August 30, 1999
MEMORANDUM FOR INSPECTORS GENERAL AND CHIEF FINANCIAL OFFICERS OF
EXECUTIVE DEPARTMENTS AND AGENCIES
||Sheila O. Conley, Acting Deputy Controller /s/
| || |
||Impact of Y2K on Audits of Federal Awards Under OMB Circular A-133
The Year 2000 (Y2K) issue relates to the ability of data processing systems to process year-date
dependent data accurately beyond the year 1999. Systems that are not Y2K compliant may affect the
ability of grantees to administer Federally-funded programs in accordance with Federal requirements.
The purpose of this memorandum is to:
This memorandum should be provided to officials in your organization responsible for grants
management and implementation of OMB Circular A-133.
- address the impact of opinion qualifications resulting from Y2K disclosures required by Technical
Bulletin (TB) 98-1, Disclosures About Year 2000 Issues, issued by the Governmental Accounting
Standards Board (GASB);
- describe the procedures to be followed if an auditee elects to submit revised financial statements to the
Federal Government resulting from GASB TB 99-1, Disclosures About Year 2000 Issues-An
Amendment of Technical Bulletin 98-1; and
- provide guidance about an auditor's responsibility to consider the Y2K issue when conducting audits in
accordance with the Single Audit Act Amendments of 1996 and Office of Management and Budget
(OMB) Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations.
OMB has determined that an opinion qualification resulting solely from Y2K disclosures, or the
omission of such disclosures, required by GASB TB 98-1 would not preclude an entity from qualifying
as a low-risk auditee under OMB Circular A-133. If an entity chooses to revise its financial statements
as a result of GASB TB 99-1, and elects to submit its revised financial statements to the Federal
Government, the entity should follow the procedures presented in the Attachment. Also, as with any
other issue affecting an auditee's ability to comply with Federal program requirements, auditors must
consider the effect of the Y2K issue when conducting OMB Circular A-133 audits, including applying
the risk-based approach to selecting major Federal programs to audit. However, the auditor is not
expected to plan and perform procedures to determine whether an auditee is Y2K compliant.
Impact of GASB Technical Bulletin 98-1 on Single Audits
In October 1998, GASB issued TB 98-1, which is effective for financial statements on which the
auditor's report is dated after October 31, 1998. GASB TB-98-1 requires State and local governments
to include in the notes to the financial statements certain disclosures relating to the Y2K issue including:
On October 22, 1998, the American Institute of Certified Public Accountants (AICPA) expressed
concern that the required Y2K disclosures are neither assertable by management nor verifiable by
auditors. The AICPA advised auditors to be very cautious about being associated with the disclosures.
Because of the unprecedented nature of the Y2K issue, its effects and the success of related
remediation efforts will not be fully determinable until the year 2000 and thereafter. Accordingly,
sufficient audit evidence may not exist to support the required Y2K disclosures. As a result, many audit
reports issued after October 31, 1998, are qualified due to either:
- significant amounts of resources committed to Y2K compliance;
- a general description of how the organization is affected by the Y2K issue; and
- information about the entity's stage of readiness.
OMB has received numerous inquiries about the impact of qualified and adverse opinions relating to
Y2K disclosures on an auditee's ability to qualify as a low-risk auditee under OMB Circular A-133.
OMB Circular A-133 permits entities to qualify as low-risk auditees and be eligible for reduced audit
coverage if certain conditions are met. One condition is that the auditor's opinion on the entity's financial
statements for each of the preceding two years is unqualified, unless the Federal cognizant or oversight
agency for audit provides a waiver to this criterion.
OMB has concluded that a qualified or adverse opinion resulting solely from either:
- a scope limitation resulting from the auditor's inability to obtain sufficient audit evidence relating to the
Y2K note disclosures; or
- the omission of the Y2K note disclosures required by GASB TB 98-1. (Omitted Y2K disclosures
could result in an adverse opinion.)
- a scope limitation with respect to the Y2K note disclosures required by GASB TB 98-1, or
- an omission of the Y2K note disclosures required by GASB TB 98-1
would not preclude an entity from qualifying as a low-risk auditee under paragraph ___.530 of OMB
Circular A-133. Accordingly, auditees with qualified or adverse opinions resulting solely from the limited
circumstances described in the preceding sentence do not need to request separate waivers from their
Federal cognizant or oversight agencies for audit. However, for opinion modifications or disclaimers of
opinion for any other reason, auditees must obtain waivers from their Federal cognizant or oversight
agencies for audit to be considered a low-risk auditee under paragraph ___.530 of OMB Circular
Procedures for Submitting Revised Financial Statements
On March 29, 1999, GASB issued TB 99-1, Disclosures About Year 2000 Issues-An Amendment
of Technical Bulletin 98-1. The revision modifies the Y2K disclosures and allows such disclosures to
be presented either in the notes to the financial statements or as required supplementary information
(RSI). While the auditor is required to perform certain procedures on RSI, reporting on such
information (including an omission of RSI) does not affect the auditor's opinion on the basic financial
statements (see Auditing Sections 551, "Reporting on Information Accompanying the Basic Financial
Statements in Auditor-Submitted Documents," and 558, "Required Supplementary Information," of the
AICPA's Codification of Statements on Auditing Standards). GASB TB 99-1 became effective
upon issuance on March 29, 1999, and retroactive application is allowed. As a result of permitting
retroactive implementation, some auditees may choose to revise their 1998 financial statements and
have their auditors reissue the related auditor's reports.
Auditees are not required to submit financial statements that are revised based on GASB TB 99-1 to
the Federal Government, unless specifically requested by a Federal awarding agency. Under these
circumstances, the revised financial statements need only be sent to the requesting agency and are not
required to be sent to the Federal Audit Clearinghouse as provided in the Attachment. However, if an
auditee elects to submit revised financial statements to the Federal Government, the procedures
described in the Attachment should be followed.
Auditor Consideration of the Y2K Issue Under Single Audit
As with any other issue affecting an auditee's ability to comply with requirements related to Federal
awards, auditors must consider the effect of the Y2K issue when conducting audits in accordance with
OMB Circular A-133, including applying the risk-based approach to selecting major programs
(paragraph ___.520 of OMB Circular A-133). However, the auditor is not expected to plan and
perform procedures to determine whether an auditee is Y2K compliant or has made specified progress
towards becoming Y2K compliant.
When applying the risk-based approach to selecting major programs, paragraph ___.520(c)(1) of
OMB Circular A-133 states that "The auditor shall consider . . . whether any changes in personnel or
systems affecting a Type A program have significantly increased risk . . . ." The Y2K issue poses a
greater risk for Federal awards that rely heavily on data processing systems to administer such awards.
Auditors should specifically assess the risk associated with Y2K for large Federal programs (i.e., Type
A programs) and document this assessment as part of the risk-based approach.
Auditors should be aware, and consider as part of the major program risk assessment process, that the
Y2K issue may affect the administration of Federal awards prior to the year 2000 for certain
programs. For example, programs that provide assistance to individuals may have time limits on
eligibility. Such systems must be able to calculate the passage of time accurately to ensure that
assistance payments do not exceed prescribed limits. Also, loan programs may require that interest be
calculated on outstanding balances over time. Accordingly, loan systems must be capable of calculating
interest payments over the period covered by loan agreements.
Questions regarding this memorandum should be directed to an auditee's Federal cognizant or oversight
agency for audit. (See paragraph ___.400 of OMB Circular A-133 for guidance on determining
Federal cognizant or oversight agencies for audit.)
Websites that contain useful information include:
Procedures for Submitting an Amended Reporting Package
Due to Y2K Disclosures(1)
1. Prepare amended reporting package. The amended reporting package should only include the
revised financial statements and reissued auditor's report on the revised financial statements.
2. Mark contents of amended reporting package: "REVISED DUE TO Y2K DISCLOSURES"
3. Prepare a transmittal letter. The transmittal letter should accompany the amended reporting
package, in lieu of preparing a revised data collection form, and include the following:
- A description of the nature of the revision and its impact.(2)
- Name, title, and signature of certifying official (representing the auditee).
- Auditee's employer identification number (EIN).
4. Submit one copy of the amended reporting package and transmittal letter to the Federal
Audit Clearinghouse.(3) Amended reporting packages, along with accompanying transmittal letters,
should be addressed as follows:
Revised Report--Y2K Disclosure
Federal Audit Clearinghouse
Bureau of the Census
1201 E. 10th Street
Jeffersonville, IN 47132
5. A subrecipient should determine whether an amended reporting package should be
submitted to its pass-through entities. Subrecipients required to submit a reporting package to
pass-through entities under paragraph ___.320(e) of OMB Circular A-133 should also submit an
amended reporting package to those same pass-through entities, unless otherwise informed by such
(1) These procedures apply only to situations in which an auditee chooses to revise its financial
statements pursuant to Technical Bulletin (TB) 99-1, Disclosures About Year 2000 Issues-An
Amendment of Technical Bulletin 98-1, issued by the Governmental Accounting Standards Board
(GASB). Auditees are not required to submit financial statements that have been revised based on
GASB TB 99-1 to the Federal Government, unless specifically requested by a Federal awarding
agency. However, if an auditee elects to submit revised financial statements to the Federal Government,
the auditee should follow the procedures presented in this Attachment.
(2) For example, "As permitted by GASB TB 99-1, ABC Government revised its financial statements as
of and for the period ended June 30, 1998. Required disclosures about the Year 2000 are presented as
required supplementary information in the revised financial statements, whereas such disclosures were
previously presented in the notes to the financial statements. As a result, the auditor's report on the
revised financial statements is unqualified, whereas a qualified opinion was rendered on the
previously-issued financial statements."
(3) It is not necessary to submit to the Clearinghouse additional report copies for Federal awarding
agencies. The Clearinghouse will retain one archival copy of the amended OMB Circular A-133
reporting package and transmittal letter. However, if specifically requested by a Federal awarding
agency, an auditee should provide additional copies directly to the Federal agency.