PART 3 - COMPLIANCE REQUIREMENTS
INTRODUCTION
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.
Administrative Requirements
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.
Non-Profit Organizations
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.
Subrecipients
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.
Internal Control
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
Compliance Requirements
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.
Audit Objectives
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
Disclosure Statements
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 - Unique research needs - Special building
needs - Building site preparation - Environmental consideration -
Competitive procurement practices
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)
General
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.
Selected Cost Items Not Treated the Same Among
the Circulars |
Exhibit 1 |
Selected Cost Items |
A-87 - State, Local & Indian Tribal
Governments |
A-21 - Educational Institutions |
A-122 - Non-Profit Organizations |
Advertising & Public Relations
|
Allowable with restrictions - (2) |
Allowable with restrictions - (1) |
Allowable with restrictions - (1) |
Bad Debts |
Unallowable unless provided in program regulations
- (7) |
Unallowable |
Unallowable - (3) |
Bonding |
Allowable - (8) |
Not Addressed |
Allowable - (5) |
Civil Defense (local) |
Not Addressed |
Allowable with restrictions - (5) |
Not Addressed |
Compensation for Personal Services |
Unique criteria for support - (11) |
Unique criteria for support - (8) |
Unique criteria for support - (7) |
Defense & Prosecution of Criminal & Civil
Proceedings |
Allowable with restrictions - (14) |
Allowable with restrictions - (11) |
Allowable with restrictions - (10) |
Goods or Services for Personal Use |
Not Addressed |
Unallowable - (19) |
Unallowable - (18) |
Housing & Personal Living
Expenses |
Not Addressed |
Unallowable - (20) |
Unallowable as overhead costs -
(19) |
Idle Facilities |
Allowable with restrictions - (24) |
Not Addressed |
Allowable with restrictions - (20) |
Interest, Fund Raising &
Investment |
Allowable with restrictions - (21,
26) |
Allowable with restrictions - (22) |
Allowable with restrictions - (23) |
Lobbying |
Unallowable (certain exceptions at State/local
level) - (27) |
Unallowable - (17, 24) |
Unallowable - (21) |
Memberships, Subscriptions, & Professional
Activities |
Allowable for civic, community & social
organizations with Federal approval - (30) |
Unallowable for civic, community & social
organizations - (28) |
Unallowable for civic, community & social
organizations - (30) |
Organizational Costs |
Not Addressed |
Not Addressed |
Allowable with prior approval -
(31) |
Patents |
Not Addressed |
Allowable with restrictions - (29) |
Allowable with restrictions - (35) |
Professional Services Costs |
Allowable with restrictions - (33) |
Allowable with restrictions - (32) |
Allowable with restrictions - (39) |
Proposal Costs |
Allowable with restrictions - (34) |
Allowable with restrictions - (34) |
Not Addressed |
Publication & Printing |
Allowable (35) |
Not Addressed |
Allowable with restrictions - (41) |
Recruiting Costs |
Allowable with restrictions - (2) |
Allowable with restrictions -
(37.b) |
Allowable with restrictions - (44) |
Relocation Costs |
Not Addressed |
Allowable with restrictions -
(37.b) |
Allowable with restrictions - (45) |
Royalties |
Not Addressed |
Allowable with restrictions - (39) |
Allowable with restrictions - (47) |
Selling & Marketing |
Not Addressed |
Unallowable - (42) |
Unallowable - (48) |
Specialized Services Facilities |
Not Addressed |
Allowable with restrictions - (44) |
Allowable with restrictions - (50) |
Substantial Relocation - Interest
Provision |
Possible adjustment if relocated within useful
life - (26) |
Possible adjustment if relocated within 20 years -
(22) |
Possible adjustment if relocated within 20 years -
(23) |
Taxes |
Allowable with restrictions - (39) |
Allowable with restrictions - (46) |
Allowable with restrictions - (51) |
Termination Costs |
Not Addressed |
Allowable with restrictions - (49) |
Allowable with restrictions - (52) |
Training |
Allowable for employee development -
(40) |
Allowable - (8.f) |
Allowable with limitations - (53) |
Travel |
Allowable with restrictions - (41) |
Allowable with restrictions - (48,
50) |
Allowable with restrictions - (55) |
Trustees (travel expense) |
Not addressed |
Unallowable - (50) |
Allowable with restrictions - (56) |
Selected Unallowable Cost Items
|
Exhibit 2 |
Selected Cost Items |
A-87 - State, Local & Indian Tribal
Governments |
A-21 - Educational
Institutions |
A-122 - Non-Profit Organizations |
Advertising & Public Relations |
Allowable with restrictions - (2) |
Allowable with restrictions - (1) |
Allowable with restrictions - (1) |
Alcoholic Beverages |
(4) |
(2) |
Unallowable - (2) |
Alumni Activities |
Not Applicable |
(3) |
Not Applicable |
Audit Services |
Allowable with restrictions - (5) and as addressed
in OMB Circular A-133 |
Allowable with restrictions as addressed in OMB
Circular A-133 |
Allowable with restrictions as addressed in OMB
Circular A-133 |
Civil Defense (local) |
Not Addressed |
Allowable with restrictions - (5) |
Not Addressed |
Commencement & Convocations |
Not Applicable |
(6) |
Not Applicable |
Compensation - Institution
Automobile |
Not Addressed |
(8.g) |
Unallowable as overhead costs -
(7g) |
Contingencies |
(12) |
(9) |
(8) |
Defense & Prosecution of Criminal & Civil
Proceedings |
Allowable with restrictions - (14) |
Allowable with restrictions - (11) |
Allowable with restrictions - (10) |
Donations & Contributions |
(13) |
(13) |
(9, 12) |
Entertainment |
(18) |
(15) |
(14) |
Fines and Penalties |
Allowable with restrictions - (20) |
Allowable with restrictions - (18) |
Allowable with restrictions - (16) |
General Government Expenses |
(23) |
Not Applicable |
Not Applicable |
Goods or Services for Personal Use |
Not Addressed |
Unallowable - (19) |
Unallowable - (18) |
Housing & Personal Living
Expenses |
Not Addressed |
(20) |
Unallowable as overhead costs -
(19) |
Idle Facilities |
Allowable with restrictions - (24) |
Not Addressed |
Allowable with restrictions - (20) |
Insurance & Indemnification |
Allowable with restrictions - (25) |
Allowable with restrictions - (21) |
Allowable with restrictions - (22) |
Interest, Fund Raising &
Investment |
Allowable with restrictions - (21,
26) |
Allowable with restrictions - (22) |
Allowable with restrictions - (23) |
Lobbying |
Unallowable except at State/local level -
(27) |
(17, 24) |
(25) |
Losses on Other Sponsored Programs |
(42) |
(25) |
(26) |
Memberships, Subscriptions & Professional
Activities |
Allowable with restrictions - (30) |
Allowable with restrictions - (28) |
Allowable with restrictions - (30) |
Organizational Costs |
Not Addressed |
Not Addressed |
Allowable with prior approval -
(31) |
Patents |
Not Addressed |
Allowable with restrictions - (29) |
Allowable with restrictions - (35) |
Pre-Agreement Costs |
Allowable with restrictions - (32) |
Allowable with restrictions - (31) |
Allowable with restrictions - (38) |
Publication & Printing |
Allowable (35) |
Not Addressed |
Allowable with restrictions - (41) |
Recruiting Costs |
Allowable with restrictions - (2) |
Allowable with restrictions -
(37.b) |
Allowable with restrictions - (44) |
Relocation Costs |
Not Addressed |
Allowable with restrictions -
(37.b) |
Allowable with restrictions - (45) |
Selling & Marketing |
Not Addressed |
(42) |
Unallowable as overhead costs -
(48) |
Severance Pay |
Allowable with restrictions -
(11.g) |
Allowable with restrictions - (43) |
Allowable with restrictions - (49) |
Student Activity Costs |
Not Applicable |
(45) |
Not Applicable |
Taxes |
Allowable with restrictions - (39) |
Allowable with restrictions- (46) |
Allowable with restrictions (51) |
Termination Costs |
Not Addressed |
Allowable with restrictions - (49) |
Allowable with restrictions - (52) |
Travel - First Class |
(41) |
(48) |
(55) |
Trustees (travel expense) |
Not Applicable |
(50) |
Allowable with restrictions - (56) |
Under recovery of Costs on Federal
Agreements |
(42) |
(25) |
(26) |
C.
CASH MANAGEMENT
Compliance Requirements
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/).
Audit Objectives
Determine whether:
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.
States
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.
D.
DAVIS-BACON ACT
Compliance Requirements
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).
Audit Objective
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.
E.
ELIGIBILITY
Compliance Requirements
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.
Audit Objectives
Determine whether:
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
Compliance Requirements
Equipment 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.
Audit Objectives
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
Compliance Requirements
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.
Audit Objectives
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
1. Matching
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.
3. Earmarking
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
Compliance Requirements
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).
Audit Objective
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
Compliance Requirements
Procurement
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.
Audit Objectives
Determine whether:
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.
J.
PROGRAM INCOME
Compliance Requirements
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.
Audit Objective
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
Compliance Requirements
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.
Audit Objective
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.
L.
REPORTING
Compliance Requirements
Financial Reporting
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.
Performance Reporting
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.
Special Reporting
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.
Audit Objective
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.
M. SUBRECIPIENT
MONITORING
Compliance Requirements
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.
Audit Objectives
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
Compliance Requirements
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.
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