[Federal Register Volume 60, Number 201 (Wednesday, October 18, 1995)]
[Notices]
[Pages 53934-53940]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25841]
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[[Page 53935]]
LEGAL SERVICES CORPORATION
Audit Guide for LSC Recipients and Auditors
AGENCY: Legal Services Corporation.
ACTION: Final audit guide for recipients and auditors.
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SUMMARY: The Legal Services Corporation (LSC or Corporation) hereby
publishes as final the Audit Guide for Legal Services Corporation
Recipients and Auditors (Audit Guide), which was adopted by the LSC
Board of Directors on October 6, 1995. This Audit Guide will replace
the audit portions of both editions (1981 and 1986) of the current
``Audit and Accounting Guide for Recipients and Auditors'' (Audit and
Accounting Guide). The Audit Guide will be maintained as a separate
document under the authority of the LSC Office of Inspector General
(OIG). The accounting and financial reporting requirements of the Audit
and Accounting Guide will remain in effect until amended in the future,
and will remain the responsibility of LSC management. All questions
regarding LSC accounting requirements should be directed to LSC's
Office of Program Evaluation, Analysis and Review (OPEAR).
The Audit Guide prescribes the use of Government Auditing Standards
(GAS or GAGAS), and Office of Management and Budget (OMB) Circular A-
133. There will be three appendices to the new Audit Guide, which in
themselves establish no new rules, regulations or guidelines for
recipients, and as such are not published herein. The Appendices are:
(1) The Compliance Supplement; (2) the Sample Audit Agreement; and (3)
the Guide for Procurement of Audit Services by Legal Services
Corporation Recipients.
EFFECTIVE DATE: The requirements of the Audit Guide are effective for
audits of fiscal years ending on or after December 31, 1995, except as
otherwise authorized by the Corporation.
FOR FURTHER INFORMATION CONTACT: Charmaine Romear, Office of Inspector
General, Legal Services Corporation, 750 First St., N.E., 10th Floor,
Washington, DC 20002-4250 (Telephone: (202) 336-8840).
SUPPLEMENTARY INFORMATION: The Legal Services Corporation Act requires
that the Corporation ``conduct, or require each grantee, contractor, or
person or entity receiving financial assistance'' (Section
1009(c)(1))from the Corporation to provide for an annual financial
audit. Historically, the Corporation has chosen to require recipients
to provide the annual audit pursuant to the Corporation's audit
guidance provided in the Audit and Accounting Guides.
On July 30, 1976, the Legal Services Corporation published in the
Federal Register its ``Audit and Accounting Guide for Recipients and
Auditors'' (41 FR 29951-29979). Pursuant to Section 1008(e) of the
Legal Services Corporation Act (42 U.S.C. 2996(g)(c)), the Corporation
thereafter requested (41 FR 32794) and received comment from interested
persons. The Audit and Accounting Guide became effective on October 4,
1976.
On July 19, 1977, the Corporation published a notice instructing
recipients to use the revised Audit and Accounting Guide (June 1977)
that had been distributed in June of 1977. (42 FR 37077). The
instruction was effective immediately upon publication. There were
additional unpublished revisions in September 1979 and 1981, and a
separate ``Fundamental Criteria of an Accounting and Financial
Reporting System''; each was issued directly to grant recipients.
On February 20, 1985, the Corporation published a notice of
availability of a revised Audit and Accounting Guide that had been
distributed February 11, 1985. (50 FR 7150). The notice established a
90-day period for the submission of comments. On November 29, 1985,
after adoption by the Corporation's Board of Directors, the final
publication of the revised Audit and Accounting Guide appeared in the
Federal Register. (50 FR 49276). This version of the Audit and
Accounting Guide became effective January 1, 1986. Shortly thereafter,
however, the Corporation gave recipients the option of using either the
September 1981 or the January 1986 version of the Audit and Accounting
Guide.
On May 24, 1995, pursuant to the LSC Board Resolution of May 13,
1995 which transferred responsibility for establishing audit policy to
the OIG , the OIG published in the Federal Register for public notice
and comment the proposed Audit Guide for LSC Recipients and Auditors.
(60 FR 27562-27567). The initial notice established a 30-day comment
period. The comment period was subsequently extended for 30 additional
days to July 24, 1995 through two published notices. (60 FR 30901 and
60 FR 34303).
The Audit Guide makes one major change in the current standards.
All financial statement audits for periods ending on or after December
31, 1995, will be conducted pursuant to GAS and OMB Circular A-133,
except as otherwise provided by the Corporation.
Twenty-two comments were received. The comments from the American
Institute of Certified Public Accountants (AICPA), and the Center for
Law and Social Policy (CLASP) have been referenced in the Supplementary
Information, as they mirrored those of many other respondents. The
comments were analyzed and discussed before the Finance Committee of
the LSC Board of Directors in September 1995.
Some of the comments raised issues that relate to the proposed
Fiscal Year 1996 (FY96) Appropriation. No response is made to those
comments at this time; however, the Corporation is aware of the varying
1996 Appropriation Bills passed by the House and the Senate. The
Corporation will consider the application of the audit requirements of
this Audit Guide when the Appropriation is enacted.
Several comments were received opposing or requesting the
Corporation's re-consideration of the requirement for GAS and OMB
Circular A-133 because of increased audit costs, decreased LSC funding
for FY96, the impact of staff reductions, and in some cases, the impact
on the program's current auditors who may not be qualified to conduct
such audits. Adoption of GAS for audits of LSC grants will increase
accountability and credibility with the Congress and the public. Audits
performed under OMB Circular A-133 will cost more; however, this
increased cost will significantly enhance accountability. Although we
expect an initial cost increase, we also expect a subsequent reduction
in audit costs as auditors become more familiar with the LSC
requirements, and as programs become better prepared for the audits. We
believe the incremental costs are not substantial, and are balanced by
the concomitant savings as a result of a more focused and less
intrusive monitoring mechanism.
As to the comments regarding the impact on Independent Public
Accountants (IPAs) who are not qualified under GAS, the impact is not
necessarily negative. A requirement that the auditor meets the
requirements of GAS ensures that a recipient is audited by an IPA with
specific training, and thus increases accountability.
There were comments expressing concern about the timing of the
adoption of the new audit requirements (December, 31, 1995 audits), and
the impact on a program's ability to respond effectively during a
period of budget cuts, staff reductions and pending imposition of new
restrictions for FY96. Most recommended implementation for audits of
fiscal year ends after December 31, 1995. The AICPA recommended
[[Page 53936]]
implementation at least six months after finalization of the Audit
Guide and the Compliance Supplement. CLASP recommended a voluntary
adoption for programs which are not already subject to the requirements
and do not have binding audit agreements. The Corporation's Budget
Request for FY96, distributed to all current recipients February 1995,
contained a statement that the Corporation intended to implement GAS
and OMB Circular A-133 for fiscal years ending December 31, 1995, and
after. In May 1995, after the transfer of the audit function to the
OIG, the OIG published the proposed Audit Guide for comment in the
Federal Register. The Board of Directors, having reviewed the comments,
has decided to adopt the Audit Guide. Given this history, recipients
have had adequate notice that the new requirements were likely to be
adopted and it is not unreasonable to implement the new Audit Guide
effective December 31, 1995. Moreover, implementation of the new Audit
Guide will significantly enhance the fiscal compliance monitoring
conducted on behalf of the Corporation, adding comprehensive on-site
examination of a recipient's compliance with fiscal regulations to the
current desk reviews and on-site compliance reviews. Achieving
implementation on December 31, 1995, is particularly important from the
perspective of audit coverage--recipients with fiscal years ending on
December 31 receive approximately 63% of the total annualized LSC
grants. The OIG will extend a one-time exemption on the initial
application of these requirements for the following groups of
recipients:
Category 1: Programs receiving less than $300,000 in total federal
funding (which includes LSC funding), and are not currently required to
have a GAGAS audit or an A-133 audit. The one-time exemption is
automatic, and does not require prior notification to the OIG.
Category 2: Programs which are not eligible for funding effective
January 1, 1996. The one-time exemption is automatic, and does not
require prior notification.
Category 3: Programs receiving $300,000 or greater in total federal
funding (which includes LSC funding), and currently have binding
contracts for generally accepted auditing standards (GAAS) audits.
Exemptions will only be granted upon written request, and will only
apply to contracts in effect prior to July 1, 1995, which must be
submitted to the OIG along with the exemption requests.
Most comments and calls received by the OIG expressed the need to
give the recipients and auditors an opportunity to review and comment
on the Appendices. Some of these comments expressed concern about, or
seemed to be attributable to the statements made in the initial
publication that the Appendices were not published as they established
no new rule or regulation, and that they would be promulgated without
formal adoption by the Corporation's Board of Directors. The Appendices
were not published in the Federal Register for notice and comment
because none of the documents established new rules or regulations.
Rather, they were a reflection of already existing regulations and
accounting standards that had been previously subject to notice and
comment. Notwithstanding this, it was always intended that recipients
and interested parties would be given an opportunity to comment on the
Appendices. The ``Compliance Supplement'' was distributed for notice
and comment to recipients and interested parties on August 30, 1995.
The ``Sample Audit Agreement'' is merely a model which recipients may
find useful. The ``Guide for Procurement of Audit Services by Legal
Services Corporation Recipients'' was previously distributed in April
1994 to all LSC recipients. Any future revisions to the Audit Guide or
its Appendices that reflect or implement new policies or rules would be
published for notice and comment in the Federal Register, and would be
distributed to recipients and interested parties for comment.
Two Appendices referenced in the May 24, 1995 Federal Register
notice of the ``Audit Guide'' were more appropriate to the LSC
Accounting Guide, and will be drafted by management. We, therefore,
excluded the following from the Audit Guide: 1) Model Format for
Audited Financial Statements and Footnotes; and 2) the Fundamental
Criteria of an Accounting and Financial Reporting System. Both
Appendices were excerpts from the previous Audit and Accounting Guides
to make auditors aware of existing LSC requirements for internal
control from an audit perspective, and to achieve some form of
standardization in the classification of accounts reported in the
annual audits. These documents would be subject to review and revision
in the near future as a result of changes to two accounting standards
for non-profits, Statements of Financial Accounting Standards (SFAS):
SFAS 116, Accounting for Contributions Received and Contributions Made;
and SFAS 117, Financial Statements of Not-for-Profit Organizations.
There were several comments recommending deletion of paraphrases or
quotes from the GAGAS and GAAS standards. It was stated that GAS and
GAAS contain sufficient guidance to the auditor, and it was suggested
that to streamline the Guide these requirements be incorporated by
reference only. Except where special emphasis was needed, we have
deleted the restated existing standard.
Some comments disagreed with defining LSC as a major program in the
initial publication. The general view was that LSC should not impose
criteria for determining a major program for the purposes of OMB
Circular A-133 as the Circular already defines the criteria for such
determinations. The Audit Guide has been revised to eliminate the
reference to LSC as a major program.
Financial Responsibilities of Recipients (Section I-7, Subsection
A): The AICPA suggested that the Audit Guide, in discussing the
objectives of a financial system, adopt language that is consistent
with the definition of internal controls in the Internal Control-
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The AICPA also
suggested that the title of the Section, ``Maintain Adequate Accounting
System,'' be changed to ``Maintain Adequate Internal Controls.'' Both
suggestions reflect the view within the audit community that
management's responsibility for maintaining adequate internal controls
should be emphasized.
The AICPA's suggestion that the Audit Guide adopt the COSO
definition of internal controls is contingent on revisions to existing
audit standards, viz. Statement on Auditing Standards (SAS) 55,
``Consideration of the Internal Control Structure in a Financial
Statement Audit.'' Since SAS 55 revisions have not yet been finalized
or implemented, we did not make any revisions to the Audit Guide;
however, we have revised the Audit Guide to adopt the suggested title.
Basis for Precluding the Appointment of the Auditor (Section I-7,
Financial Responsibilities of Recipients, Subsection B): Comments
questioned the definition of the phrase ``if a conflict of interest
exists'' as a basis for LSC preclusion on the appointment of an
auditor. The respondents argued that GAS addresses auditor
independence, and that LSC should not establish different independence
standards. We have revised the language to ensure consistency with GAS.
The Audit Guide makes reference to the qualification requirements of
GAS as one of the bases for LSC's preclusion of the appointment of the
auditor.
[[Page 53937]]
Retention Period for Audit Working Papers (Section II-1, Audit
Requirements, Subsection D): There were comments stating that the eight
year period for retention of the audit working papers was too long and
burdensome. The retention period has been revised to three years,
consistent with the requirements of OMB Circular A-133.
Access to Audit Working Papers and Impact on Attorney Client
Privilege (Sections II-1, Audit Requirements, Sub-sections E and G):
There were several comments on third party access to information that
is protected by the attorney-client privilege, an issue which was
raised by management prior to the publication of the proposed Audit
Guide. The general concern was that the Audit Guide, under the sections
related to ``Access to Audit Working Papers,'' and ``Privileged or
Confidential Information,'' did not identify the LSC Act restriction
(Sec. 1009(d)) on access to attorney-client privileged information, nor
did it provide guidance on how such information should be handled in
the course of the audit. CLASP suggested that the language on
``Privileged and Confidential Information'' (Section II-1, Subsection G
of the initial notice) be deleted and access be discussed under
``Access to Audit Working Papers'' (Section II-1, Subsection E). We
agreed with the concerns expressed and adopted CLASP's recommendation.
The Guide has been revised to delete Section II-1, Subsection G. In
addition, the LSC Act restriction has been referenced under Section II-
1, Subsection E. We have not accepted CLASP's suggestion that the
provisions of state codes of ethics concerning confidential information
also be included as a restriction on access. Similarly, we have not
accepted management's suggestion that auditors be cautioned to exclude
from their working papers material which might be protected. The OIG
believes that an audit guide is not the proper vehicle for resolving
disputed issues, and that auditing standards provide adequate guidance
to the auditors with respect to confidential and/or sensitive
information. The Corporation's Board has adopted the OIG position.
Disclosure of Errors and Irregularities and Illegal Acts to Third
Parties (Section II-1 Audit Requirements, Subsection F): The AICPA
expressed the concern that the terminology used in this section was
inconsistent with GAS and the requirement for the notification to the
OIG appeared to exceed the requirements of Statement on Auditing
Standards (SAS) 53, ``The Auditor's Responsibility to Detect and Report
Errors and Irregularities'' and SAS 54, ``Illegal Acts by Clients.''
The Corporation, pursuant to the applicable grant condition and the IG
Act, believes that it should be notified of irregularities and illegal
acts that come to the attention of the auditor in the course of the
audit. This position is consistent with the Corporation's position
taken in the 1981 and 1986 Audit and Accounting Guides. The language in
the May 24, 1995 notice of the Audit Guide was retained. In addition,
the Audit Guide was revised to identify the criteria for the auditor's
reporting of such matters that come to his/her attention during the
audit, consistent with the 1981 Audit and Accounting Guide.
Review of Internal Controls (Section II-2): The AICPA commented
that the ``Fundamental Criteria of an Accounting and Financial
Reporting System'' (Appendix D) can be helpful to auditors in assessing
the internal control structure as required by GAS and OMB Circular A-
133. However, they suggested that the Guide ``should clearly state that
the auditor's responsibility for considering and reporting on the
organization's internal control structure does not exceed the
requirements of'' GAS.
We do not believe that the language as written in the initial
notice requires revision; however, for reasons previously expressed and
unrelated to this comment, we deleted reference to the ``Fundamental
Criteria for an Accounting and Financial Reporting System.'' No further
revisions were deemed necessary.
Audit Follow-up on Immaterial Findings (Section II-4, Audit Follow-
up): Some comments questioned the requirement for the auditor to
follow-up on immaterial findings disclosed in the management letter,
stating that the requirement exceeded GAS. Management believes that the
requirement for the auditor's follow-up of findings in the management
letter is appropriate. This requirement is consistent with the 1981 and
1986 Audit and Accounting Guides.
Audit Objectives (Section II-1, Subsection A): The AICPA commented
that the term ``results of operations'' is no longer used in describing
financial statements of not-for-profit organizations and recommended
substitute language. The Audit Guide was revised to adopt the AICPA's
suggested language.
Audit Reports (Section II-1, Subsection B): The AICPA commented
that the audit reports referenced in the May 24, 1995 notice identified
the reports required under GAS, but did not include the additional
reports required under OMB Circular A-133. We have deleted the reports
identified in the initial notice and instead made reference to GAS and
OMB Circular A-133.
Assessing Compliance with Laws and Regulations (Section II-3): The
AICPA suggested that the Audit Guide refer to the laws and regulations
as having a material effect on the ``program'' as opposed to the
``organization's financial statements.'' We have adopted the AICPA's
suggestion and revised the Audit Guide accordingly.
Audit Report Due Dates (Financial Responsibilities of Recipients,
Section I-7, Subsection B): The AICPA commented that the 90-day
submission date for the reports was inconsistent with the 13-month
requirement of OMB Circular A-133. The Corporation is aware of the
inconsistency with OMB Circular A-133, but has chosen not to expand the
time limit to 13 months. LSC recipients are currently required to
submit their audit reports within 90 days of the close of the audit
period. Given the increased attention paid to the activities of LSC
grantees at this time, we do not believe it would be prudent to expand
that requirement to 13 months. While the Audit Guide requires a
submission date that is much shorter than the requirements of OMB
Circular A-133, a majority of LSC recipients have been able to submit
the audit reports within the period. Based on an OIG analysis of
submission of 1993 audits conducted in accordance with OMB Circular A-
133, we found that 34% of the recipients submitted reports within the
90 days, and an additional 65% submitted the reports well within the 60
day extension period currently allowed. We believe that these
statistics indicate that LSC current requirements are not overly
burdensome, in that 99% of recipients comply with the permitted 150
days. We, therefore, extended the 90-day submission requirement to 150
days. Extensions should no longer be necessary, and will be granted
only in exceptional cases.
In addition to the general and specific comments noted above, there
were minor comments related to the use of inconsistent terms or phrases
within the Audit Guide, or the Audit Guide's reference to certain
auditing standards without a title description. While these comments do
not require a separate response, we have considered them and have
revised the Audit Guide accordingly.
For the reasons set forth above, the LSC Audit Guide reads as
follows:
[[Page 53938]]
Legal Services Corporation
Audit Guide for Recipients and Auditors
Foreword
Under the Legal Services Corporation (LSC) Act, LSC provides
financial support to organizations that furnish legal assistance to
eligible clients. The Act requires that LSC either conduct or require
each recipient of LSC funds to provide for an annual financial
statement audit.
In 1976, LSC adopted an ``Audit and Accounting Guide for Recipients
and Auditors'' of LSC funds. The Audit and Accounting Guide was amended
several times through 1981. Then, effective January 1, 1986, a fully
revised Audit and Accounting Guide was published. LSC subsequently
declared the 1986 Audit and Accounting Guide to be just an alternative
to, rather than a binding replacement of, the amended original Audit
and Accounting Guide.
In 1995, LSC promulgated the following Audit Guide to replace the
audit portions of both the original and the 1986 Audit and Accounting
Guide. In addition, LSC will attach three appendices to this Audit
Guide for use by recipients and auditors.
Appendix A. The Compliance Supplement provides notice to both
recipients and their auditors of the general federal requirements and
the specific LSC regulations which are to be tested for compliance. The
Compliance Supplement will change as LSC rules, regulations and
guidelines are adopted, amended or revoked, but it establishes no new
rules, regulations or guidelines itself.
Appendix B. A Sample Audit Agreement which contains provisions LSC
recommends recipients consider incorporating in their audit agreements.
Appendix C. A Guide for Procurement of Audit Services prepared by
the LSC Office of Inspector General (OIG) in the spring of 1994 and
revised in 1995. This Guide is intended to assist recipients in
planning and procuring audit services.
It is anticipated that the accounting portions of both the original
and the 1986 Audit and Accounting Guide will also be replaced in the
future. Until so notified, recipients should continue to refer to the
1981 and 1986 Audit and Accounting Guide for LSC financial accounting
requirements.
Table of Contents
I. Introduction
I-1 Purpose
I-2 Required Standards and Guidance
I-3 Authority
I-4 Effective Date
I-5 Revisions and Supplements to the Guide
I-6 Cumulative Status of Revisions
I-7 Financial Responsibilities of Recipients
II. Audit Performance Requirements
II-1 Audit Requirements
II-2 Review of Internal Controls
II-3 Assessing Compliance with Laws and Regulations
II-4 Audit Follow-up
III. Audit Reporting Requirements
III-1 Audit Reports and Distribution
III-2 Views of Responsible Officials
IV. Reference Materials
Appendix
Appendix A--Compliance Supplement
Appendix B--Sample Audit Agreement
Appendix C--Guide for Procurement of Audit Services by Legal
Services Corporation Recipients
Authorities: The Legal Services Corporation Act of 1974, as
amended, Sec. 1008 (a) and (b), (42 U.S.C. 2996g (a) and (b));
Sec. 1009(c)(1), (42 U.S.C. 2996h(c)(1)); and Sec. 1010(c), (42
U.S.C.2996i(c)); The Inspector General Act of 1978, as amended, 5
U.S.C. App. 3, Sec. 4(a)(1); and Sec. 4(b)(1).
Introduction
The Office of Inspector General (OIG) of the Legal Services
Corporation (LSC) is responsible for establishing and interpreting LSC
audit policy pursuant to a resolution adopted by the LSC Board of
Directors on May 13, 1995. The OIG will periodically revise the Audit
Guide and related audit policies and will review audit reports to
ensure compliance with appropriate auditing standards and the policies
prescribed by the Audit Guide. The OIG will examine the audits to
identify reported control deficiencies, questioned costs and financial-
related instances of noncompliance. Program-related findings and issues
identified in the review of the audit reports will be forwarded to
management for action.
I-1. Purpose
This Audit Guide provides a uniform approach for audits of LSC
recipients and describes recipients' financial responsibilities with
respect to the audit. The Audit Guide is to be used in conjunction with
the Compliance Supplement (Appendix A). The Audit Guide and the
Compliance Supplement provide the auditor flexibility in planning and
performing the audit, encourage professional judgement in determining
the audit steps necessary to accomplish audit objectives, and do not
supplant the auditor's judgement of the audit work required in
particular situations. The suggested procedures included in the
Compliance Supplement do not cover all the circumstances or conditions
likely to be encountered during the course of an audit.
I-2. Required Standards and Guidance
Audits of recipients, contractors, persons or entities receiving
financial assistance from LSC (all hereinafter referred to as
``recipients'') are to be performed in accordance with Government
Auditing Standards (GAS or GAGAS) issued by the Comptroller General of
the United States; Office of Management and Budget (OMB) Circular A-
133, Audits of Institutions of Higher Education and Other Not-for-
Profit Organizations; and this Audit Guide.
For purposes of OMB Circular A-133, the Compliance Supplement is to
be followed for LSC funds. Accordingly, the OMB Compliance Supplement
for Audits of Institutions of Higher Learning and Other Non-Profit
Institutions does not apply to LSC programs.
The requirements of the Audit Guide apply to all recipients and
subrecipients of LSC funds, except where specific provisions have been
otherwise made through grant or subgrant agreements. This Audit Guide
is not intended to apply to grants to law schools, universities or
other special grants, which are covered by special provisions.
Exceptions to these audit requirements will be determined by the OIG in
conjunction with LSC management.
3. Authority
This Audit Guide has been prepared under the authority provided by
the following sections of the LSC Act and the IG Act:
Records and Reports--LSC Act Sec. 1008:
(a) The Corporation is authorized to require such reports as it
deems necessary from any recipient, contractor, or person or entity
receiving financial assistance under this title regarding activities
carried out pursuant to this title.
(b) The Corporation is authorized to prescribe the keeping of
records with respect to funds provided by grant or contract and shall
have access to such records at all reasonable times for the purpose of
insuring compliance with the grant or contract or terms and conditions
upon which financial assistance was provided.
Audit--LSC Act Sec. 1009(c)(1):
The corporation shall conduct or require each recipient,
contractor, or person or entity receiving financial assistance under
this title to provide for an annual financial audit.
Recipients' Non-LSC Funds--LSC Act Sec. 1010(c):
Non-Federal funds received by the Corporation, and funds received
by any
[[Page 53939]]
recipient from a source other than the Corporation, shall be accounted
for and reported as receipts and disbursements separate and distinct
from Federal funds * * *.
Duties and Responsibilities * * *--IG Act Sec. 4(a)(1) and 4(b)(1):
4(a) It shall be the duty and responsibility of each Inspector
General, with respect to the establishment within which his Office is
established--(1) To provide policy direction for and to conduct,
supervise, and coordinate audits * * * relating to the programs and
operations of such establishment * * *.
4(b)(1) In carrying out the responsibilities specified in
subsection (a)(1), each Inspector General shall * * * (C) take
appropriate steps to assure that any work performed by non-Federal
auditors complies with the standards established by the Comptroller
General * * *.
I-4. Effective Date
This Audit Guide is effective for audits of LSC programs for
periods ending on or after December 31, 1995, except as otherwise
authorized by the Corporation.
I-5. Revisions and Supplements to the Guide
The OIG will periodically revise the Audit Guide and its appendices
through bulletins or replacement sections. Revisions may reflect
changes to corporate regulations, auditing standards, funding
requirements, or other published guidelines. Revisions should be
incorporated into the recipient's copy of the Audit Guide, and
furnished to the Independent Public Accountants (IPAs) by the
recipients. If there are any questions regarding the content of any
revisions or supplements, please contact the OIG prior to the audit.
I-6. Cumulative Status of Revisions
------------------------------------------------------------------------
Effective date Description
------------------------------------------------------------------------
August 1976............................ Original Edition of ``Audit and
Accounting Guide for
Recipients and Auditors''
issued.
June 1977.............................. Revised Original Edition of
Audit and Accounting Guide
issued.
September 1979......................... Revision to Pages 4-1 and 6-6.
September 1981......................... Revision to Pages ii, 4-1, 6-6,
VIII-3, and addition of Page 4-
2.
January 1, 1986........................ Revised 1986 Edition of Audit
and Accounting Guide
Effective.
August 13, 1986........................ Regulation 1630 Replaces
Chapter 4 of both the Original
and 1986 Edition of the Audit
and Accounting Guide.
December 31, 1995...................... Chapter 6 of both Original and
1986 Audit and Accounting
Guide replaced by Audit Guide.
------------------------------------------------------------------------
I-7. Financial Responsibilities of Recipients
A. Maintain Adequate Internal Controls
Recipients, under the direction of their boards of directors, are
required to establish and maintain adequate accounting records and
internal control procedures. Until revised, guidance with regard to
these responsibilities is found in both LSC's Original and 1986 Edition
of the ``Audit and Accounting Guide for Recipients and Auditors,''
referred to in I-6, above. An effective financial system should
accomplish the following objectives:
1. Resources are safeguarded against waste, loss and misuse;
2. Resources are used consistent with LSC Act, regulations and
grant conditions;
3. Management is provided with timely, accurate financial
information sufficient to manage the resources of the recipient; and
4. Reporting is reliable and in sufficient detail to demonstrate to
funding sources and the general public the recipient's commitment to
accountability for the resources with which it has been entrusted.
B. Provide Audited Financial Statements
Recipients are responsible for preparing annual financial
statements and arranging for an audit of those statements to be
completed within 150 days of the recipient's fiscal year end. The
recipients' boards of directors have the final responsibility for the
appointment of the auditor. However, consistent with the authority
granted in the LSC Act Sec. 1009(c)(1), LSC reserves the right to
preclude the appointment of an auditor if experience has shown the
auditor's work to be unsatisfactory and/or the auditor does not meet
the qualification requirements of GAS.
A written agreement between the recipient and the IPA must be
executed and, at a minimum, is to specifically include all matters
described in Section II-1 of this Audit Guide (Subsections A through
F). Contracts or engagement letters should also contain an escape
clause that would allow, without significant penalty, modification or
cancellation made necessary by changes in the law.
Appendix B is a sample audit agreement that includes the required
matters described in Section II-1, and additional provisions that can
be used to document the understanding between the recipient and the
IPA. Recipients should consider incorporating these additional
provisions in their audit.
In connection with the procurement of audit services, recipients
should refer to the Guide for Procurement of Audit Services (Appendix
C).
II. Audit Performance Requirements
II-1. Audit Requirements
A. Objectives
The primary audit objectives are to determine whether:
1. the financial statements are presented fairly, in all material
respects, in conformity with Generally Accepted Accounting Principles
(GAAP), or other Comprehensive Basis of Accounting;
2. the internal control structure provides reasonable assurance
that the institution is managing Corporation funds in compliance with
applicable laws and regulations, and controls ensure compliance with
the laws and regulations that could have a material impact on the
financial statements; and
3. the recipient has complied with applicable provisions of federal
law, Corporation regulations and the grant agreement that may have a
direct and material effect on its financial statement amounts.
B. Reports
The IPA will prepare the audit reports required by GAS and OMB
Circular A-133. Recipients should ensure that the management letters
are included with the report submissions to LSC.
C. Qualifications of the IPA
The comprehensive nature of auditing performed in accordance with
GAS places on the IPA the responsibility for ensuring that: (1) The
audit is conducted by personnel who collectively have the necessary
skills; (2) independence is maintained; (3) applicable standards are
followed in planning and conducting audits and reporting the results;
(4) the IPA has an appropriate internal quality control system in
place; and (5) the IPA undergoes an external quality control review.
IPAs must meet the qualifications stated in Government Auditing
Standards.
D. Audit Working Papers
The audit working papers will be prepared in accordance with GAS,
and
[[Page 53940]]
will be retained by the IPA for at least three years from the date of
the final audit report.
E. Access to Audit Working Papers
The audit working papers will be available for examination upon
request by representatives of LSC and the Comptroller General of the
United States. The LSC Act, Sec. 1009(d), restricts the Corporation and
the Comptroller General's access to any reports or records subject to
the attorney-client privilege. The audit working papers will be subject
to Quality Assurance Review conducted by the LSC OIG.
F. Disclosure of Irregularities, Illegal Acts and Other Non-Compliance
If, during an audit, matters are uncovered relative to actual,
potential, or suspected defalcations, or other similar irregularities,
the IPA will comply with Statement on Auditing Standards (SAS) Number
53, ``The Auditor's Responsibility to Detect and Report Errors and
Irregularities,'' and SAS Number 54, ``Illegal Acts by Clients.'' While
the auditor may contract directly with the recipient for audit
services, it is emphasized that any items considered by the auditor to
justify reporting to the recipient's program director and/or board of
directors, should also be included in the management letter for LSC's
consideration. If such items relate to the recipient's capabilities to
safeguard and account for LSC funds, the IPA shall notify immediately
the Office of Inspector General at (202) 336-8830.
II-2. Review of Internal Controls
In accepting LSC funds, recipient management asserts that its
accounting system is adequate to comply with LSC requirements. As part
of the review of internal controls the auditor is required to evaluate
the effectiveness of the recipient's accounting system and internal
controls. The primary objectives of this evaluation are to ensure that
resources are safeguarded against waste, loss and misuse, and that
resources are used consistent with LSC regulations and grant
conditions.
II-3. Assessing Compliance With Laws and Regulations
The requirements set out in the Compliance Supplement (Appendix A)
are those that could have a material impact on an organization's
financial statements. Accordingly, examination of these compliance
requirements are to be included as part of the audit.
The Compliance Supplement specifies the objectives and provides
suggested procedures to be considered in the auditor's assessment of a
recipient's compliance with laws and regulations. The suggested
procedures can be used to test for compliance with laws and
regulations, as well as to evaluate the related controls. Auditors
should use professional judgement to decide which procedures to apply,
and the extent to which reviews and tests should be performed. Some
procedures require a review and evaluation of internal controls. If the
reviews and evaluations were performed as part of the internal control
structure review, audit procedures can be modified to avoid
duplication. Auditors should also refer to the grant agreements for
additional requirements.
In certain cases non-compliance may result in questioned costs.
Auditors are to ensure that sufficient information is obtained to
support the amounts questioned. Working papers should adequately
document the basis for any questioned costs and the amounts reported.
II-4. Audit Follow-up
Consistent with GAS paragraph 4.10, the auditor is required to
follow-up on known material findings and recommendations from previous
audits that could affect the financial statement audit. The objective
is to determine whether timely and appropriate corrective action has
been taken. Auditors are required to report the status of uncorrected
material findings and recommendations from prior audits. In addition,
these requirements are also applicable to findings and recommendations
issued in a management letter.
III. Audit Reporting Requirements
III-1. Audit Reports and Distribution
IPAs should follow the requirements of GAS, OMB Circular A-133 and
Statement on Auditing Standards (SAS) 74 (and any revisions thereto)
for the content and format of the reports. Four copies of the audit
reports and management letter, where applicable, are to be submitted to
the LSC OIG within 150 days of the recipient's year end. Under
exceptional circumstances, an extension of the 150-day requirement may
be granted. Requests for extensions should be in writing, and directed
to the Office of Inspector General.
III-2. Views of Responsible Officials
Consistent with GAS paragraph 7.38, auditors are encouraged to
report the views of responsible program officials concerning the
auditors' findings, conclusions, and recommendations, as well as
corrections planned, where practical.
IV. Reference Materials
A. Title X--Legal Services Corporation Act of 1974, 42 USC 2996;
Public Law 93-355, amended by Public Law 95-222 and 98-166.
B. 45 Code of Federal Regulations Part 1600, et seq.
C. Government Auditing Standards, issued by the Comptroller
General of the United States, 1994 Revision.
D. OMB Circular A-133, Audits of Institutions of Higher
Education and Other Non-Profit Institutions.
E. AICPA Professional Standards, Volume I.
F. AICPA Integrated Practice System, Not-For-Profit
Organizations Audit Manual.
G. Practitioners Publishing Company Guide to Audits of Nonprofit
Organizations, Seventh Edition (June 1994).
H. AICPA Statement of Position (SOP) 92-9, Audits of Not-for-
Profit Organizations Receiving Federal Awards, December 28, 1992.
I. Pursuant to LSC Regulations, 45 C.F.R. 1630.4(g):
The Circulars of the Office of Management and Budget shall
provide guidance for all allowable cost questions arising under this
part when relevant policies or criteria therein are not inconsistent
with the provisions of the Act, applicable appropriations acts, this
part, the Audit and Accounting Guide for Recipients and Auditors,
and Corporation rules, regulations, guidelines, and instructions.
Among the OMB Circulars which might be referred to if LSC
policies are not dispositive:
1. Office of Management and Budget (OMB) Circular A-50
(Revised), Audit Follow-up.
2. OMB Circular A-110, Uniform Administrative Requirements for
Grants and Agreements with Institutions of Higher Education,
Hospitals, and Other Nonprofit Organizations.
3. OMB Circular A-122, Cost Principles for Nonprofit
Organizations.
4. OMB Circular A-123, Internal Control Systems.
5. OMB Circular A-127, Financial Management Systems.
Dated: October 13, 1995.
Victor M. Fortuno,
General Counsel.
[FR Doc. 95-25841 Filed 10-17-95; 8:45 am]
BILLING CODE 7050-01-P
