[Federal Register Volume 61, Number 215 (Tuesday, November 5, 1996)]
[Notices]
[Pages 57232-57249]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27819]
[[Page 57231]]
_______________________________________________________________________
Part V
Office of Management and Budget
_______________________________________________________________________
Audits of States, Local Governments, and Non-Profit Organizations;
Notice
Federal Register / Vol. 61, No. 215 / Tuesday, November 5, 1996 /
Notices
[[Page 57232]]
OFFICE OF MANAGEMENT AND BUDGET
Audits of States, Local Governments, and Non-Profit Organizations
AGENCY: Office of Management and Budget.
ACTION: Proposed revision of OMB Circular No. A-133 and proposed
rescission of OMB Circular No. A-128.
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SUMMARY: This Notice offers interested parties an opportunity to
comment on further proposed revisions to Office of Management and
Budget (OMB) Circular No. A-133, ``Audits of Institutions of Higher
Education and Other Non-Profit Institutions,'' and the proposed
consolidation of OMB Circular No. A-128, ``Audits of State and Local
Governments,'' into Circular No. A-133 (with Circular A-128 being
rescinded). This Notice also requests comment on two proposed
information collections contained in the proposed revision to Circular
A-133. These actions are being proposed to implement the Single Audit
Act Amendments of 1996 (1996 Amendments), which were signed into law on
July 5, 1996 (Public Law 104-156).
In the proposed revisions to Circular A-133, as published in the
Federal Register on March 17, 1995 (60 FR 14594), OMB stated an intent
to seek modifications to the Single Audit Act of 1984 (1984 Act) and,
upon passage, extend the provisions of Circular A-133 to include audits
of States and local governments and then rescind Circular A-128.
(Indian tribal governments are included under the definition of States
and are covered under the 1984 Act, Circular A-128, the 1996
Amendments, and this proposed revision.) The April 1996 revision of
Circular A-133 was coordinated with the 1996 Amendments such that only
minimum changes are now necessary to include States and local
governments under Circular A-133. When States and local governments are
covered under Circular A-133, OMB will rescind Circular A-128.
Interested parties may wish to refer to the March 17, 1995, and
April 30, 1996, Federal Register (61 FR 19134) for a more detailed
discussion of the changes made during the recent revisions to Circular
A-133.
DATES: All comments on this proposal should be in writing, and must be
received by January 6, 1997. Late comments will be considered to the
extent practicable.
ADDRESSES: Comments should be mailed to Office of Management and
Budget, Office of Federal Financial Management, Financial Standards and
Reporting Branch, Room 6025, New Executive Office Building, Washington,
DC 20503. Where possible, comments should reference applicable
paragraph or section numbers in the proposed revision. When comments
are sent in by facsimile (fax), they should be faxed to (202) 395-4915.
Electronic mail comments may be submitted via Internet to
[email protected] Please include the full body of electronic mail
comments in the text of the message and not as an attachment. Please
include the name, title, organization, postal address, and E-mail
address in the text of the message.
To facilitate conversion of the comments into a computer format for
analysis, it would be helpful if respondents send a copy of comments on
either a 3.5 or 5.25 inch diskette in either WordPerfect 5.1,
WordPerfect for Windows, or ASCII format. When a diskette cannot be
provided, it would be helpful if the comments were printed in pica or
an equivalent 10 characters per inch type on white paper so the
document can be easily scanned into a computer format.
A copy of the current Circulars A-128 and A-133 may be obtained
from the OMB fax information line, 202-395-9068, document numbers 1128
and 1133, respectively, or by writing or calling the Office of
Administration, Publications Office, Room 2200, New Executive Office
Building, Washington, DC 20503, telephone (202) 395-7332. Also,
Circular A-133 and this proposed revision are available on the OMB home
page on the internet which is currently located at http://
www.whitehouse.gov/WH/EOP/OMB/html/ombhome.html.
FOR FURTHER INFORMATION CONTACT: Sheila O. Conley, Office of Federal
Financial Management (OFFM), Financial Standards and Reporting Branch,
OMB telephone (202) 395-3993 and fax (202) 395-4915. A redlined/
strikeout version showing the detailed changes between the recently
revised OMB Circular A-133 and the further proposed revision is
available by written request to OFFM.
SUPPLEMENTARY INFORMATION: Pursuant to the Single Audit Act Amendments
of 1996 (Pub. L. 104-156), the proposed revision requires non-Federal
entities (States, local governments, and non-profit organizations)
expending $300,000 or more in a year in Federal awards to have an
audit, sets forth requirements for both the performance and reporting
of this audit, and provides for follow-up on audit findings. Each non-
Federal entity is responsible for having its audit conducted and
ensuring that subrecipients expending $300,000 or more in a year meet
the audit requirements of Office of Management and Budget (OMB)
Circular A-133 which will be renamed ``Audits of States, Local
Governments, and Non-Profit Organizations.''
Significant Changes from Circular A-128 to Circular A-133
The Single Audit Act Amendments of 1996, signed by the President on
July 5, 1996, called for uniform requirements for audits of all types
of organizations. As a consequence, OMB proposes to co-locate
requirements for States, local governments, and non-profit
organizations in Circular A-133, which currently addresses only non-
profit organizations. At the same time, OMB would rescind Circular A-
128, ``Audits of State and Local Governments,'' which currently
specifies audit requirements for States and local governments.
The April 1996 revision of Circular A-133 includes the following
major changes which are not reflected in Circular A-128 issued April
12, 1985:
(1) increased the threshold that triggers an audit requirement
under the Circular from $25,000 to $300,000 (Sec. __.200(a));
(2) prescribed a risk-based approach to determine major programs
(Sec. __.520);
(3) required a minimum major program coverage of 50 percent (25
percent for low-risk auditees) of Federal awards expended
(Sec. __.520(f));
(4) clarified the required level of internal control testing
(Sec. __.500(c));
(5) provided minimum reporting requirements for the schedule of
expenditures of Federal awards (Sec. __.310(b));
(6) required auditees to prepare a summary schedule of prior audit
findings (Sec. __.315) and a data collection form (Sec. __.320(b));
(7) required auditors to report audit findings and questioned costs
in a single schedule, including a summary of the auditor's results
(Sec. __.505(a)(4));
(8) prescribed criteria for reporting audit findings and questioned
costs (Sec. __.510);
(9) modified the method of determining the cognizant agency for
audit (Sec. __.400(a));
(10) after a two-year transition period, precluded the same auditor
from preparing the indirect cost proposal or cost allocation plan when
indirect costs exceeded $1 million in the prior year (Sec. __.305(b));
(11) after a two-year transition period, shortened the due date for
submitting reports from 13 months to nine months (Sec. __.320(a));
(12) streamlined the report submission process and expanded the
[[Page 57233]]
role of the Federal clearinghouse (Sec. __.320);
(13) changed the basis for determining the amount of Federal awards
administered by the non-Federal entity from receipts to expenditures
(Sec. __.200);
(14) provided guidance for conducting program-specific audits
(Sec. __.235); and,
(15) reorganized the Circular into a ``common rule'' format to
facilitate codification by Federal agencies and improve the
presentation of information included in the Circular.
Significant Proposed Revisions to Circular A-133
The most significant difference between this proposed revision and
the recently revised Circular A-133 is the inclusion of States and
local governments. This proposed revision also includes changes
relating to the effective date (31 U.S.C. 7507), the provisions
permitting biennial audits in limited circumstances (31 U.S.C.
7502(b)(2) and (3)), and the allowability of audit costs (31 U.S.C.
7505(b)(1)(A)(ii)) to conform the April 1996 revision of Circular A-133
to the 1996 Amendments. Aside from these changes, the 1996 Amendments
do not require other substantive changes to Circular A-133.
The following discussion is provided to describe the changes needed
to conform this proposed revision with the 1996 Amendments, solicit
input from interested parties, and summarize some of the other changes
included in this proposed revision. The readers' attention is directed
to section D. Proposed Requirement for the Auditor to Prepare and Sign
the Data Collection Form Required by Circular A-133, because it is
particularly important to OMB that commenters provide views on the
matters discussed in this section.
A. Effective Dates
The 1996 Amendments apply to any non-Federal entity with respect to
any of its fiscal years which begin after June 30, 1996 (31 U.S.C.
7507). Changes are proposed in paragraph 10 of the Circular,
``Effective Dates,'' to reflect the effective dates mandated in the
1996 Amendments.
Inquirers asked which circular applies for biennial audits when the
biennial period includes time before and after the effective date of
the proposed revision. The 1996 Amendments do not specifically address
the effective dates for biennial audits. OMB interprets the 1996
Amendments to be effective for any biennial periods which begin after
June 30, 1996. As with annual audits, the prior circulars are in effect
until this proposed revision is effective. Therefore, a non-Federal
entity which elects a biennial audit and has a biennial period
beginning on or before June 30, 1996, should apply the provisions of
Circular A-128 issued April 12, 1985 (for a State or local government)
or Circular A-133 issued March 8, 1990 (for a non-profit organization),
as applicable. The requirements of this proposed revision apply to any
biennial periods beginning after June 30, 1996.
Circular A-133 shortened the report due date from 13 months to nine
months after the end of the audit period (Sec. __.320(a)). However, the
1996 Amendments (31 U.S.C. 7502(h)) provide for a transition period of
at least two years during which the report due date would remain at 13
months. The proposed revision at Sec. __.320(a) incorporates this
transition period such that the due date of nine months after the end
of the audit period is not effective until audits of fiscal years
beginning after June 30, 1998. Cognizant or oversight agencies may
still provide extensions.
Paragraphs 6 and 10 of the April 1996 revision of Circular A-133
instructed Federal agencies to adopt the standards set forth in the
Circular in codified regulations not later than November 30, 1996. As a
result of the 1996 Amendments, the April 1996 revision of Circular A-
133, which applies only to non-profit organizations, will not become
operable unless this proposed revision is not finalized by June 30,
1997 (i.e., OMB expects that Circular A-133 issued March 8, 1990, will
apply to non-profit organizations and Circular A-128 issued April 12,
1985, will apply to States and local governments prior to the effective
dates of the 1996 Amendments, and this proposed revision will apply to
these types of organizations when the 1996 Amendments become
effective). Therefore, Federal agencies may forgo the requirement under
the April 1996 revision of Circular A-133 to adopt the standards set
forth in the Circular in codified regulations not later than November
30, 1996. However, the 1996 Amendments (31 U.S.C. 7505(a)) require each
Federal agency to promulgate such revisions to its regulations as may
be necessary to conform such regulations to the requirements of the
1996 Amendments and OMB implementing guidance. Accordingly, the
proposed revision includes a provision in paragraphs 6 and 10 of the
Circular whereby Federal agencies shall adopt the standards set forth
in the Circular in codified regulations not later than six months after
publication of the final revision in the Federal Register.
B. Biennial Audits in Limited Circumstances
Changes are proposed at Sec. __.220 to permit biennial audits in
limited circumstances in accordance with the 1996 Amendments. The
provisions in the 1996 Amendments which allow non-Federal entities to
elect a biennial audit are very specific (31 U.S.C. 7502(b)(2)and (3)).
For a State or local government to qualify for a biennial audit
election, there must be a requirement (as opposed to authorization) in
a State's constitution or State or local law which was in effect on
January 1, 1987. Also, this requirement must still be in effect. Only
non-profit organizations that had biennial audits for all biennial
periods ending between July 1, 1992, and January 1, 1995, may elect a
biennial audit. OMB expects that very few States, local governments, or
non-profit organizations meet this criteria. Nonetheless, all auditees
are encouraged to have annual audits which provide increased
accountability.
The April 1996 revision of Circular A-133 includes a provision
whereby a Federal agency or pass-through agency may allow a non-profit
organization that elects a program-specific audit under Sec. __.200(c)
to perform the audit every two years. This provision was removed from
the proposed revision to conform with the biennial audit requirements
specified in the 1996 Amendments.
Changes are also proposed at Sec. __.520 and Sec. __.530(a) to the
major program determination process and the criteria for low-risk
auditee for situations which are unique to single audits which are
performed on a biennial basis.
C. Audit Costs Prohibited for Subrecipients With Federal Awards
Expended of Less Than $300,000 Annually
The 1996 Amendments discourage pass-through entities from requiring
single audits of subrecipients with total Federal awards expended of
less than $300,000 annually. This is done by prohibiting charges to
Federal awards for audit costs under these circumstances (31 U.S.C.
7505(b)(1)(A)(ii)). However, pass-through entities are not prohibited
from charging subrecipient monitoring costs, provided those procedures
are of lesser scope than a single audit.
For example, if a pass-through entity requires a subrecipient which
expends less than $300,000 annually in total Federal awards to have a
single audit conducted in accordance with the 1996 Amendments, this
audit must be paid for with other than Federal funds.
[[Page 57234]]
However, the 1996 Amendments do not prohibit charging Federal awards
for limited scope audits and other subrecipient monitoring procedures.
Pass-through entities would need to make appropriate changes in
their agreements with subrecipients to reflect that audits will no
longer be required for non-Federal entities with total Federal awards
expended of less than $300,000 annually. Pass-through entities will
need to review their overall subrecipient monitoring process, and
decide what, if any, additional monitoring procedures may be necessary
to ensure subrecipient compliance. Monitoring procedures, which include
limited scope audits, can be more targeted and less costly than a full
Circular A-133 audit. Subrecipient monitoring procedures include: on-
site visits, reviews of documentation supporting requests for
reimbursement, limited scope audits of specific compliance areas (e.g.,
eligibility determinations made by subrecipients), and financial
statement audits in accordance with generally accepted government
auditing standards. A pass-through entity should consider the cost-
effectiveness of monitoring procedures compared to the relative size
and complexity of the Federal awards administered by subrecipients in
determining the appropriateness of monitoring procedures.
D. Proposed Requirement for the Auditor To Prepare and Sign the Data
Collection Form Required by Circular A-133
To streamline the distribution of audit reports and improve the
governmentwide collection and analysis of single audit results,
Circular A-133 provides for a machine-readable form (Sec. __.320(b)) to
be prepared at the completion of each audit and submitted to the
Federal clearinghouse designated by OMB and pass-through entities. The
data collection form will provide key information about the non-Federal
entity, the Federal awards it administers, and the audit results. It
will serve as the basis for developing a governmentwide database on
covered Federal awards administered by non-Federal entities. The April
1996 revision of Circular A-133 provides for a data collection form to
be submitted to the Federal clearinghouse and each pass-through entity
in lieu of sending the full single audit reporting package when there
are no audit findings.
The April 1996 revision of Circular A-133 requires the auditee's
management to prepare the data collection form. Many auditees are
concerned about the additional burden this reporting requirement would
place on them. A more efficient and effective method could be to have
the auditor prepare the form and sign it as preparer. OMB believes this
would not significantly increase audit costs, since most of the
information requested on the form will be obtained directly from the
schedule of expenditures of Federal awards and the auditor's reports.
Since the auditor is most knowledgeable about the audit results, OMB
expects that it will be efficient for the auditor to simply prepare the
form at the completion of the audit. Also, OMB believes that the
incremental legal exposure faced by the auditor as a result of signing
the form can be minimized by restricting its use to the Federal
clearinghouse and pass-through entities for the sole purpose of data
collection and so stating on the form. Under this method, the auditee
would continue to be required to provide assurance to the Federal
Government and pass-through entities that the auditee engaged an
auditor to conduct an audit in accordance with the Circular, that the
audit was completed, and that the information included on the form is
accurate.
OMB believes that the auditor's association with the data
collection form will add value to its usefulness, reduce the need for
Federal awarding agencies and pass-through entities to perform
unnecessary verification procedures, improve the accuracy of the
governmentwide database, streamline the single audit report submission
process, and reduce burden on auditees.
Therefore, OMB is considering adding a provision that requires the
auditor to prepare the data collection form and sign it. If this change
is made, OMB will work with the auditing profession and other
interested parties to develop any necessary revisions to the form.
Respondents are encouraged to comment on this change, including:
Whether the auditor should prepare and sign the data collection form;
what would be the estimated cost of the auditor's performing this
service; whether it would be beneficial to auditees, Federal agencies,
and pass-through entities; and, whether there are concerns over
litigation exposure.
The name of the certification form required under Sec. __.320(b) of
the April 1996 revision of Circular A-133 is changed to ``Data
Collection Form'' in the proposed revision to more appropriately
characterize the nature of the information request. This name change
also affects Sec. __.235(c)(2), Sec. __.235(c)(3), Sec. __.320(c),
Sec. __.320(e)(i), and Sec. __.320(h).
E. Audit Coverage Over the Allowability of Charges to Cost Pools
Changes are proposed at Sec. __.500(c), Sec. __.500(d),
Sec. __.505(b), Sec. __.505(c), and Sec. __.510(a) to clarify the
auditor's responsibility for testing and reporting on the allowability
of costs charged to cost pools: (1) used to support an indirect cost
rate, or (2) allocated through a State/local-wide central service cost
allocation plan (as fully described in Appendix C of Circular A-87,
``Cost Principles for State, Local and Indian Tribal Governments,''
issued May 4, 1995 (60 FR 26484), and hereinafter referred to as a
``cost allocation plan''). The proposed language is added to address
the timing of costs charged to cost pools used to support an indirect
cost rate or allocated through a cost allocation plan. Indirect cost
rates are based on costs incurred in a base period and applied
prospectively. Costs allocated through a cost allocation plan are based
on the actual costs incurred in two previous years.
Because it would not be practical to perform such tests
retroactively, the auditor is expected to perform tests of costs
charged to cost pools during the period that the actual costs were
incurred, rather than during the period in which the rate was applied
or in which the costs were allocated. For example, if the actual costs
charged to cost pools for 1997 form the basis for the indirect cost
proposal and the final negotiated indirect cost rate that will be
applied in 1998 and 1999, then the auditor should test actual costs
charged to cost pools during 1997 as part of the 1997 audit, since 1997
is the base year. The auditor would not be expected to test such costs
as part of the 1998 and 1999 audits.
F. Pilot Project Authority
The 1996 Amendments (31 U.S.C. 7502(j)) authorize OMB, in
consultation with the Chair and Ranking Minority Member of the
Committee on Governmental Affairs of the Senate and the Chair and
Ranking Minority Member of the Committee on Government Reform and
Oversight of the House of Representatives, to approve pilot projects to
test alternative methods of achieving the purposes of the 1996
Amendments. Such pilot projects, which would be voluntary undertakings
by non-Federal entities, would provide a means of assessing new ways of
testing and reporting on Federal awards.
Suggestions from auditees for pilot projects should be submitted
first to Federal funding agencies. If a Federal agency concludes that a
suggested pilot project has merit, the Federal agency
[[Page 57235]]
may present the suggestion to OMB for consideration. OMB will consult
with the appropriate members of the House and Senate prior to
authorizing any pilot projects under the 1996 Amendments.
G. Other Changes To Comply With the 1996 Amendments
The revision proposes the following other changes to comply with
the 1996 Amendments and include States and local governments under
Circular A-133.
(1) Retitles the Circular to include States and local governments.
States and local governments were also added to paragraph 1 of the
Circular.
(2) Deletes the references to Circular A-128 from paragraph 4 of
the Circular and sections Sec. __.105 and Sec. __.400(d)(4) of the
attachment.
(3) Changes definitions in Sec. __.105 of ``Federal award''
``Federal financial assistance'' ``Federal program'' ``internal
control'' ``internal control pertaining to the compliance requirements
over Federal programs'' ``pass-through entity'' and ``subrecipient'' to
conform with the definitions included in the 1996 Amendments.
(4) Adds definitions in Sec. __.105 for the terms ``Indian tribe,''
``local government,'' and ``State,'' which are defined terms in the
1996 Amendments.
(5) Adds definitions in Sec. __.105 for the term ``non-Federal
entity'' and replaces the term ``non-profit organization'' with ``non-
Federal entity'' in paragraphs 4, 6, and 10 of the Circular and
sections Sec. __.100, Sec. __.105, Sec. __.200(d), Sec. __.205(a), and
Sec. __.205(h) of the attachment.
(6) Replaces the term ``non-profit organization'' with
``subrecipient'' in Sec. __.205(i).
(7) Adds ``full'' as a modifier of cost in Sec. 7.215(b).
(8) Changes title of schedule in Sec. __.235(b)(2) to ``schedule of
expenditures of Federal awards.''
(9) Changes title of ``central clearinghouse'' to ``Federal
clearinghouse'' in Sec. __.235(c)(2), Sec. __.235(c)(3),
Sec. __.300(e), Sec. __.315(b)(4)(i), Sec. __.320(b), Sec. __.320(d),
Sec. __.320(g), Sec. __.320(h), Sec. __.320(i), and Sec. __.320(j).
910) Adds reference to Grants Management Common Rule in
Sec. __.305(a).
(11) Drops ``non-profit'' as a modifier to pass-through entity and
subrecipients in Sec. __.400(d) and Sec. __.400(d)(4), respectively.
(12) Adds a provision to cover a series of audits in
Sec. __.500(a).
(13) Changes the schedule of findings and questioned costs
(Sec. __.505(d)) to include information from the audit of the financial
statements performed in accordance with generally accepted government
auditing standards. Consistency changes were made to
Sec. __.235(b)(4)(iv) for program-specific audits.
(14)Drops from Sec. __.520(b)(3) the reference to insurance
programs because insurance programs are not specifically cited in the
1996 Amendments.
H. Other Changes
The revision proposes the following detailed changes.
(1) Adds to Sec. __.235(c)(3) a requirement that one copy of the
data collection form prepared in accordance with Sec. __.320(b) be
submitted to each pass-through entity.
(2) Adds to Sec. __.320(b) a requirement that the auditee identify
the cognizant or oversight agency for audit on the data collection
form.
(3) Changes the requirement in Sec. __.400(a)(4) for the cognizant
agency for audit to report to other Federal agencies any direct
reporting of irregularities and illegal acts.
(4) Simplifies the summary of the auditor's results in Sec. __.505
by removing the requirement for a statement concerning the auditee's
ability to continue as a going concern and consolidating the reporting
of audit findings which were not reportable conditions or material non-
compliance.
(5) Adds to the definition of audit findings reported
(Sec. __.510(a)(4)) known questioned costs greater than $10,000 for
Federal programs which are not audited as major programs. Consistent
with this, adds in Sec. __.520(c) a reference to this requirement.
(6) Removes from Sec. __.510(a)(6) the definition of fraud because
this term is the same as in professional auditing standards.
(7) Adds in Sec. __.520(d) and Sec. __.520(e) an option to allow an
auditor to minimize the risk assessment required for Type B programs
under certain circumstances.
(8) Adds in Sec. __.520(e) a statement to encourage auditors to use
an approach in identifying high-risk Type B program which provides an
opportunity for different high-risk Type B programs to be audited as
major over a period of time.
I. Changes for Clarity
The revision proposes the following changes for clarity.
(1) Changes the title of the Circular to use the term ``non-profit
organizations'' in lieu of the phrase ``institutions of higher
education and other non-profit institutions'' since non-profit
organization is the defined term (Sec. __.105) which includes non-
profit institutions of higher education.
(2) Changes the definitions in Sec. __.105 of cluster of programs
and Federal programs to clarify that research and development (R&D) and
student financial aid (SFA) are types of clusters of programs. Based
upon this change, the phrase ``category of programs'' was replaced with
``cluster of programs'' in Sec. __.105, Sec. __.310(b)(6),
Sec. __.320(b). Moves discussion of State governments combining funding
from definition of Federal programs to definition of cluster of
programs in Sec. __.105. Adds to Sec. __.105 emphasis that when a State
designates a cluster of programs, the State must identify the Federal
awards and advise subrecipients of the applicable compliance
requirements.
(3) Replaces the reference to ``Federal expenditures'' with
``Federal awards expended'' in Sec. __.200(d), Sec. __.310(b)(2),
Sec. __.310(b)(6), Sec. __.310(b)(7), Sec. __.520(b)(1),
Sec. __.520(d)(2), Sec. __.520(f), Sec. __.525(d)(4),
Sec. __.530(d)(3).
(4) For consistency with the format of the effective date of the
Circular, changes the date format from fiscal years ``ending'' to
fiscal years ``beginning'' in Sec. __.305(b).
(5) Clarifies in Sec. __.315(b) that follow-up on prior audit
findings is concerned with those relative to Federal awards as opposed
to those relative to the financial statements of the entity.
(6) Clarifies in Sec. __.500(a) that the entity's financial
statements and schedule of expenditures of Federal awards must be for
the same fiscal year.
(7) Replaces in Sec. __.500(c) the term ``achieve'' with
``support.''
(8) Clarifies in Sec. __.510(a)(2) that this reporting only relates
to major programs and removes discussion relating to auditor
conclusions which is included in generally accepted government auditing
standards.
(9) Clarifies in Sec. __.510(a)(5) and Sec. __.510(a)(6) that the
reference to the schedule of findings and questioned costs is to the
part of the schedule that deals with Federal awards.
(10) Changes the term ``50 percent rule'' to ``percentage of
coverage rule'' in Sec. __.520(d)(2), Sec. __.520(e)(3),
Sec. __.520(f), Sec. __.520(i).
(11) Clarifies in Sec. __.530(d) that this provision applies for
either of the preceding two years in which the program was classified
as a Type A program.
Information Collection Activity Under OMB Review
In accordance with the Paperwork Reduction Act (44 U.S.C. Chapter
35 et seq.), this notice requests comment on
[[Page 57236]]
the following two proposed information collections contained in this
proposed revision. The information collection request involves two
types of entities: (1) Reports from auditors to auditees concerning
audit results, audit findings, and questioned costs; and, (2) reports
from auditees to the Federal Government providing information about the
auditees, the awards they administer, and the audit results. The
proposed revision specifies what auditors are required to report to
auditees, under Sec. __.235(b)(4), for program-specific audits, and
Sec. __.505, ``Audit Reporting,'' for single audits. The proposed
revision also specifies what auditees are required to report to the
Federal clearinghouse designated by OMB and pass-through entities, if
applicable, under Sec. __.235(c), for program-specific audits, and
Sec. __.320, ``Report Submission,'' for single audits.
The information collection requests included in this proposal would
result in a decrease in overall reporting burden. Although the
reporting burden per audit will increase under this proposal from 26 to
34 hours (described in the following paragraphs), fewer entities will
be subject to the reporting requirements as a result of the proposal to
increase the threshold that triggers an audit requirement under the
Circular from $25,000 to $300,000. Based on available information, OMB
estimates that approximately 25,000 non-Federal entities would be
subject to the information collection requirement included in this
proposal; whereas, approximately 35,000 non-Federal entities are
subject to the current requirements under Circulars A-128 and A-133.
The overall reporting burden currently approximates 910,000 hours
(35,000 non-Federal entities at 26 hours per audit). Under the
proposal, the overall reporting burden would be approximately 850,000
hours (25,000 non-Federal entities at 34 hours per audit), or 60,000
hours less than the current reporting burden. In addition, as more
fully discussed below, there is an opportunity to reduce further the
overall reporting burden under the proposal from 850,000 to 800,000
hours by having auditors, rather than auditees, prepare the data
collection form discussed below.
Congress intended to improve the contents of single audit reports
to make them more useful by enacting the 1996 Amendments. OMB believes
that the increase in reporting burden per audit is warranted because
several changes included in the proposed revision would improve the
usefulness and effectiveness of single audit reporting with respect to
information provided by both auditors and auditees.
OMB estimates that reporting by auditors currently takes
approximately 10 hours on the average per audit under Circulars A-128
and A-133, and will take 14 hours under the proposal. The estimated
increase of 4 hours of reporting burden per audit on auditors is due
primarily to a provision in the 1996 Amendments (31 U.S.C. 7502(g)(2))
which requires the auditor, for the first time, to prepare a summary of
audit results. In its report on the 1996 Amendments, the Committee on
Government Reform and Oversight stated that ``the complexity of the
reports makes it difficult for the average reader to understand what
has been audited and reported ... A summary of the audit results would
highlight important information and thus enable users to quickly
discern the overall results of an audit'' (H.R. Report 104-607, page
18).
OMB estimates that reporting by auditees currently takes
approximately 16 hours on the average per audit under Circulars A-128
and A-133, and will take 20 hours under the proposal. The estimated
increase of 4 hours of reporting burden per audit on auditees is due
primarily to a proposed requirement whereby management would prepare
two new documents to improve the usefulness of single audit reports.
The first of these reports is a summary schedule of prior audit
findings which will provide the current status of previously reported
audit findings until such findings are corrected. This information,
which is important to Federal funding agencies and pass-through
entities, is currently required under Circulars A-128 and A-133 but it
is not consistently provided in single audit reports. As a result,
Federal funding agencies and pass-through entities frequently request
this type of information long after a finding is reported, which
results in additional burden on Federal agencies, auditees, and
auditors. The proposed requirements provide additional guidance to
auditees on where and how to present information regarding prior audit
findings. While additional time may be required up-front for certain
auditees to prepare the summary schedule of prior audit findings, the
reporting burden for such entities should be offset by the elimination
of the inefficiencies caused by the current practice of having to
retrieve and provide information after-the-fact on old audit findings.
The second report management would be required to prepare is the
``Data Collection Form'' prescribed in Sec. ____.320(b) of the proposed
revision and discussed previously in Section D (Proposed Requirement
for the Auditor to Prepare and Sign the Data Collection Form Required
by Circular A-133). The data collection form will facilitate
streamlining the report distribution process and improve the
governmentwide collection and analysis of single audit results.
OMB believes that the overall reporting burden under the proposed
revision could be further reduced by having the auditor prepare the
data collection form. Specifically, OMB estimates that if auditors,
rather than auditees, prepare the data collection form then the
estimate of reporting burden on auditors would increase by two hours
(that is, from 14 hours to 16 hours), and the estimate of reporting
burden on auditees would decrease by four hours (that is, from 20 hours
to 16 hours) per audit under the proposal. This would result in a net
decrease of 2 hours per audit, or 50,000 hours in overall reporting
burden (25,000 non-Federal entities at 2 hours savings per audit). As a
result of having auditors, rather than auditees, prepare the data
collection form, overall reporting burden could be reduced from 850,000
to 800,000 hours.
Comments are invited on: (a) Whether the proposed information
collection is necessary for the proper performance of the functions of
the agencies, including whether the information has practical utility;
(b) the accuracy of the estimate of the burden of the collection of the
information; (c) ways to enhance the quality, utility, and clarity of
the information to be collected; and (d) ways to minimize the burden
related to the collection of information on respondents, including use
of automated collection techniques or other forms of information
technology.
G. Edward DeSeve,
Controller.
1. OMB proposes to rescind Circular A-128 upon issuance of a
revised Circular A-133 that covers States and local governments.
2. OMB proposes to revise Circular A-133 to read as follows:
To the Heads of Executive Departments and Establishments
Subject: Audits of States, Local Governments, and Non-Profit
Organizations
1. Purpose. This Circular is issued pursuant to the Single Audit
Act of 1984, Public Law 98-502, and the Single Audit Act Amendments
of 1996, Public Law 104-156. It sets forth standards for obtaining
consistency and uniformity among Federal agencies for the audit of
States, local
[[Page 57237]]
governments, and non-profit organizations expending Federal awards.
2. Authority. Circular A-133 is issued under the authority of
sections 503, 1111, and 7501 et seq. of title 31, United States
Code, and Executive Orders 8248 and 11541.
3. Rescission and Supersession. This Circular rescinds Circular
A-128, ``Audits of State and Local Governments,'' issued April 12,
1985, and supersedes the prior Circular A-133, ``Audits of
Institutions of Higher Education and Other Non-Profit
Institutions,'' issued April 22, 1996. For effective dates, see
paragraph 10.
4. Policy. Except as provided herein, the standards set forth in
this Circular shall be applied by all Federal agencies. If any
statute specifically prescribes policies or specific requirements
that differ from the standards provided herein, the provisions of
the statute shall govern.
Federal agencies shall apply the provisions of the sections of
this Circular to non-Federal entities, whether they are recipients
expending Federal awards received directly from Federal awarding
agencies, or are subrecipients expending Federal awards received
from a pass-through entity (a recipient or another subrecipient).
This Circular does not apply to non-U.S. based entities
expending Federal awards received either directly as a recipient or
indirectly as a subrecipient.
5. Definitions. The definitions of key terms used in this
Circular are contained in Sec. ____.105 in the Attachment to this
Circular.
6. Required Action. The specific requirements and
responsibilities of Federal agencies and non-Federal entities are
set forth in the Attachment to this Circular. Federal agencies
making awards to non-Federal entities, either directly or
indirectly, shall adopt the language in the Circular in codified
regulations as provided in Section 10 (below), unless different
provisions are required by Federal statute or are approved by OMB.
7. OMB Responsibilities. OMB will review Federal agency
regulations and implementation of this Circular, and will provide
interpretations of policy requirements and assistance to ensure
uniform, effective and efficient implementation.
8. Information Contact. Further information concerning Circular
A-133 may be obtained by contacting the Financial Standards and
Reporting Branch, Office of Federal Financial Management, Office of
Management and Budget, Washington, DC 20503, telephone (202) 395-
3993.
9. Review Date. This Circular will have a policy review three
years from the date of issuance.
10. Effective Dates. The standards set forth in Sec. ____.400 of
the Attachment to this Circular, which apply directly to Federal
agencies, shall be effective July 1, 1996, and shall apply to audits
of fiscal years beginning after June 30, 1996.
The standards set forth in this Circular that Federal agencies
are to apply to non-Federal entities shall be adopted by Federal
agencies in codified regulations not later than six months after
publication of the final revision in the Federal Register, so that
they will apply to audits of fiscal years beginning after June 30,
1996, with the exception that Sec. ____.305(b) of the Attachment
applies to audits of fiscal years beginning after June 30, 1998. In
the interim period, until the standards in this Circular are adopted
and become applicable, the audit provisions of Circular A-128 issued
April 12, 1985, and Circular A-133, issued April 22, 1996, shall
continue in effect.
Franklin D. Raines,
Director.
Attachment
PART ____--AUDITS OF STATES, LOCAL GOVERNMENTS, AND NON-PROFIT
ORGANIZATIONS
Subpart A--General
Sec.
____.100 Purpose.
____.105 Definitions.
Subpart B--Audits
____.200 Audit requirements.
____.205 Basis for determining Federal awards expended.
____.210 Subrecipient and vendor determinations.
____.215 Relation to other audit requirements.
____.220 Frequency of audits.
____.225 Sanctions.
____.230 Audit costs.
____.235 Program-specific audits.
Subpart C--Auditees
____.300 Auditee responsibilities.
____.305 Auditor selection.
____.310 Financial statements.
____.315 Audit findings follow-up.
____.320 Report submission.
Subpart D--Federal Agencies and Pass-Through Entities
____.400 Responsibilities.
____.405 Management decision.
Subpart E--Auditors
____.500 Scope of audit.
____.505 Audit reporting.
____.510 Audit findings.
____.515 Audit working papers.
____.520 Major program determination.
____.525 Criteria for Federal program risk.
____.530 Criteria for a low-risk auditee.
Subpart A--General
Sec. ____.100 Purpose.
This part sets forth standards for obtaining consistency and
uniformity among Federal agencies for the audit of non-Federal entities
expending Federal awards.
Sec. ____.105 Definitions.
Auditee means any non-Federal entity that expends Federal awards
which must be audited under this part.
Auditor means an auditor that is a public accountant or a Federal,
State or local government audit organization, which meets the general
standards specified in generally accepted government auditing standards
(GAGAS). The term auditor does not include internal auditors of non-
profit organizations.
Audit finding means deficiencies which the auditor is required by
Sec. ____.510(a) to report in the schedule of findings and questioned
costs.
CFDA number means the number assigned to a Federal program in the
Catalog of Federal Domestic Assistance (CFDA).
Cluster of programs means a grouping of closely related programs
that share common compliance requirements. The types of clusters of
programs are research and development (R&D), student financial aid
(SFA), and other clusters. ``Other clusters'' are as defined by the
Office of Management and Budget (OMB) in the compliance supplements or
as designated by a State for Federal awards the State provides to its
subrecipients that meet the definition of a cluster of programs. When
designating an ``other cluster,'' a State shall identify the Federal
awards included in the cluster and advise the subrecipients of
compliance requirements applicable to the cluster, consistent with
Sec. ____.400(d)(1) and Sec. ____.400(d)(2), respectively. A cluster of
programs shall be considered as one program for determining major
programs, as described in Sec. ____.520, and, with the exception of R&D
as described in Sec. ____.200(c), whether a program-specific audit may
be elected.
Cognizant agency for audit means the Federal agency designated to
carry out the responsibilities described in Sec. ____.400(a).
Compliance supplements refers to the Compliance Supplement for
Audits of Institutions of Higher Learning and Other Non-Profit
Institutions and the Compliance Supplement for Single Audits of State
and Local Governments or such documents as OMB or its designee may
issue to replace them. These documents are available from the
Government Printing Office, Superintendent of Documents, P.O. Box
371954, Pittsburgh, PA 15250-7954, telephone (202) 512-1800.
Corrective action means action taken by the auditee that:
(1) Corrects identified deficiencies;
(2) Produces recommended improvements; or
(3) Demonstrates that audit findings are either invalid or do not
warrant auditee action.
Federal agency has the same meaning as the term agency in Section
551(1) of title 5, United States Code.
Federal award means Federal financial assistance and Federal cost-
[[Page 57238]]
reimbursement contracts that non-Federal entities receive directly from
Federal awarding agencies or indirectly from pass-through entities. It
does not include procurement contracts, under grants or contracts, used
to buy goods or services from vendors. Any audits of such vendors shall
be covered by the terms and conditions of the contract. Contracts to
operate Federal Government owned, contractor operated facilities
(GOCOs) are excluded from the requirements of this part.
Federal awarding agency means the Federal agency that provides an
award directly to the recipient.
Federal financial assistance means assistance that non-Federal
entities receive or administer in the form of grants, loans, loan
guarantees, property (including donated surplus property), cooperative
agreements, interest subsidies, insurance, food commodities, direct
appropriations, and other assistance, but does not include amounts
received as reimbursement for services rendered to individuals as
described in Sec. ____.205(h) and Sec. ____.205(i).
Federal program means:
(1) All Federal awards to a non-Federal entity assigned a single
number in the CFDA.
(2) When no CFDA number is assigned, all Federal awards from the
same agency made for the same purpose should be combined and considered
one program.
(3) Notwithstanding paragraphs (1) and (2) of this definition, a
cluster of programs. The types of clusters of programs are:
(i) Research and development (R&D);
(ii) Student financial aid (SFA); and
(iii) ``Other clusters,'' as described in the definition of cluster
of programs in this section.
GAGAS means generally accepted government auditing standards issued
by the Comptroller General of the United States, which are applicable
to financial audits.
Generally accepted accounting principles has the meaning specified
in generally accepted auditing standards issued by the American
Institute of Certified Public Accountants (AICPA).
Indian tribe means any Indian tribe, band, nation, or other
organized group or community, including any Alaskan Native village or
regional or village corporation (as defined in, or established under,
the Alaskan Native Claims Settlement Act) that is recognized by the
United States as eligible for the special programs and services
provided by the United States to Indians because of their status as
Indians.
Internal control means a process, effected by an entity's
management and other personnel, designed to provide reasonable
assurance regarding the achievement of objectives in the following
categories:
(1) Effectiveness and efficiency of operations;
(2) Reliability of financial reporting; and
(3) Compliance with applicable laws and regulations.
Internal control pertaining to the compliance requirements for
Federal programs (Internal control over Federal programs) means a
process--effected by an entity's management and other personnel--
designed to provide reasonable assurance regarding the achievement of
the following objectives for Federal programs:
(1) Transactions are properly recorded and accounted for to:
(i) Permit the preparation of reliable financial statements and
Federal reports;
(ii) Maintain accountability over assets; and
(iii) Demonstrate compliance with laws, regulations, and other
compliance requirements;
(2) Transactions are executed in compliance with:
(i) Laws, regulations, and the provisions of contracts or grant
agreements that could have a direct and material effect on a Federal
program; and
(ii) Any other laws and regulations that are identified in the
compliance supplements; and
(3) Funds, property, and other assets are safeguarded against loss
from unauthorized use or disposition.
Loan means a Federal loan or loan guarantee received or
administered by a non-Federal entity.
Local government means any unit of local government within a State,
including a county, borough, municipality, city, town, township,
parish, local public authority, special district, school district,
intrastate district, council of governments, and any other
instrumentality of local government.
Major program means a Federal program determined by the auditor to
be a major program in accordance with Sec. ____.520 or a program
identified as a major program by a Federal agency or pass-through
entity in accordance with Sec. ____.215(c).
Management decision means the evaluation by the Federal awarding
agency or pass-through entity of the audit findings and corrective
action plan and the issuance of a written decision as to what
corrective action is necessary.
Non-Federal entity means a State, local government, or non-profit
organization.
Non-profit organization means:
(1) any corporation, trust, association, cooperative, or other
organization that:
(i) Is operated primarily for scientific, educational, service,
charitable, or similar purposes in the public interest;
(ii) Is not organized primarily for profit; and
(iii) Uses its net proceeds to maintain, improve, or expand its
operations; and
(2) The term non-profit organization includes non-profit
institutions of higher education and hospitals.
OMB means the Executive Office of the President, Office of
Management and Budget.
Oversight agency for audit means the Federal awarding agency that
provides the predominant amount of direct funding to a recipient not
assigned a cognizant agency for audit. When there is no direct funding,
the Federal agency with the predominant indirect funding shall assume
the oversight responsibilities. The duties of the oversight agency for
audit are described in Sec. ____.400(b).
Pass-through entity means a non-Federal entity that provides a
Federal award to a subrecipient to carry out a Federal program.
Program-specific audit means an audit of one Federal program as
provided for in Sec. ____.200(c) and Sec. ____.235.
Questioned cost means a cost that is questioned by the auditor
because of an audit finding:
(1) Which resulted from a possible violation of a provision of a
law, regulation, contract, grant, cooperative agreement, or other
agreement or document governing the use of Federal funds, including
funds used to match Federal funds;
(2) Where the costs, at the time of the audit, are not supported by
adequate documentation; or
(3) Where the costs incurred appear unreasonable and do not reflect
the actions a prudent person would take in the circumstances.
Recipient means a non-Federal entity that expends Federal awards
received directly from a Federal awarding agency to carry out a Federal
program.
Research and development (R&D) means all research activities, both
basic and applied, and all development activities that are performed by
a non-Federal entity. Research is defined as a systematic study
directed toward fuller scientific knowledge or understanding of the
subject studied. The term research also includes activities involving
the training of individuals in research
[[Page 57239]]
techniques where such activities utilize the same facilities as other
research and development activities and where such activities are not
included in the instruction function. Development is the systematic use
of knowledge and understanding gained from research directed toward the
production of useful materials, devices, systems, or methods, including
design and development of prototypes and processes.
Single audit means an audit which includes both the entity's
financial statements and the Federal awards as described in
Sec. ____.500.
State means any State of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam,
American Samoa, the Commonwealth of the Northern Mariana Islands, and
the Trust Territory of the Pacific Islands, any instrumentality
thereof, any multi-State, regional, or interstate entity which has
governmental functions, and any Indian tribe as defined in this
section.
Student Financial Aid (SFA) includes those programs of general
student assistance, such as those authorized by Title IV of the Higher
Education Act of 1965, as amended (20 U.S.C. 1070 et seq.), which is
administered by the U.S. Department of Education, and similar programs
provided by other Federal agencies. It does not include programs which
provide fellowships or similar Federal awards to students on a
competitive basis, or for specified studies or research.
Subrecipient means a non-Federal entity that expends Federal awards
received from a pass-through entity to carry out a Federal program, but
does not include an individual that is a beneficiary of such a program.
A subrecipient may also be a recipient of other Federal awards directly
from a Federal awarding agency. Guidance on distinguishing between a
subrecipient and a vendor is provided in Sec. ____.210.
Types of compliance requirements refers to the types of compliance
requirements listed in the compliance supplements. Examples include
cash management, Federal financial reporting, allowable costs/cost
principles, types of services allowed or unallowed, eligibility, and
matching.
Vendor means a dealer, distributor, merchant, or other seller
providing goods or services that are required for the conduct of a
Federal program. These goods or services may be for an organization's
own use or for the use of beneficiaries of the Federal program.
Additional guidance on distinguishing between a subrecipient and a
vendor is provided in Sec. ____.210.
Subpart B--Audits
Sec. ____.200 Audit Requirements.
(a) Audit required. Non-Federal entities that expend $300,000 or
more in a year in Federal awards shall have a single or program-
specific audit conducted for that year in accordance with the
provisions of this part. Guidance on determining Federal awards
expended is provided in Sec. ____.205.
(b) Single audit. Non-Federal entities that expend $300,000 or more
in a year in Federal awards shall have a single audit conducted in
accordance with Sec. ____.500 except when they elect to have a program-
specific audit conducted in accordance with paragraph (c) of this
section.
(c) Program-specific audit election. When an auditee expends
Federal awards under only one Federal program (excluding R&D) and the
Federal program's laws, regulations, or grant agreements do not require
a financial statement audit of the auditee, the auditee may elect to
have a program-specific audit conducted in accordance with
Sec. ____.235. A program-specific audit may not be elected for R&D
unless all of the Federal awards expended were received from the same
Federal agency, or the same Federal agency and the same pass-through
entity, and that Federal agency, or pass-through entity in the case of
a subrecipient, approves in advance a program-specific audit.
(d) Exemption when Federal awards expended are less than $300,000.
Non-Federal entities that expend less than $300,000 a year in Federal
awards are exempt from Federal audit requirements for that year, except
as noted in Sec. ____.215(a), but records must be available for review
or audit by appropriate officials of the Federal agency, pass-through
entity, and General Accounting Office (GAO).
(e) Federally Funded Research and Development Centers (FFRDC).
Management of an auditee that owns or operates an FFRDC may elect to
treat the FFRDC as a separate entity for purposes of this part.
Sec. ____.205 Basis for determining Federal awards expended.
(a) Determining Federal awards expended. The determination of when
an award is expended should be based on when the activity related to
the award occurs. Generally, the activity pertains to events that
require the non-Federal entity to comply with laws, regulations, and
the provisions of contracts or grant agreements, such as: expenditure/
expense transactions associated with grants, cost-reimbursement
contracts, cooperative agreements, and direct appropriations; the
disbursement of funds passed through to subrecipients; the use of loan
proceeds under loan and loan guarantee programs; the receipt of
property; the receipt of surplus property; the receipt or use of
program income; the distribution or consumption of food commodities;
the disbursement of amounts entitling the non-Federal entity to an
interest subsidy; and, the period when insurance is in force.
(b) Loan and loan guarantees (loans). Since the Federal Government
is at risk for loans until the debt is repaid, the following guidelines
shall be used to calculate the value of Federal awards expended under
loan programs, except as noted in paragraphs (c) and (d) of this
section:
(1) Value of new loans made or received during the fiscal year;
plus
(2) Balance of loans from previous years for which the Federal
Government imposes continuing compliance requirements; plus
(3) Any interest subsidy, cash, or administrative cost allowance
received.
(c) Loan and loan guarantees (loans) at institutions of higher
education. When loans are made to students of an institution of higher
education but the institution does not make the loans, then only the
value of loans made during the year shall be considered Federal awards
expended in that year. The balance of loans for previous years is not
included as Federal awards expended because the lender accounts for the
prior balances.
(d) Prior loan and loan guarantees (loans). Loans, the proceeds of
which were received and expended in prior-years, are not considered
Federal awards expended under this part when the laws, regulations, and
the provisions of contracts or grant agreements pertaining to such
loans impose no continuing compliance requirements other than to repay
the loans.
(e) Endowment funds. The cumulative balance of Federal awards for
endowment funds which are federally restricted are considered awards
expended in each year in which the funds are still restricted.
(f) Free rent. Free rent received by itself is not considered a
Federal award expended under this part. However, free rent received as
part of an award to carry out a Federal program shall be included in
determining Federal awards expended and subject to audit under this
part.
(g) Valuing non-cash assistance. Federal non-cash assistance, such
as free rent, food stamps, food commodities, donated property, or
[[Page 57240]]
donated surplus property, shall be valued at fair market value at the
time of receipt or the assessed value provided by the Federal agency.
(h) Medicare. Medicare payments to a non-Federal entity for
providing patient care services to Medicare eligible individuals are
not considered Federal awards expended under this part.
(i) Medicaid. Medicaid payments to a subrecipient for providing
patient care services to Medicaid eligible individuals are not
considered Federal awards expended under this part unless a State
requires the funds to be treated as Federal awards expended because
reimbursement is on a cost-reimbursement basis.
Sec. ____.210 Subrecipient and vendor determinations.
(a) General. An auditee may be a recipient, a subrecipient, and a
vendor. Federal awards expended as a recipient or a subrecipient would
be subject to audit under this part. The payments received for goods or
services provided as a vendor would not be considered Federal awards.
The guidance in paragraphs (b) and (c) of this section should be
considered in determining whether payments constitute a Federal award
or a payment for goods and services.
(b) Federal award. Characteristics indicative of a Federal award
received by a subrecipient are when the organization:
(1) Determines who is eligible to receive what Federal financial
assistance;
(2) Has its performance measured against whether the objectives of
the Federal program are met;
(3) Has responsibility for programmatic decision making;
(4) Has responsibility for adherence to applicable Federal program
compliance requirements; and
(5) Uses the Federal funds to carry out a program of the
organization as compared to providing goods or services for a program
of the pass-through entity.
(c) Payment for goods and services. Characteristics indicative of a
payment for goods and services received by a vendor are when the
organization:
(1) Provides the goods and services within normal business
operations;
(2) Provides similar goods or services to many different
purchasers;
(3) Operates in a competitive environment;
(4) Provides goods or services that are ancillary to the operation
of the Federal program; and
(5) Is not subject to compliance requirements of the Federal
program.
(d) Use of judgment in making determination. There may be unusual
circumstances or exceptions to the listed characteristics. In making
the determination of whether a subrecipient or vendor relationship
exists, the substance of the relationship is more important than the
form of the agreement. It is not expected that all of the
characteristics will be present and judgment should be used in
determining whether an entity is a subrecipient or vendor.
(e) For-profit subrecipient. Since this part does not apply to for-
profit subrecipients, the pass-through entity is responsible for
establishing requirements, as necessary, to ensure compliance by for-
profit subrecipients. The contract with the for-profit subrecipient
should describe applicable compliance requirements and the for-profit
subrecipient's compliance responsibility. Methods to ensure compliance
for Federal awards made to for-profit subrecipients may include pre-
award audits, monitoring during the contract, and post-award audits.
(f) Compliance responsibility for vendors. In most cases, the
auditee's compliance responsibility for vendors is only to ensure that
the procurement, receipt, and payment for goods and services comply
with laws, regulations, and the provisions of contracts or grant
agreements. Program compliance requirements normally do not pass
through to vendors. However, the auditee is responsible for ensuring
compliance for vendor transactions which are structured such that the
vendor is responsible for program compliance or the vendor's records
must be reviewed to determine program compliance. Also, when these
vendor transactions relate to a major program, the scope of the audit
shall include determining whether these transactions are in compliance
with laws, regulations, and the provisions of contracts or grant
agreements.
Sec. ____.215 Relation to other audit requirements.
(a) Audit under this part in lieu of other audits. An audit made in
accordance with this part shall be in lieu of any financial audit
required under individual Federal awards. To the extent this audit
meets a Federal agency's needs, it shall rely upon and use such audits.
The provisions of this part neither limit the authority of Federal
agencies, including their Inspectors General, or GAO to conduct or
arrange for additional audits (e.g., financial audits, performance
audits, evaluations, inspections, or reviews) nor authorize any auditee
to constrain Federal agencies from carrying out additional audits. Any
additional audits shall be planned and performed in such a way as to
build upon work performed by other auditors.
(b) Federal agency to pay for additional audits. A Federal agency
that conducts or contracts for additional audits shall, consistent with
other applicable laws and regulations, arrange for funding the full
cost of such additional audits.
(c) Request for a program to be audited as a major program. A
Federal agency may request an auditee to have a particular Federal
program audited as a major program in lieu of the Federal agency
conducting or arranging for the additional audits. To allow for
planning, such requests should be made at least 180 days prior to the
end of the fiscal year to be audited. The auditee, after consultation
with its auditor, should promptly respond to such request by informing
the Federal agency whether the program would otherwise be audited as a
major program using the risk-based audit approach described in
Sec. ____.520 and, if not, the estimated incremental cost. The Federal
agency shall then promptly confirm to the auditee whether it wants the
program audited as a major program. If the program is to be audited as
a major program based upon this Federal agency request, and the Federal
agency agrees to pay the full incremental costs, then the auditee shall
have the program audited as a major program. A pass-through entity may
use the provisions of this paragraph for a subrecipient.
Sec. ____.220 Frequency of audits.
Except for the provisions for biennial audits provided in
paragraphs (a) and (b) of this section, audits required by this part
shall be performed annually. Any biennial audit shall cover both years
within the biennial period.
(a) A State or local government that is required by constitution or
statute, in effect on January 1, 1987, to undergo its audits less
frequently than annually, is permitted to undergo its audits pursuant
to this part biennially. This requirement must still be in effect for
the biennial period under audit.
(b) Any non-profit organization that had biennial audits for all
biennial periods ending between July 1, 1992, and January 1, 1995, is
permitted to undergo its audits pursuant to this part biennially.
Sec. ____.225 Sanctions.
No audit costs may be charged to Federal awards when audits
required by this part have not been made or have been made but not in
accordance with this part. In cases of continued inability or
unwillingness to have an audit
[[Page 57241]]
conducted in accordance with this part, Federal agencies and pass-
through entities shall take appropriate action using sanctions such as:
(a) Withholding a percentage of Federal awards until the audit is
completed satisfactorily;
(b) Withholding or disallowing overhead costs;
(c) Suspending Federal awards until the audit is conducted; or
(d) Terminating the Federal award.
Sec. ____.230 Audit costs.
(a) Allowable costs. Unless prohibited by law, the cost of audits
made in accordance with the provisions of this part are allowable
charges to Federal awards. The charges may be considered a direct cost
or an allocated indirect cost, as determined in accordance with the
provisions of applicable OMB cost principles circulars, the Federal
Acquisition Regulation (FAR) (48 CFR parts 30 and 31), or other
applicable cost principles or regulations.
(b) Unallowable costs. A non-Federal entity shall not charge the
following to a Federal award:
(1) The cost of any audit under the Single Audit Act Amendments of
1996 (31 U.S.C. 7501 et seq.) not conducted in accordance with this
part.
(2) The cost of auditing a non-Federal entity which has Federal
awards expended of less than $300,000 per year and is thereby exempted
under Sec. ____.200(d) from having an audit conducted under this part.
However, this does not prohibit a pass-through entity from charging
Federal awards for the cost of limited scope audits to monitor its
subrecipients in accordance with Sec. ____.400(d)(3), provided the
subrecipient does not have a single audit.
Sec. ____.235 Program-specific audits.
(a) Program-specific audit guide available. In many cases, a
program-specific audit guide will be available to provide specific
guidance to the auditor with respect to internal control, compliance
requirements, suggested audit procedures, and audit reporting
requirements. The auditor should contact the Office of Inspector
General of the Federal agency to determine whether such a guide is
available. When a current program-specific audit guide is available,
the auditor shall follow GAGAS and the guide when performing a program-
specific audit.
(b) Program-specific audit guide not available. (1) When a program-
specific audit guide is not available, the auditee and auditor shall
have basically the same responsibilities for the Federal program as
they would have for an audit of a major program in a single audit.
(2) The auditee shall prepare the financial statement(s) for the
Federal program that includes, at a minimum, a schedule of expenditures
of Federal awards for the program and notes that describe the
significant accounting policies used in preparing the schedule, a
summary schedule of prior audit findings consistent with the
requirements of Sec. ____.315(b), and a corrective action plan
consistent with the requirements of Sec. ____.315(c).
(3) The auditor shall:
(i) Perform an audit of the financial statement(s) for the Federal
program in accordance with GAGAS;
(ii) Obtain an understanding of internal control and perform tests
of internal control over the Federal program consistent with the
requirements of Sec. ____.500(c) for a major program;
(iii) Perform procedures to determine whether the auditee has
complied with laws, regulations, and the provisions of contracts or
grant agreements that could have a direct and material effect on the
Federal program consistent with the requirements of Sec. ____.500(d)
for a major program; and
(iv) Follow up on prior audit findings, perform procedures to
assess the reasonableness of the summary schedule of prior audit
findings prepared by the auditee, and report, as a current year audit
finding, when the auditor concludes that the summary schedule of prior
audit findings materially misrepresents the status of any prior audit
finding in accordance with the requirements of Sec. ____.500(e).
(4) The auditor's report(s) may be in the form of either combined
or separate reports and may be organized differently from the manner
presented in this section. The auditor's report(s) shall state that the
audit was conducted in accordance with this part and include the
following:
(i) An opinion (or disclaimer of opinion) as to whether the
financial statement(s) of the Federal program is presented fairly in
all material respects in accordance with the stated accounting
policies;
(ii) A report on internal control related to the Federal program,
which shall describe the scope of testing of internal control and the
results of the tests;
(iii) A report on compliance which includes an opinion (or
disclaimer of opinion) as to whether the auditee complied with laws,
regulations, and the provisions of contracts or grant agreements which
could have a direct and material effect on the Federal program; and
(iv) A schedule of findings and questioned costs for the Federal
program that includes a summary of the auditor's results relative to
the Federal program in a format consistent with Sec. ____.505(d)(1) and
findings and questioned costs consistent with the requirements of
Sec. ____.505(d)(3).
(c) Report submission for program-specific audits. The audit shall
be completed and the reporting required by paragraph (c)(2) or (c)(3)
of this section submitted within nine months after the end of the audit
period, unless a longer period is agreed to in advance by the Federal
agency that provided the funding or a different period is specified in
a program-specific audit guide. (However, for fiscal years beginning on
or before June 30, 1998, auditees shall have 13 months after the end of
the audit period to complete the audit and submit the reporting package
unless a different period is specified in a program-specific audit
guide.) This required reporting shall be submitted within 30 days after
the issuance of the auditor's report(s) to the auditee. Unless
restricted by law or regulation, the auditee shall make report copies
available for public inspection.
(2) When a program-specific audit guide is available, the auditee
shall submit to the Federal clearinghouse designated by OMB one copy of
the data collection form prepared in accordance with Sec. ____.320(b),
as applicable to a program-specific audit, and the reporting required
by the program-specific audit guide to be retained as an archival copy.
Also, the auditee shall submit to the Federal awarding agency or pass-
through entity the reporting required by the program-specific audit
guide.
(3) When a program-specific audit guide is not available, the
reporting package for a program-specific audit shall consist of the
data collection form prepared in accordance with Sec. ____.320(b), as
applicable to a program-specific audit, the financial statement(s) of
the Federal program, a summary schedule of prior audit findings, and a
corrective action plan as described in paragraph (b)(2) of this
section, and the auditor's report(s) described in paragraph (b)(4) of
this section. One copy of this reporting package shall be submitted to
the Federal clearinghouse designated by OMB to be retained as an
archival copy and one copy of the data collection form prepared in
accordance with Sec. ____.320(b) shall be submitted to each pass-
through entity. Also, when the schedule of findings and questioned
[[Page 57242]]
costs disclosed audit findings or the summary schedule of prior audit
findings reported the status of any audit findings, the auditee shall
submit one copy of the reporting package to the Federal clearinghouse
on behalf of the Federal awarding agency, or directly to the pass-
through entity in the case of a subrecipient.
(d) Other sections of this part may apply. Program-specific audits
are subject to Sec. ____.100 through Sec. ____.215(b), Sec. ____.220
through Sec. ____.230, Sec. ____.300 through Sec. ____.305,
Sec. ____.315, Sec. ____.320(f) through Sec. ____.320(j), Sec. ____.400
through Sec. ____.405, Sec. ____.510 through Sec. ____.515, and other
referenced provisions of this part unless contrary to the provisions of
this section, a program-specific audit guide, or program laws and
regulations.
Subpart C--Auditees
Sec. ____.300 Auditee responsibilities.
The auditee shall:
(a) Identify, in its accounts, all Federal awards received and
expended and the Federal programs under which they were received.
Federal program and award identification shall include, as applicable,
the CFDA title and number, award number and year, name of the Federal
agency, and name of the pass-through entity.
(b) Maintain internal control over Federal programs that provides
reasonable assurance that the auditee is managing Federal awards in
compliance with laws, regulations, and the provisions of contracts or
grant agreements that could have a material effect on each of its
Federal programs.
(c) Comply with laws, regulations, and the provisions of contracts
or grant agreements related to each of its Federal programs.
(d) Prepare appropriate financial statements, including the
schedule of expenditures of Federal awards in accordance with
Sec. ____.310.
(e) Ensure that the audits required by this part are properly
performed and submitted when due. When extensions to the report
submission due date required by Sec. ____.320(a) are granted by the
cognizant or oversight agency for audit, promptly notify the Federal
clearinghouse designated by OMB and each pass-through entity providing
Federal awards of the extension.
(f) Follow up and take corrective action on audit findings,
including preparation of a summary schedule of prior audit findings and
a corrective action plan in accordance with Sec. ____.315(b) and
Sec. ____.315(c), respectively.
Sec. ____.305 Auditor selection.
(a) Auditor procurement. In arranging for audit services, auditees
shall follow the procurement standards prescribed by the Grants
Management Common Rule (GMCR) published March 11, 1988 and amended
April 19, 1995 [Each agency should insert appropriate CFR citation.]
Circular A-110, ``Uniform Requirements for Grants and Agreements with
Institutions of Higher Education, Hospitals and Other Non-Profit
Organizations,'' or the FAR (48 CFR part 42), as applicable. (Circular
available from Office of Administration, Publications Office, Room
2200, New Executive Office Building, Washington, DC 20503; telephone
(202) 395-7332.) Whenever possible, auditees shall make positive
efforts to utilize small businesses, minority-owned firms, and women's
business enterprises, in procuring audit services as stated in GMCR,
OMB Circular A-110, or the FAR (48 CFR part 42), as applicable. In
requesting proposals for audit services, the objectives and scope of
the audit should be made clear. Factors to be considered in evaluating
each proposal for audit services include the responsiveness to the
request for proposal, relevant experience, availability of staff with
professional qualifications and technical abilities, the results of
external quality control reviews, and price.
(b) Restriction on auditor preparing indirect cost proposals. An
auditor who prepares the indirect cost proposal or cost allocation plan
may not also be selected to perform the audit required by this part
when the indirect costs recovered by the auditee during the prior year
exceeded $1 million. This restriction applies to the base year used in
the preparation of the indirect cost proposal or cost allocation plan
and any subsequent years in which the resulting indirect cost agreement
or cost allocation plan is used to recover costs. To minimize any
disruption in existing contracts for audit services, this paragraph
applies to audits of fiscal years beginning after June 30, 1998.
(c) Use of Federal auditors. Federal auditors may perform all or
part of the work required under this part if they comply fully with the
requirements of this part.
Sec. ____.310 Financial statements.
(a) Financial statements. The auditee shall prepare financial
statements that reflect its financial position, results of operations,
and, where appropriate, cash flows for the fiscal year audited. The
financial statements shall be for the same organizational unit and
fiscal year that is chosen to meet the requirements of this part.
(b) Schedule of expenditures of Federal awards. The auditee shall
also prepare a schedule of expenditures of Federal awards for the
period covered by the auditee's financial statements. While not
required, it is appropriate for the auditee to provide information
requested to make the schedule easier to use by Federal awarding
agencies and pass-through entities. For example, when a Federal program
has multiple award years, the auditee may list the amount of each award
year separately. At a minimum, the schedule shall:
(1) List individual Federal programs by Federal agency and major
subdivision within a Federal agency. For Federal awards received as a
subrecipient, the name of the pass-through entity and identifying
number assigned by the pass-through entity shall be included.
(2) Provide total Federal awards expended for each individual
Federal program and the CFDA number or other identifying number when
the CFDA information is not available.
(3) Identify major programs.
(4) Include notes that describe the significant accounting policies
used in preparing the schedule and identify in the notes the dollar
threshold used to distinguish between Type A and Type B programs, as
described in Sec. ____.520(b).
(5) To the extent practical, pass-through entities should identify
in the schedule the total amount provided to subrecipients from each
Type A program and from each Type B program which is audited as a major
program.
(6) List individual Federal awards within a cluster of programs.
However, when it is not practical to list each individual Federal award
for R&D, total Federal awards expended shall be shown by Federal agency
and major subdivision within the Federal agency. For example, the
National Institutes of Health is a major subdivision in the Department
of Health and Human Services.
(7) Include, in either the schedule or a note to the schedule, the
value of the Federal awards expended in the form of non-cash
assistance, insurance in effect during the year, and loans or loan
guarantees outstanding at year end.
Sec. ____.315 Audit findings follow-up.
(a) General. The auditee is responsible for follow-up and
corrective action on all audit findings. As part of this
responsibility, the auditee shall prepare a summary schedule of prior
audit findings. The auditee shall also prepare a corrective action plan
for current year audit findings. The summary schedule
[[Page 57243]]
of prior audit findings and the corrective action plan shall include
the reference numbers the auditor assigns to audit findings under
Sec. ____.510(c). Since the summary schedule may include audit findings
from multiple years, it shall include the fiscal year in which the
finding initially occurred.
(b) Summary schedule of prior audit findings. The summary schedule
of prior audit findings shall report the status of all audit findings
included in the prior audit's schedule of findings and questioned costs
relative to Federal awards. The summary schedule shall also include
audit findings reported in the prior audit's summary schedule of prior
audit findings except audit findings listed as corrected in accordance
with paragraph (b)(1) of this section, or no longer valid or not
warranting further action in accordance with paragraph (b)(4) of this
section.
(1) When audit findings were fully corrected, the summary schedule
need only list the audit findings and state that corrective action was
taken.
(2) When audit findings were not corrected or were only partially
corrected, the summary schedule shall describe the planned corrective
action as well as any partial corrective action taken.
(3) When corrective action taken is significantly different from
corrective action previously reported in a corrective action plan or in
the Federal agency's or pass-through entity's management decision, the
summary schedule shall provide an explanation.
(4) When the auditee believes the audit findings are no longer
valid or do not warrant further action, the reasons for this position
shall be described in the summary schedule. A valid reason for
considering an audit finding as not warranting further action is that
all of the following have occurred:
(i) Two years have passed since the audit report in which the
finding occurred was submitted to the Federal clearinghouse;
(ii) The Federal agency or pass-through entity is not currently
following up with the auditee on the audit finding; and
(iii) A management decision was not issued.
(c) Corrective action plan. At the completion of the audit, the
auditee shall prepare a corrective action plan to address each audit
finding included in the current year auditor's reports. The corrective
action plan shall provide the name(s) of the contact person(s)
responsible for corrective action, the corrective action planned, and
the anticipated completion date. If the auditee does not agree with the
audit findings or believes corrective action is not required, then the
corrective action plan shall include an explanation and specific
reasons.
Sec. ____.320 Report submission.
(a) General. The audit shall be completed and the reporting package
described in paragraph (c) of this section submitted within nine months
after the end of the audit period, unless a longer period is agreed to
in advance by the cognizant or oversight agency for audit. (However,
for fiscal years beginning on or before June 30, 1998, auditees shall
have 13 months after the end of the audit period to complete the audit
and submit the reporting package.) The reporting package shall be
submitted within 30 days after issuance of the auditor's report(s) to
the auditee. Unless restricted by law or regulation, the auditee shall
make copies available for public inspection.
(b) Data Collection. The auditee shall complete a data collection
form which states whether the audit was completed in accordance with
this part and provides information about the auditee, its Federal
programs, and the results of the audit. The form shall be approved by
OMB, available from the Federal clearinghouse designated by OMB,
include data elements similar to those presented in this paragraph, and
use a machine-readable format. The auditee's chief executive officer or
chief financial officer shall sign a statement that the information on
the form is accurate and complete as follows:
Certificate of Audit
This is to certify that, to the best of my knowledge and belief,
the [specify name of the auditee] has: (1) Engaged an auditor to
perform an audit in accordance with the provisions of OMB Circular
A-133 for the [specify number] months ended [specify date]; (2) the
auditor has completed such audit and presented a signed audit report
which states that the audit was conducted in accordance with the
provisions of the Circular; and, (3) the information on the attached
form is accurate and complete and reflects the results of this
audit, as presented in the auditor's report. I declare that the
foregoing is true and correct.
Attachment to Certificate
Data Collection Form
1. The type of report the auditor issued on the financial
statements of the auditee (i.e., unqualified opinion, qualified
opinion, adverse opinion, or disclaimer of opinion).
2. A yes or no statement as to whether the auditor's report on the
financial statements indicated that the auditor has substantial doubt
about the auditee's ability to continue as a going concern.
3. The type of report the auditor issued on compliance for major
programs (i.e., unqualified opinion, qualified opinion, adverse
opinion, or disclaimer of opinion).
4. A list of the Federal awarding agencies and pass-through
entities which will receive a copy of the reporting package pursuant to
Sec. ------.320(d)(2) and Sec. ------.320(e)(2), respectively, of OMB
Circular A-133. An explanation should be provided if this list is
different from the communication the auditor provides to the auditee
under Sec. ------.500(f) of OMB Circular A-133.
5. A yes or no statement as to whether the auditee qualified as a
low-risk auditee under Sec. ------.530 of OMB Circular A-133.
6. The dollar threshold used to distinguish between Type A and Type
B programs as defined in Sec. ------.520(b) of OMB Circular A-133.
7. The Catalog of Federal Domestic Assistance (CFDA) number for
each Federal program, as applicable.
8. The name of each Federal program and identification of each
major program. Individual awards within a cluster of programs should be
listed in the same level of detail as they are listed in the schedule
of expenditures of Federal awards.
9. The amount of expenditures in the schedule of expenditures of
Federal awards associated with each Federal program.
10. A yes or no statement as to whether there are audit findings
and the amount of any questioned costs related to the following for
each Federal program:
a. Types of services allowed or unallowed b. Eligibility c.
Matching, level of effort, or earmarking d. Federal financial reporting
e. Program income f. Procurement g. Subrecipient monitoring h.
Allowable costs/cost principles i. Other
11. Auditee Name: ---------------------------------- Employer
Identification Number: ---------------------------------- Name and
Title of Responsible Official: ----------------------------------
Telephone Number: ---------------------------------- Signature: ------
---------------------------- Date: ----------------------------------
12. Auditor Name: ---------------------------------- Name and Title
of Contact Person: ---------------------------------- Auditor Address:
----------------------------------
[[Page 57244]]
Auditor Telephone Number: ----------------------------------
13. Whether the auditee has a cognizant or oversight agency for
audit.
14. The name of the cognizant or oversight agency for audit
determined in accordance with Sec. ------.400(a) and Sec. ------
.400(b), respectively.
(c) Reporting Package. The reporting package shall include the:
(1) Data collection form discussed in paragraph (b) of this
section;
(2) Financial statements and schedule of expenditures of Federal
awards discussed in Sec. ____.310(a) and Sec. ____.310(b),
respectively;
(3) Summary schedule of prior audit findings discussed in
Sec. ____.315(b);
(4) Auditor's report(s) discussed in Sec. ____.505; and
(5) Corrective action plan discussed in Sec. ____.315(c).
(d) Submission to clearinghouse. All auditees shall submit to the
Federal clearinghouse designated by OMB one copy of the reporting
package described in paragraph (c) of this section for:
(1) The Federal clearinghouse to retain as an archival copy; and
(2) Each Federal awarding agency when the schedule of findings and
questioned costs disclosed audit findings relating to Federal awards
that the Federal awarding agency provided directly or the summary
schedule of prior audit findings reported the status of any audit
findings relating to Federal awards that the Federal awarding agency
provided directly.
(e) Additional submission by subrecipients. In addition to the
requirements discussed in paragraph (d) of this section, subrecipients
shall submit to each pass-through entity one copy of the:
(1) Data collection form discussed in paragraph (b) of this
section; and
(2) Reporting package described in paragraph (c) of this section
for each pass-through entity when the schedule of findings and
questioned costs disclosed audit findings relating to Federal awards
that the pass-through entity provided or the summary schedule of prior
audit findings reported the status of any audit findings relating to
Federal awards that the pass-through entity provided.
(f) Requests for report copies. In response to requests by a
Federal agency or pass-through entity, auditees shall submit the
appropriate copies of the reporting package described in paragraph (c)
of this section and, if requested, a copy of any management letters
issued by the auditor.
(g) Report retention requirements. Auditees shall keep one copy of
the reporting package described in paragraph (c) of this section on
file for three years from the date of submission to the Federal
clearinghouse designated by OMB. Pass-through entities shall keep
subrecipients' submissions on file for three years from date of
receipt.
(h) Clearinghouse responsibilities. The Federal clearinghouse
designated by OMB shall distribute the reporting packages received in
accordance with paragraph (d)(2) of this section and
Sec. ____.235(c)(3) to applicable Federal awarding agencies, maintain a
data base of completed audits, provide appropriate information to
Federal agencies, and follow up with known auditees which have not
submitted the required data collection forms and reporting packages.
(i) Clearinghouse address. The address of the Federal clearinghouse
currently designated by OMB is Federal Audit Clearinghouse, Bureau of
the Census, 1201 E. 10th Street, Jeffersonville, IN 47132.
(j) Electronic filing. Nothing in this part shall preclude
electronic submissions to the Federal clearinghouse in such manner as
may be approved by OMB. With OMB approval, the Federal clearinghouse
may pilot test methods of electronic submissions.
Subpart D--Federal Agencies and Pass-Through Entities
Sec. ____.400 Responsibilities.
(a) Cognizant agency for audit responsibilities. Recipients
expending more than $25 million a year in Federal awards shall have a
cognizant agency for audit. The designated cognizant agency for audit
shall be the Federal awarding agency that provides the predominant
amount of direct funding to a recipient unless OMB makes a specific
cognizant agency for audit assignment and provides notice in the
Federal Register. To provide for continuity of cognizance, the
determination of the predominant amount of direct funding shall be
based upon direct Federal awards expended in the recipient's fiscal
years ending in 1995, 2000, 2005, and every fifth year thereafter. For
example, audit cognizance for periods ending in 1996 through 2000 will
be determined based on Federal awards expended in 1995. A Federal
awarding agency with cognizance for an auditee may reassign cognizance
to another Federal awarding agency which provides substantial direct
funding and agrees to be the cognizant agency for audit. Within 30 days
after any reassignment, both the old and the new cognizant agency for
audit shall notify the auditee, and, if known, the auditor of the
reassignment. The cognizant agency for audit shall:
(1) Provide technical audit advice and liaison to auditees and
auditors.
(2) Consider auditee requests for extensions to the report
submission due date required by Sec. ____.320(a). The cognizant agency
for audit may grant extensions for good cause.
(3) Obtain or conduct quality control reviews of selected audits
made by non-Federal auditors, and provide the results, when
appropriate, to other interested organizations.
(4) Promptly inform other affected Federal agencies and appropriate
Federal law enforcement officials of any direct reporting by the
auditee or its auditor of irregularities or illegal acts, as required
by GAGAS or laws and regulations.
(5) Advise the auditor and, where appropriate, the auditee of any
deficiencies found in the audits when the deficiencies require
corrective action by the auditor. When advised of deficiencies, the
auditee shall work with the auditor to take corrective action. If
corrective action is not taken, the cognizant agency for audit shall
notify the auditor, the auditee, and applicable Federal awarding
agencies and pass-through entities of the facts and make
recommendations for follow-up action. Major inadequacies or repetitive
substandard performance by auditors shall be referred to appropriate
State licensing agencies and professional bodies for disciplinary
action.
(6) Coordinate, to the extent practical, audits or reviews made by
or for Federal agencies that are in addition to the audits made
pursuant to this part, so that the additional audits or reviews build
upon audits performed in accordance with this part.
(7) Coordinate a management decision for audit findings that affect
the Federal programs of more than one agency.
(8) Coordinate the audit work and reporting responsibilities among
auditors to achieve the most cost-effective audit.
(b) Oversight agency for audit responsibilities. An auditee which
does not have a designated cognizant agency for audit will be under the
general oversight of the Federal agency determined in accordance with
the definition of oversight agency for audit in Sec. ____.105. The
oversight agency for audit:
(1) Shall provide technical advice to auditees and auditors as
requested.
(2) May assume all or some of the responsibilities normally
performed by a cognizant agency for audit.
(c) Federal awarding agency responsibilities. The Federal awarding
[[Page 57245]]
agency shall perform the following for the Federal awards it makes:
(1) Identify Federal awards made by informing each recipient of the
CFDA title and number, award name and number, award year, and if the
award is for R&D. When some of this information is not available, the
Federal agency shall provide information necessary to clearly describe
the Federal award.
(2) Ensure that audits are completed and reports are received in a
timely manner and in accordance with the requirements of this part.
(3) Provide technical advice and counsel to auditees and auditors
as requested.
(4) Issue a management decision on audit findings within six months
after receipt of the audit report and ensure that the recipient takes
appropriate and timely corrective action.
(5) Assign a person responsible to inform OMB annually of any
updates needed to the compliance supplements.
(d) Pass-through entity responsibilities. A pass-through entity
shall perform the following for the Federal awards it makes:
(1) Identify Federal awards made by informing each subrecipient of
CFDA title and number, award name and number, award year, if the award
is R&D, and name of Federal agency. When some of this information is
not available, the pass-through entity shall provide the best
information available to describe the Federal award.
(2) Advise subrecipients of requirements imposed on them by Federal
laws, regulations, and the provisions of contracts or grant agreements
as well as any supplemental requirements imposed by the pass-through
entity.
(3) Monitor the activities of subrecipients as necessary to ensure
that Federal awards are used for authorized purposes in compliance with
laws, regulations, and the provisions of contracts or grant agreements
and that performance goals are achieved.
(4) Ensure that subrecipients expending $300,000 or more in Federal
awards during the subrecipient's fiscal year have met the audit
requirements of this part for that fiscal year.
(5) Issue a management decision on audit findings within six months
after receipt of the subrecipient's audit report and ensure that the
subrecipient takes appropriate and timely corrective action.
(6) Consider whether subrecipient audits necessitate adjustment of
the pass-through entity's own records.
(7) Require each subrecipient to permit the pass-through entity and
auditors to have access to the records and financial statements as
necessary for the pass-through entity to comply with this part.
Sec. ______.405 Management decision.
(a) General. The management decision shall clearly state whether or
not the audit finding is sustained, the reasons for the decision, and
the expected auditee action to repay disallowed costs, make financial
adjustments, or take other action. If the auditee has not completed
corrective action, a timetable for follow-up should be given. Prior to
issuing the management decision, the Federal agency or pass-through
entity may request additional information or documentation from the
auditee, including a request that the documentation be audited, as a
way of mitigating disallowed costs. The management decision should
describe any appeal process available to the auditee.
(b) Federal agency. As provided in Sec. ______.400(a)(7), the
cognizant agency for audit shall be responsible for coordinating a
management decision for audit findings that affect the programs of more
than one Federal agency. As provided in Sec. ______.400(c)(4), a
Federal awarding agency is responsible for issuing a management
decision for findings that relate to Federal awards it makes to
recipients. Alternate arrangements may be made on a case-by-case basis
by agreement among the Federal agencies concerned.
(c) Pass-through entity. As provided in Sec. ______.400(d)(5), the
pass-through entity shall be responsible for making the management
decision for audit findings that relate to Federal awards it makes to
subrecipients.
(d) Time requirements. The entity responsible for making the
management decision shall do so within six months of receipt of the
audit report. Corrective action should be initiated within six months
and proceed as rapidly as possible.
(e) Reference numbers. Management decisions shall include the
reference numbers the auditor assigned to each audit finding in
accordance with Sec. ______.510(c).
Subpart E--Auditors
Sec. ______.500 Scope of audit.
(a) General. The audit shall be conducted in accordance with GAGAS.
The audit shall cover the entire operations of the auditee; or, at the
option of the auditee, such audit shall include a series of audits that
cover departments, agencies, and other organizational units which
expended or otherwise administered Federal awards during such fiscal
year, provided that each such audit shall encompass the financial
statements and schedule of expenditures of Federal awards for each such
department, agency, and organizational unit, which shall be considered
to be a non-Federal entity. The financial statements and schedule of
expenditures of Federal awards shall be for the same fiscal year.
(b) Financial statements. The auditor shall determine whether the
financial statements of the auditee are presented fairly in all
material respects in conformity with generally accepted accounting
principles. The auditor shall also determine whether the schedule of
expenditures of Federal awards is presented fairly in all material
respects in relation to the auditee's financial statements taken as a
whole.
(c) Internal control. (1) In addition to the requirements of GAGAS,
the auditor shall perform procedures to obtain an understanding of
internal control over Federal programs sufficient to plan the audit to
support a low assessed level of control risk for major programs and the
allowability of costs charged to cost pools used to support an indirect
cost rate or allocated through a State/local-wide central service cost
allocation plan (as fully described in Appendix C of Circular A-87,
``Cost Principles for State, Local and Indian Tribal Governments,''
issued May 4, 1995, and hereinafter referred to as a ``cost allocation
plan''). (Circular available from Office of Administration,
Publications Office, Room 2200, New Executive Office Building,
Washington, DC 20503; telephone (202) 395-7332.)
(2) Except as provided in paragraph (c)(3) of this section, the
auditor shall:
(i) Plan the testing of internal control over major programs and
the allowability of costs charged to cost pools used to support an
indirect cost rate or allocated through a cost allocation plan to
support a low assessed level of control risk for the assertions
relevant to the compliance requirements for each major program; and
(ii) Perform testing of internal control as planned in paragraph
(c)(2)(i) of this section.
(3) When internal control over some or all of the compliance
requirements for a major program and the allowability of costs charged
to cost pools used to support an indirect cost rate or allocated
through a cost allocation plan are likely to be ineffective in
preventing or detecting noncompliance, the planning and performing of
testing described in paragraph (c)(2) of this section are not required
for those compliance requirements. However, the auditor
[[Page 57246]]
shall report a reportable condition or a material weakness in
accordance with Sec. ______.510, assess the related control risk at the
maximum, and consider whether additional compliance tests are required
because of ineffective internal control.
(d) Compliance. (1) In addition to the requirements of GAGAS, the
auditor shall determine whether the auditee has complied with laws,
regulations, and the provisions of contracts or grant agreements that
may have a direct and material effect on each of its major programs and
the allowability of costs charged to cost pools used to support an
indirect cost rate or allocated through a cost allocation plan.
(2) The principal compliance requirements common to most Federal
programs and the programmatic compliance requirements of the largest
Federal programs are included in the compliance supplements.
(3) For the compliance requirements (common and programmatic)
related to Federal programs contained in the compliance supplements, an
audit of these compliance requirements will meet the requirements of
this part. Where there have been changes to the compliance requirements
and the changes are not reflected in the compliance supplements, the
auditor shall determine the current compliance requirements and modify
the audit procedures accordingly. For those Federal programs not
covered in the compliance supplements, the auditor should use the types
of compliance requirements (e.g., cash management, Federal financial
reporting, allowable costs/cost principles, types of services allowed
or unallowed, eligibility, and matching) contained in the compliance
supplements as guidance for identifying the types of compliance
requirements to test, and determine the requirements governing the
Federal program by reviewing the provisions of contracts and grant
agreements and the laws and regulations referred to in such contracts
and grant agreements. The auditor should consult with the applicable
Federal agency to determine the availability of agency-prepared
supplements or audit guides.
(4) The compliance testing shall include tests of transactions,
including costs charged to cost pools used to support an indirect cost
rate or allocated through a cost allocation plan, and such other
auditing procedures necessary to provide the auditor sufficient
evidence to support an opinion on compliance.
(e) Audit follow-up. The auditor shall follow up on prior audit
findings, perform procedures to assess the reasonableness of the
summary schedule of prior audit findings prepared by the auditee in
accordance with Sec. ______.315(b), and report, as a current year audit
finding, when the auditor concludes that the summary schedule of prior
audit findings materially misrepresents the status of any prior audit
finding. The auditor shall perform audit follow-up procedures
regardless of whether a prior audit finding relates to a major program
or the allowability of costs charged to cost pools used to support an
indirect cost rate or allocated through a cost allocation plan in the
current year.
(f) Communication. The auditor shall communicate, preferably in
writing, to the auditee which Federal awarding agencies and pass-
through entities are required to receive a copy of the reporting
package pursuant to Sec. ______.320(d)(2) and Sec. ______.320(e)(2),
respectively. The auditor shall retain a record of this communication
in the auditor's working papers.
Sec. ______.505 Audit reporting.
The auditor's report(s) may be in the form of either combined or
separate reports and may be organized differently from the manner
presented in this section. The auditor's report(s) shall state that the
audit was conducted in accordance with this part and include the
following:
(a) An opinion (or disclaimer of opinion) as to whether the
financial statements are presented fairly in all material respects in
conformity with generally accepted accounting principles and an opinion
(or disclaimer of opinion) as to whether the schedule of expenditures
of Federal awards is presented fairly in all material respects in
relation to the financial statements taken as a whole.
(b) A report on internal control related to the financial
statements, major programs, and the allowability of costs charged to
cost pools used to support an indirect cost rate or allocated through a
cost allocation plan. This report shall describe the scope of testing
of internal control and the results of the tests, and, where
applicable, refer to the separate schedule of findings and questioned
costs described in paragraph (d) of this section.
(c) A report on compliance with laws, regulations, and the
provisions of contracts or grant agreements, noncompliance with which
could have a material effect on the financial statements. This report
shall also include an opinion (or disclaimer of opinion) as to whether
the auditee complied with laws, regulations, and the provisions of
contracts or grant agreements which could have a direct and material
effect on each major program and on the allowability of costs charged
to cost pools used to support an indirect cost rate or allocated
through a cost allocation plan, and, where applicable, refer to the
separate schedule of findings and questioned costs described in
paragraph (d) of this section.
(d) A schedule of findings and questioned costs which shall include
the following three components:
(1) A summary of the auditor's results which shall include:
(i) The type of report the auditor issued on the financial
statements of the auditee (i.e., unqualified opinion, qualified
opinion, adverse opinion, or disclaimer of opinion);
(ii) Where applicable, a statement that reportable conditions in
internal control were disclosed by the audit of the financial
statements and whether any such conditions were material weaknesses;
(iii) A statement as to whether the audit disclosed any
noncompliance which is material to the financial statements of the
auditee;
(iv) Where applicable, a statement that reportable conditions in
internal control over major programs and the allowability of costs
charged to cost pools used to support an indirect cost rate or
allocated through a cost allocation plan were disclosed by the audit
and whether any such conditions were material weaknesses;
(v) The type of report the auditor issued on compliance for major
programs and with the provisions of applicable OMB cost principles
circulars, the FAR (48 CFR parts 30 and 31), or other applicable cost
principles or regulations pertaining to the allowability of costs
charged to cost pools used to support an indirect cost rate or
allocated through a cost allocation plan (i.e., unqualified opinion,
qualified opinion, adverse opinion, or disclaimer of opinion); and
(vi) A statement as to whether the audit disclosed any audit
findings which the auditor is required to report under
Sec. ______.510(a).
(2) Findings and questioned costs for the financial statements
which are required to be reported in accordance with GAGAS.
(3) Findings and questioned costs for Federal awards which shall
include audit findings as defined in Sec. ______.510(a).
(i) Audit findings (e.g., internal control findings, compliance
findings, questioned costs, or fraud) which relate to the same issue
should be presented as a single audit finding. Where
[[Page 57247]]
practical, audit findings should be organized by Federal agency or
pass-through entity.
(ii) Audit findings which relate to both the financial statements
and Federal awards, as reported under paragraphs (d)(2) and (d)(3) of
this section, respectively, should be reported in both schedules.
However, the reporting in one schedule may be in summary form with a
reference to a detailed reporting in the other schedule.
Sec. ______.510 Audit findings.
(a) Audit findings reported. The auditor shall report the following
as audit findings in a schedule of findings and questioned costs:
(1) Reportable conditions in internal control over major programs
and over the allowability of costs charged to cost pools used to
support an indirect cost rate or allocated through a cost allocation
plan. The auditor's determination of whether a deficiency in internal
control is a reportable condition for the purpose of reporting an audit
finding is in relation to a type of compliance requirement for a major
program, total costs charged to cost pools used to support an indirect
cost rate or allocated through a cost allocation plan, or an audit
objective identified in the compliance supplements. The auditor shall
identify reportable conditions which are individually or cumulatively
material weaknesses.
(2) Material noncompliance with the provisions of laws,
regulations, contracts, or grant agreements related to a major program
and the provisions of applicable OMB cost principles circulars, the
FAR, or other applicable cost principles or regulations pertaining to
the allowability of costs charged to cost pools used to support an
indirect cost rate or allocated through a cost allocation plan. The
auditor's determination of whether a noncompliance with the provisions
of laws, regulations, contracts, or grant agreements is material for
the purpose of reporting an audit finding is in relation to a type of
compliance requirement for a major program, total costs charged to cost
pools used to support an indirect cost rate or allocated through a cost
allocation plan, or an audit objective identified in the compliance
supplements.
(3) Known questioned costs which are greater than $10,000 for a
type of compliance requirement for a major program and costs charged to
cost pools used to support an indirect cost rate or allocated through a
cost allocation plan. Known questioned costs are those specifically
identified by the auditor. In evaluating the effect of questioned costs
on the opinion on compliance, the auditor considers the best estimate
of total costs questioned (likely questioned costs), not just the
questioned costs specifically identified (known questioned costs). The
auditor shall also report known questioned costs when likely questioned
costs are greater than $10,000 for a type of compliance requirement for
a major program and costs charged to cost pools used to support an
indirect cost rate or allocated through a cost allocation plan. In
reporting questioned costs, the auditor shall include information to
provide proper perspective for judging the prevalence and consequences
of the questioned costs.
(4) Known questioned costs which are greater than $10,000 for a
Federal program which is not audited as a major program. Except for
audit follow-up, the auditor is not required under this part to perform
audit procedures for such a Federal program; therefore, the auditor
will normally not find questioned costs for a program which is not
audited as a major program. However, if the auditor does become aware
of questioned costs for a Federal program which is not audited as a
major program (e.g., as part of audit follow-up or other audit
procedures) and the known questioned costs are greater than $10,000,
then the auditor shall report this as an audit finding.
(5) The circumstances concerning why the auditor's report on
compliance for major programs and the allowability of costs charged to
cost pools used to support an indirect cost rate or allocated through a
cost allocation plan is other than an unqualified opinion, unless such
circumstances are otherwise reported as audit findings in the schedule
of findings and questioned costs for Federal awards.
(6) Known fraud affecting a Federal award, unless such fraud is
otherwise reported as an audit finding in the schedule of findings and
questioned costs for Federal awards. This paragraph does not require
the auditor to make an additional reporting when the auditor confirms
that the fraud was reported outside of the auditor's reports under the
direct reporting requirements of GAGAS.
(7) Instances where the results of audit follow-up procedures
disclosed that the summary schedule of prior audit findings prepared by
the auditee in accordance with Sec. ______ .315(b) materially
misrepresents the status of any prior audit finding.
(b) Audit finding detail. Audit findings shall be presented in
sufficient detail for the auditee to prepare a corrective action plan
and take corrective action and for Federal agencies and pass-through
entities to arrive at a management decision. The following specific
information shall be included, as applicable, in audit findings:
(1) Federal program and specific Federal award identification
including the CFDA title and number, Federal award number and year,
name of Federal agency, and name of the applicable pass-through entity.
When information, such as the CFDA title and number or Federal award
number, is not available, the auditor shall provide the best
information available to describe the Federal award.
(2) The criteria or specific requirement upon which the audit
finding is based, including statutory, regulatory, or other citation.
(3) The condition found, including facts that support the
deficiency identified in the audit finding.
(4) Identification of questioned costs and how they were computed.
(5) Information to provide proper perspective for judging the
prevalence and consequences of the audit findings, such as whether the
audit findings represent an isolated instance or a systemic problem.
Where appropriate, instances identified shall be related to the
universe and the number of cases examined and be quantified in terms of
dollar value.
(6) The possible asserted effect to provide sufficient information
to the auditee and Federal agency, or pass-through entity in the case
of a subrecipient, to permit them to determine the cause and effect to
facilitate prompt and proper corrective action.
(7) Recommendations to prevent future occurrences of the deficiency
identified in the audit finding.
(8) Views of responsible officials of the auditee when there is
disagreement with the audit findings, to the extent practical.
(c) Reference numbers. Each audit finding in the schedule of
findings and questioned costs shall include a reference number to allow
for easy referencing of the audit findings during follow-up.
Sec. ______.515 Audit working papers.
(a) Retention of working papers. The auditor shall retain working
papers and reports for a minimum of three years after the date of
issuance of the auditor's report(s) to the auditee, unless the auditor
is notified in writing by the cognizant agency for audit, oversight
agency for audit, or pass-through entity to extend the retention
period. When
[[Page 57248]]
the auditor is aware that the Federal awarding agency, pass-through
entity, or auditee is contesting an audit finding, the auditor shall
contact the parties contesting the audit finding for guidance prior to
destruction of the working papers and reports.
(b) Access to working papers. Audit working papers shall be made
available upon request to the cognizant or oversight agency for audit
or its designee, a Federal agency providing direct or indirect funding,
or GAO at the completion of the audit. Access to working papers
includes the right of Federal agencies to obtain copies of working
papers, as is reasonable and necessary.
Sec. ______.520 Major program determination.
(a) General. The auditor shall use a risk-based approach to
determine which Federal programs are major programs. This risk-based
approach shall include consideration of: Current and prior audit
experience, oversight by Federal agencies and pass-through entities,
and the inherent risk of the Federal program. The process in paragraphs
(b) through (i) of this section shall be followed.
(b) Step 1. The auditor shall identify the larger Federal programs,
which shall be labeled Type A programs. Type A programs are defined as
Federal programs with Federal awards expended during the audit period
exceeding the larger of:
(i) $300,000 or three percent (.03) of total Federal awards
expended in the case of an auditee for which total Federal awards
expended equal or exceed $300,000 but are less than or equal to $100
million.
(ii) $3 million or three-tenths of one percent (.003) of total
Federal awards expended in the case of an auditee for which total
Federal awards expended exceed $100 million but are less than or equal
to $10 billion.
(iii) $30 million or 15 hundredths of one percent (.0015) of total
Federal awards expended in the case of an auditee for which total
Federal awards expended exceed $10 billion.
(2) Federal programs not labeled Type A under paragraph (b)(1) of
this section shall be labeled Type B programs.
(3) The inclusion of large loan and loan guarantees (loans) should
not result in the exclusion of other programs as Type A programs. When
a Federal program providing loans significantly affects the number or
size of Type A programs, the auditor shall consider this Federal
program as a Type A program and exclude its values in determining other
Type A programs.
(4) For biennial audits permitted under Sec. ______.220, the
determination of Type A and Type B programs shall be based upon the
Federal awards expended during the two-year period.
(c) Step 2. The auditor shall identify Type A programs which are
low-risk. For a Type A program to be considered low-risk, it shall have
been audited as a major program in at least one of the two most recent
audit periods (in the most recent audit period in the case of a
biennial audit), and, in the most recent audit period, it shall have
had no audit findings under Sec. ______.510(a). However, the auditor
may use judgment and consider that audit findings from questioned costs
under Sec. ______.510(a)(3) and Sec. ______.510(a)(4), fraud under
Sec. ______.510(a)(6), and audit follow-up for the summary schedule of
prior audit findings under Sec. ______.510(a)(7) do not preclude the
Type A program from being low-risk. The auditor shall consider: the
criteria in Sec. ______.525(c), Sec. ______.525(d)(1),
Sec. ______.525(d)(2), and Sec. ______.525(d)(3); the results of audit
follow-up; whether any changes in personnel or systems affecting a Type
A program have significantly increased risk; and apply professional
judgment in determining whether a Type A program is low-risk.
(2) Notwithstanding paragraph (c)(1) of this section, OMB may
approve a Federal awarding agency's request that a Type A program at
certain recipients may not be considered low-risk. For example, it may
be necessary for a large Type A program to be audited as major each
year at particular recipients to allow the Federal agency to comply
with the Government Management Reform Act of 1994 (31 U.S.C. 3515). The
Federal agency shall notify the recipient and, if known, the auditor at
least 120 days prior to the end of the fiscal year to be audited of
OMB's approval.
(d) Step 3. The auditor shall identify Type B programs which are
high-risk using professional judgment and the criteria in
Sec. ______.525. However, should the auditor select Option 2 under Step
4 (paragraph (e)(2)(i)(B) of this section), the auditor is not required
to identify more high-risk Type B programs than the number of low-risk
Type A programs. Except for known reportable conditions in internal
control or compliance problems as discussed in Sec. ______.525(b)(1),
Sec. ______.525(b)(2), and Sec. ______.525(c)(1), a single criteria in
Sec. ______.525 would seldom cause a Type B program to be considered
high-risk.
(2) An audit under this part is not expected to test relatively
small Federal programs. Therefore, except to meet the percentage of
coverage rule discussed in paragraph (f) of this section, the auditor
is only required to perform risk assessments on Type B programs that
exceed the larger of:
(i) $100,000 or three-tenths of one percent (.003) of total Federal
awards expended when the auditee has less than or equal to $100 million
in total Federal awards expended.
(ii) $300,000 or three-hundredths of one percent (.0003) of total
Federal awards expended when the auditee has more than $100 million in
total Federal awards expended.
(e) Step 4. At a minimum, the auditor shall audit all of the
following as major programs:
(1) All Type A programs, except the auditor may exclude any Type A
programs identified as low-risk under Step 2 (paragraph (c)(1) of this
section).
(2) (i) High-risk Type B programs as identified under either of the
following two options:
(A) Option 1. At least one half of the Type B programs identified
as high-risk under Step 3 (paragraph (d) of this section), except this
paragraph (e)(2)(i)(A) does not require the auditor to audit more high-
risk Type B programs than the number of low-risk Type A programs
identified as low-risk under Step 2.
(B) Option 2. One high-risk Type B program for each Type A program
identified as low-risk under Step 2.
(ii) When identifying which high-risk Type B programs to audit as
major under either Option 1 or 2 in paragraph (a)(2)(i) (A) or (B) of
this section, the auditor is encouraged to use an approach which
provides an opportunity for different high-risk Type B programs to be
audited as major over a period of time.
(3) Such additional programs as may be necessary to comply with the
percentage of coverage rule discussed in paragraph (f) of this section.
This paragraph (e)(3) may require the auditor to audit more programs as
major than the number of Type A programs.
(f) Percentage of coverage rule. The auditor shall audit as major
programs Federal programs with Federal awards expended that, in the
aggregate, encompass at least 50 percent of total Federal awards
expended. If the auditee meets the criteria in Sec. ______.530 for a
low-risk auditee, the auditor need only audit as major programs Federal
programs with Federal awards expended that, in the aggregate, encompass
at least 25 percent of total Federal awards expended.
(g) Documentation of risk. The auditor shall document in the
working papers the risk analysis process used in determining major
programs.
[[Page 57249]]
(h) Auditor's judgment. When the major program determination was
performed and documented in accordance with this part, the auditor's
judgment in applying the risk-based approach to determine major
programs shall be presumed correct. Challenges by Federal agencies and
pass-through entities shall only be for clearly improper use of the
guidance in this part. However, Federal agencies and pass-through
entities may provide auditors guidance about the risk of a particular
Federal program and the auditor shall consider this guidance in
determining major programs in audits not yet completed.
(i) Deviation from use of risk criteria. For first-year audits, the
auditor may elect to determine major programs as all Type A programs
plus any Type B programs as necessary to meet the percentage of
coverage rule discussed in paragraph (f) of this section. Under this
option, the auditor would not be required to perform the procedures
discussed in paragraphs (c), (d), and (e) of this section.
(1) A first-year audit is the first year the entity is audited
under this part or the first year of a change of auditors.
(2) To ensure that a frequent change of auditors would not preclude
audit of high-risk Type B programs, this election for first-year audits
may not be used by an auditee more than once in every three years.
Sec. ______.525 Criteria for Federal program risk.
(a) General. The auditor's determination should be based on an
overall evaluation of the risk of noncompliance occurring which could
be material to the Federal program. The auditor shall use auditor
judgment and consider criteria, such as described in paragraphs (b),
(c), and (d) of this section, to identify risk in Federal programs.
Also, as part of the risk analysis, the auditor may wish to discuss a
particular Federal program with auditee management and the Federal
agency or pass-through entity.
(b) Current and prior audit experience. (1) Weaknesses in internal
control over Federal programs would indicate higher risk. Consideration
should be given to the control environment over Federal programs and
such factors as the expectation of management's adherence to applicable
laws and regulations and the provisions of contracts and grant
agreements and the competence and experience of personnel who
administer the Federal programs.
(i) A Federal program administered under multiple internal control
structures may have higher risk. When assessing risk in a large single
audit, the auditor shall consider whether weaknesses are isolated in a
single operating unit (e.g., one college campus) or pervasive
throughout the entity.
(ii) When significant parts of a Federal program are passed through
to subrecipients, a weak system for monitoring subrecipients would
indicate higher risk.
(iii) The extent to which computer processing is used to administer
Federal programs, as well as the complexity of that processing, should
be considered by the auditor in assessing risk. New and recently
modified computer systems may also indicate risk.
(2) Prior audit findings would indicate higher risk, particularly
when the situations identified in the audit findings could have a
significant impact on a Federal program or have not been corrected.
(3) Federal programs not recently audited as major programs may be
of higher risk than Federal programs recently audited as major programs
without audit findings.
(c) Oversight exercised by Federal agencies and pass-through
entities. (1) Oversight exercised by Federal agencies or pass-through
entities could indicate risk. For example, recent monitoring or other
reviews performed by an oversight entity which disclosed no significant
problems would indicate lower risk. However, monitoring which disclosed
significant problems would indicate higher risk.
(2) Federal agencies, with the concurrence of OMB, may identify
Federal programs which are higher risk. OMB plans to provide this
identification in the compliance supplements.
(d) Inherent risk of the Federal program. (1) The nature of a
Federal program may indicate risk. Consideration should be given to the
complexity of the program and the extent to which the Federal program
contracts for goods and services. For example, Federal programs that
disburse funds through third party contracts or have eligibility
criteria may be of higher risk. Federal programs primarily involving
staff payroll costs may have a high-risk for time and effort reporting,
but otherwise be at low-risk.
(2) The phase of a Federal program in its life cycle at the Federal
agency may indicate risk. For example, a new Federal program with new
or interim regulations may have higher risk than an established program
with time-tested regulations. Also, significant changes in Federal
programs, laws, regulations, or the provisions of contracts or grant
agreements may increase risk.
(3) The phase of a Federal program in its life cycle at the auditee
may indicate risk. For example, during the first and last years that an
auditee participates in a Federal program, the risk may be higher due
to start-up or closeout of program activities and staff.
(4) Type B programs with larger Federal awards expended would be of
higher risk than programs with substantially smaller Federal awards
expended.
Sec. ______.530 Criteria for a low-risk auditee.
An auditee which meets all of the following conditions for each of
the preceding two years shall qualify as a low-risk auditee and be
eligible for reduced audit coverage in accordance with
Sec. ______.520(f):
(a) Single audits were performed on an annual basis in accordance
with the provisions of this part. A non-Federal entity that has
biennial audits does not qualify as a low-risk auditee.
(b) The auditor's opinions on the financial statements and the
schedule of expenditures of Federal awards were unqualified. However,
the cognizant or oversight agency for audit may judge that an opinion
qualification does not affect the management of Federal awards and
provide a waiver.
(c) There were no deficiencies in internal control which were
identified as material weaknesses under the requirements of GAGAS.
However, the cognizant or oversight agency for audit may judge that any
identified material weaknesses do not affect the management of Federal
awards and provide a waiver.
(d) None of the Federal programs had audit findings from any of the
following in either of the preceding two years in which they were
classified as Type A programs:
(1) Internal control deficiencies which were identified as material
weaknesses;
(2) Noncompliance with the provisions of laws, regulations,
contracts, or grant agreements which have a material effect on the Type
A program; or
(3) Known or likely questioned costs that exceed five percent of
the total Federal awards expended for a Type A program during the year.
[FR Doc. 96-27819 Filed 11-4-96; 8:45 am]
BILLING CODE 3110-01-P
