monitoring and audit findings.
4. Evaluates the impact of subrecipient activities on the pass-through entity.
Suggested Audit Procedures
(Note: The auditor may consider coordinating the tests related to subrecipients performed as part of Cash Management (tests of cash reports submitted by subrecipients), Eligibility (tests that subawards were made only to eligible subrecipients), and Procurement (tests of suspension and debarment certifications) with the testing of Subrecipient Monitoring.)
1. Discuss subrecipient monitoring with the pass-through entity's staff to gain an understanding of the scope of monitoring activities, including the number, size, and complexity of awards to subrecipients.
2. Test award documents and/or approved agreements to ascertain if the pass-through entity made subrecipients aware of the award information (e.g., CFDA title and number, award name, name of Federal agency) and requirements imposed by laws, regulations and the provisions of contract or grant agreements, and to verify that the activities approved in the award documents were allowable. This testing should include procedures to verify that the pass-through entity required subrecipients expending $300,000 or more in Federal awards during the subrecipient's fiscal year to have audits made in accordance with OMB Circular A-133.
3. Review the pass-through entity's documentation of subrecipient monitoring to ascertain if the pass-through entity monitored that subrecipients used Federal funds for authorized purposes and takes actions in response to monitoring findings. This review should include procedures to verify that the pass-through entity monitored the activities of subrecipients not subject to OMB Circular A-133, using techniques such as those discussed in the Compliance Requirements provisions of this section.
4. Verify that the pass-through entity receives audit reports from subrecipients required to have an audit in accordance with OMB Circular A-133, issues timely management decisions on audit and monitoring findings, and requires subrecipients to take timely corrective action on deficiencies identified in audits and subrecipient monitoring.
5. Verify that the effects of subrecipient noncompliance are properly reflected in the pass-through entity's records.
N. SPECIAL TESTS AND PROVISIONS
The specific requirements for Special Tests and Provisions are unique to each Federal program and are found in the laws, regulations, and the provisions of contract or grant agreements pertaining to the program. For programs listed in this Supplement, the compliance requirements, audit objectives, and suggested audit procedures for Special Tests and Provisions are in Part 4 - Agency Program Requirements or Part 5 - Clusters of Programs. For programs not listed in this Supplement, the auditor shall review the program's contract and grant agreements and referenced laws and regulations to identify the compliance requirements and develop the audit objectives and audit procedures for Special Tests and Provisions which could have a direct and material effect on a major program. The auditor should also inquire of the non-Federal entity to help identify and understand any Special Tests and Provisions.
Additionally, for both programs included and not included in this Supplement, the auditor shall identify any additional compliance requirements which are not based in law or regulation (e.g., were agreed to as part of audit resolution of prior audit findings) which could be material to a major program. Reasonable procedures to identify such compliance requirements would be inquiry of non-Federal entity management and review of the contract and grant agreements pertaining to the program. Any such requirements which may have a direct and material on a major program shall be included in the audit.
Year 2000 Compliance Considerations
The Year 2000 (Y2K) problem stems from the use in many computer systems of a two-digit dating system that assumes the first two digits of the year are 1 and 9, a convention adopted years ago when coding space was a premium. Without corrective action, the systems may recognize "00" date not as 2000 but as 1900, which could cause systems to shut down or malfunction. On August 19, 1998, OMB issued an "Advisory to Federal Grantees on Responsibility to Address Year 2000 Issue," which included guidance related to Federal awards. This advisory is located under the grants management heading on OMB's Internet home page (/OMB) and a copy is also included as Appendix VI to this Supplement.
Many Federal agencies have included in the provisions of contracts and grant agreements requirements relative to the Y2K problem (e.g., the non-Federal entity should make specified progress towards becoming Y2K compliant; meet specified Y2K performance requirements; use, develop, or acquire equipment and systems that are Y2K compliant; or develop Y2K contingency plans). The auditor is not expected to plan and perform procedures to determine whether a non-Federal entity is in compliance with these Y2K compliance provisions.
However, as with any other issue affecting a non-Federal entity's ability to comply with the requirements related to Federal awards, auditors will need to consider the effect of the Y2K issue when performing tests of compliance during the audit period. This will be particularly important when the audit period or dates affecting compliance (e.g., eligibility calculations) include dates after December 31, 1999.