[Federal Register Volume 61, Number 84 (Tuesday, April 30, 1996)]
[Notices]
[Pages 19134-19150]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10330]
[[Page 19133]]
_______________________________________________________________________
Part III
Office of Management and Budget
_______________________________________________________________________
Audits of Institutions of Higher Education and Other Non-Profit
Institutions; Notice
Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 /
Notices
[[Page 19134]]
OFFICE OF MANAGEMENT AND BUDGET
Audits of Institutions of Higher Education and Other Non-Profit
Institutions
AGENCY: Office of Management and Budget.
ACTION: Final Revision of OMB Circular A-133, ``Audits of Institutions
of Higher Education and Other Non-Profit Institutions.''
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SUMMARY: This revision of Office of Management and Budget (OMB)
Circular A-133 establishes a uniform system of auditing for
institutions of higher education and other non-profit organizations.
One of the more significant revisions is that the threshold for when an
entity is required to have an audit is raised from $25,000 to $300,000.
This will significantly reduce audit costs for many small non-profit
organizations. Other significant changes are: additional guidance for
program-specific audits (Sec. ______.235), audit findings
(Sec. ______.510), and audit findings follow-up (Sec. ______.315); a
report submission due date which is shortened from 13 to 9 months and a
report submission process that includes a certification form and
streamlined filing requirements (Sec. ______.320); and, a new risk-
based approach for major program determination (Sec. ______.520).
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
ending on or after June 30, 1997. The standards set forth in this
Circular that Federal agencies are to apply to non-profit organizations
shall be adopted by Federal agencies in codified regulations not later
than November 30, 1996, so that they will apply to audits of fiscal
years ending on or after June 30, 1997, with the exception that
Sec. ______.305(b) of the Attachment applies to audits of fiscal years
ending on or after June 30, 1999.
ADDRESSES: A copy of the Circular may be obtained from the OMB fax
information line, 202-395-9068, document number 1133; OMB home page on
the internet which is currently located at http://www.whitehouse.gov/
WH/EOP/omb; or by writing or calling the Office of Administration,
Publications Office, room 2200, New Executive Office Building,
Washington, DC 20503, telephone (202) 395-7332.
FOR FURTHER INFORMATION CONTACT: Recipients should contact their
cognizant or oversight agency for audit, or Federal awarding agency, as
may be appropriate in the circumstances. Subrecipients should contact
their pass-through entity. Federal agencies should contact Sheila O.
Conley, Office of Management and Budget, Office of Federal Financial
Management, Financial Standards and Reporting Branch, telephone (202)
395-3993, fax (202) 395-4915.
SUPPLEMENTARY INFORMATION:
A. Background
The Office of Management and Budget (OMB) received approximately
150 letters providing approximately 1600 individual comments in
response to the Federal Register proposal of March 17, 1995 (60 FR
14594-14606). Letters came from Federal agencies (including Offices of
Inspectors General), State governments (including State auditors),
certified public accountants (CPAs), internal auditors, non-profit
organizations (including colleges and universities), professional
organizations, and others. All comments were considered in developing
this final revision.
Section B presents a summary of the major public comments grouped
by subject and a response to each comment. Other changes were made to
increase clarity and readability.
B. Public Comments and Responses
Common Rule Format
Comment: Several commenters suggested that the implementation of
the Circular be done using the ``common rule'' format so that all
affected Federal agencies could codify the provisions of the Circular
without change and prior to the effective date.
Response: Circular A-133 was reformatted to facilitate codification
by Federal agencies.
Uniform Audit Requirements
Comment: In the preamble of the proposed revision, OMB stated a
plan to seek modifications to the Single Audit Act of 1984 (31 U.S.C.
Chapter 75) and OMB Circular No. A-128, ``Audits of State and Local
Governments,'' such that one law and one circular could cover both
State and local governments and non-profit organizations. Commenters
strongly supported this change.
Responses: Even though Circular A-133 does not apply to State and
local governments, provisions were made to easily adapt Circular A-133
to include State and local governments if the Single Audit Act is
amended. For example, changes were made to the risk-based approach to
determine major programs for circumstances that most likely will only
occur in large Statewide single audits.
Increased Threshold for Audit
Comment: Commenters overwhelmingly supported raising the threshold
for audit, with the majority supporting the proposed threshold of
$300,000. A common statement in favor of this change was that it would
reduce audit costs, while still providing adequate audit coverage of
Federal programs.
Response: This final revision raises the audit threshold to
$300,000. Pass-through entities should make appropriate changes in
their agreements with subrecipients to reflect that Circular A-133 no
longer requires an audit for entities expending less than the $300,000
threshold. Also, pass-through entities will need to consider this
change, review their overall subrecipient monitoring process, and
decide what, if any, additional monitoring procedures may be necessary
to ensure subrecipient compliance for the subrecipients not required to
have a Circular A-133 audit. It is expected these monitoring procedures
could be more targeted and less costly than the full Circular A-133
audit.
Special Provision for Certain Small Subrecipients
Comment: Most commenters opposed the provision to allow Federal
agencies to require pass-through entities to arrange for audits of
subrecipients receiving less than the $300,000. A reason often cited
was that this provision defeats the purpose of raising the audit
threshold.
Response: This provision was included in the proposed revision to
provide audit coverage of Federal programs, such as the Job Training
Partnership Act (JTPA) programs, which are structured such that
substantial service delivery and expenditure of Federal funds are made
by subrecipients that expend less than $300,000 in Federal awards.
The provision has not been added to the Circular. However, it is
important to note that both the pass-through entity and the pass-
through entity's auditor have responsibilities for these funds even
when an audit of the subrecipient is not required. The pass-through
entity is still responsible to monitor the activities of the
subrecipient and ensure that Federal awards are only used for
authorized purposes. Additional monitoring procedures may be necessary
when a material amount of program funds is passed through to
subrecipients which are not audited.
[[Page 19135]]
The pass-through entity's auditor is responsible for performing
sufficient tests to support an opinion on compliance for each major
program. When subrecipients which are not audited expend a material
amount of funds from a major program, the auditor will need to consider
obtaining compliance assurances by reviewing the pass-through entity's
records and monitoring procedures, performing additional procedures to
determine compliance, such as testing the subrecipient's records, or a
combination of procedures. In addition, the pass-through entity's
auditor is responsible for determining whether the pass-through
entity's system for monitoring subrecipients is adequate and whether
subrecipient noncompliance necessitates adjustment of the pass-through
entity's records.
Consideration of Triennial Audit
Comment: In the preamble of the proposed revision, OMB stated it
was considering a triennial audit approach and requested comments on
its feasibility. Commenters from non-profit organizations supported a
triennial audit approach. Reasons cited were relief of audit burden and
a reduction in the number of audits required to be reviewed as part of
subrecipient monitoring.
However, Federal agency commenters were opposed to a triennial
audit approach and cited problems, such as it would alert the non-
profit organization in advance of which years should be audited,
significantly complicate the risk-based approach for selecting major
programs (e.g., under the risk-based approach a large program is only
required to be audited once every three years and with triennial audits
this could be once in every nine years), and result in only limited
cost savings (e.g., under the triennial audit approach a financial
statement audit and testing of internal control would still be
required).
Response: The triennial audit approach was not added to the
Circular. However, the Circular does provide significant audit relief
to non-profit organizations by raising the audit threshold from $25,000
to $300,000, allowing a risk-based approach to selecting major
programs, and streamlining the report distribution process by use of a
certification form. The risk-based approach will permit low-risk non-
profit organizations to reduce the percentage of Federal expenditures
required to be covered as major programs. The certification form, as
discussed later in this supplementary information, will simplify the
pass-through entity's review of subrecipient reports which have no
audit findings.
Risk-Based Approach To Determine Major Programs
Comment: Except for comments from CPAs, the commenters supported
the risk-based approach as presented. CPA commenters opposed the risk-
based approach and cited as reasons that it was inappropriate for the
auditor to determine major programs, there could be problems in
submitting a proposal to conduct a Circular A-133 audit when it is not
known in advance which programs will be audited, and there would
possibly be cost increases for the auditor to perform risk assessments.
While State auditor commenters supported the risk-based approach, those
from the larger States cited implementation problems in performing risk
assessments on a large number of Type B programs.
Response: The auditor is best suited to determine major programs
for reasons, such as independence and the understanding of risk to
Federal programs obtained as part of the audit. Therefore, the proposal
has been adopted, with no changes made to the requirement for the
auditor to determine major programs. However, in recognition of the
concerns expressed relative to larger audits, Appendix 1
(Sec. ______.520), Major Program Determination, was modified as
follows:
Step 1 (Sec. ______.520(b)(1)) was modified to provide a sliding
scale in determining Type A programs. This change only affects auditees
with Federal expenditures over $100 million.
Step 2 (Sec. ______.520(c)(2)) was modified to permit a Federal
agency, with OMB approval, to designate that a low-risk Type A program
could not be considered low-risk. This designation could be for
reasons, such as to help the Federal agency comply with Section 405 of
the Government Management Reform Act (P.L. 103-356).
Step 3 (Sec. ______.520(d)(2)) was modified to add a sliding scale
which defines relatively small Federal programs in terms of a
percentage of total Federal expenditures. This benefits very large
audits by reducing the number of Type B programs for which the auditor
must perform risk assessments. The decrease in the total amount of
Federal expenditures subject to audit will be relatively small because
of the wide difference in size between the largest and smallest Federal
programs.
Step 4 (Sec. ______.520(e)) was modified to only require one-half
of the high-risk Type B programs to be audited as major and provide a
limit that the number of these Type B programs audited as major need
not exceed the number of low-risk Type A programs.
However, should the auditor choose not to exclude a low-risk Type A
program, this would not affect the limit. The limit is on the number of
low-risk Type A programs, not the number excluded. Also, even though
larger dollar Type A programs may be excluded as low-risk, they may
still need to be audited to meet the 50 percent rule.
To mitigate any implementation problems with the risk-based
approach, the provision for deviation from use of risk criteria
provided in Sec. ______.520(i) applies to the first year this Circular
is applicable and permits auditors to defer implementation of the risk-
based approach for one year.
Implementation of the Risk-Based Approach To Determining Major Programs
Comment: A commenter inquired whether a Type A program may be
considered low-risk when it was audited as a major program in
accordance with the prior Circular A-133, issued March 8, 1990, and
otherwise met the criteria in Appendix 1, step 2 to be classified as
low-risk.
Response: The reference in Appendix 1, step 2
(Sec. ______.520(c)(1)) to the two most recent audit periods means
audit periods in which the audit was performed either under the prior
Circular A-133 or this revision. Therefore, a Type A program which
meets the Appendix 1, step 2 (Sec. ______.520(c)(1)) criteria for low-
risk based on the results of an audit performed in accordance with the
prior Circular A-133 may be considered low-risk. Similarly, the
reference in the criteria for a low-risk auditee in Appendix 3
(Sec. ______.530) to the preceding two years applies to audits
performed either under the prior Circular A-133 or this revision.
Request for a Program To Be Audited as a Major Program
Comment: Several commenters expressed concern that the provision
for a Federal agency or pass-through entity to request a program to be
audited as a major program would significantly increase the work
required for single audits and requested that it be removed. A few
commenters also expressed concern that these programs would not count
towards meeting the 50 percent rule.
Response: This provision has been adopted; however, a change was
made to allow programs audited as major under this process to count
towards
[[Page 19136]]
meeting the 50 percent rule. This process does not significantly change
the authority Federal agencies and pass-through entities now have to
perform additional audits as long as they pay for them. The addition is
that these audits may be incorporated within the framework of the
single audit and thereby eliminate duplicative audit planning and
reporting. Since the Federal agency or pass-through entity must still
pay the full incremental audit cost, OMB does not expect a significant
increase in major programs from this provision.
It should be pointed out that any Type A program selected to be
audited under this provision must be low-risk. If it were not low-risk,
it would have been audited as a major program under the risk-based
approach. Therefore, this provision will not reduce the number of high-
risk Type B programs audited as major.
Required Level of Internal Control Testing
Comment: All CPA commenters and over half of the State auditor
commenters opposed the proposed requirement for the auditor to plan the
testing of internal control over Federal programs to achieve a low
assessed level of control risk. Concerns included that it increases the
amount of audit work, limits auditor's judgment, and is arbitrary. By
contrast, one commenter stated support for the proposed requirement
because it would force the auditor to look at internal control over
Federal programs and to note reportable conditions when internal
control is not adequate.
Response: The proposal has been adopted, with no changes. Some
commenters appeared to understand this provision to mean that, when
control exceptions are found, the auditor is required to continue
testing until a low level of risk is achieved. This is not the case.
The auditor is not required to expand testing to try to achieve a low
level of risk. The auditor is only required to plan the audit for a low
level of assessed risk and report the results of this testing.
It has been a longstanding Federal policy that the recipient of
Federal funds is required to establish internal control systems to
provide reasonable assurance that it is managing Federal funds in
compliance with applicable laws and regulations. Also, the Single Audit
Act (31 U.S.C. Chapter 75) requires the auditor to test internal
control over Federal funds subject to that Act. Therefore, it is
reasonable to require the auditor to plan the audit consistent with the
level of internal control the recipient of Federal funds is required to
maintain. Also, the Circular permits the auditor to not test internal
controls which are inadequate and instead disclose a reportable
condition or material weakness and perform additional tests of
compliance as necessary in the auditor's judgment.
Schedule of Expenditures of Federal Awards
Comment: Most commenters supported the level of detail included in
the proposal for the schedule of expenditures of Federal awards. One
commenter suggested that it would be beneficial for pass-through
entities to identify in the schedule the amount passed-through to
subrecipients. This disclosure would tell program managers the amount
of program expenditures that was subject to audit at the pass-through
entity level.
Response: A provision has been added to encourage, but not require,
pass-through entities to disclose 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. In most cases this
information should be readily available and would improve the
usefulness of the schedule.
Attestation on Internal Control and Compliance
Comment: The preamble to the proposed revision requested comments
as to whether a requirement should be added for the audits to include a
management assertion and auditor attestation for internal control or
compliance. The majority of commenters were opposed to this change
because it would impose additional requirements on entity management
and increase audit cost.
Response: In light of the concerns raised, this proposed revision
has not been added to the Circular.
Criteria for Reporting Questioned Costs
Comment: Commenters' views on the proposed $10,000 threshold for
reporting known or likely questioned costs varied from describing it as
too high, too low, or just right. Commenters expressed concern that the
concept of likely questioned costs needed further clarification.
Response: OMB believes that the $10,000 threshold for reporting
questioned costs provides the appropriate balance between reporting all
questioned costs and only reporting large questioned costs. Also, audit
findings which do not result in questioned costs but are material to
the types of compliance requirements or an audit objective in the
compliance supplements will still be reported as reportable conditions
under Sec. ______.510(a)(1) or material noncompliance under
Sec. ______.510(a)(2).
Generally accepted auditing standards require the auditor to
project the amount of known questioned costs identified in the sample
to the items in the major program and to consider the best estimate of
total questioned costs (both known and likely) in determining an
opinion on compliance. The Circular does not require the auditor to
report an exact amount or statistical projection of likely questioned
costs, but rather to include an audit finding when the auditor's
extrapolation of these likely questioned costs is greater than $10,000.
Since the requirement for the auditor to consider likely questioned
costs is not new, and since likely questioned costs which are greater
than $10,000 may be significant to a Federal program, OMB believes they
should be included in audit findings. In reporting likely questioned
costs, it is important that the auditor follows the requirements of
Sec. ______.510(b) and provides appropriate information for judging the
prevalence and consequences of the audit finding.
Requirement To Follow Up on Prior Audit Findings
Comment: One commenter expressed concern that the requirement for
the summary schedule of prior audit findings to include audit findings
from before the prior year may result in many old audit findings being
reported year after year.
Response: As a practical matter, unless an audit finding is
repeated in a subsequent year, there is limited value in continuing to
follow up on an audit finding when the Federal agency or pass-through
entity chooses to take no action. Therefore, a provision has been added
stating that a valid reason for considering an audit finding as not
warranting further action is that: (a) two years have passed since the
audit report was filed with the central clearinghouse designated by
OMB, (b) the Federal agency or pass-through entity is not currently
following up on the audit finding, and (c) a management decision was
not issued.
Also, for the first year the entity is audited under this Circular,
the prior year report may not have included the equivalent of a summary
schedule of prior audit findings. In these cases, the auditee may
exercise judgment and only include, to the extent practical, audit
findings before the prior year.
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Corrective Action Plan
Comment: Some college and university commenters expressed concern
that the requirement to list the name of the contact person responsible
for corrective action precluded a non-profit organization from naming
one person responsible for all audit findings.
Response: The proposal has been adopted, with no changes. Some
commenters appeared to misunderstand this provision. It is important
that a non-profit organization name a contact person or persons to be
responsible for corrective action. However, contrary to the commenters'
understanding, the non-profit organization has discretion to determine
whether one person should be responsible for all or a group of audit
findings or whether a separate person should be responsible for each
audit finding.
Pass-Through Entity's Responsibility for Subrecipient Audit
Comment: A few commenters expressed concern that, unless the pass-
through entity gave the subrecipient $300,000, it would be difficult to
determine whether the subrecipient was required to have an audit under
the Circular. Specifically, the commenters asked for guidance on how
the pass-through entity could determine if the subrecipient received
other Federal awards which cumulatively added up to the $300,000
threshold for audit.
Response: This provision has been adopted, with no changes. There
was no intention that this provision require the passthrough entity to
perform extensive verification procedures to determine the total
Federal expenditures of a subrecipient. OMB expects that, in many
cases, the pass-through entity will have knowledge of the subrecipient
sufficient to estimate the subrecipient's total Federal expenditures.
Another technique would be for the pass-through entity to clearly
explain the audit requirements to the subrecipient and then ask the
subrecipient the amount of its total Federal expenditures.
Audit Cognizance
Comment: Some college and university commenters expressed concern
that the cognizant agency determination was not consistent with the
proposed revision to OMB Circular A-21, ``Cost Principles for
Educational Institutions'' (60 FR 7105; February 6, 1995), and could
result in an entity having one cognizant agency for audit purposes and
another for indirect cost rate negotiation.
Response: The responsibilities for audit cognizance and indirect
cost negotiation are different and, therefore, the same Federal agency
does not need to be cognizant for both. The name for the cognizant
agency has been changed to the cognizant agency for audit to clearly
distinguish it from the cognizant agency for indirect cost rate
negotiation.
Provision for Small and Minority Audit Firms
Comment: One commenter expressed concern that the provision for
small and minority audit firms was proposed for deletion.
Response: As explained in the preamble to the proposed revision,
this provision was proposed to be deleted because the requirements
related to small and minority audit firms are more fully covered in
Sec. ______.44(b)(4) of OMB Circular A-110, ``Uniform Requirements for
Grants and Agreements With Institutions of Higher Education, Hospitals
and Other Non-Profit Organizations'' (58 FR 62992; November 29, 1993).
There was no intention to change or diminish the requirements for using
small and minority audit firms. To ensure that these requirements
continue to receive consideration, a provision has been added to the
auditor selection paragraph that, whenever possible in procuring audit
services, non-profit organizations shall make positive efforts to
utilize small businesses, minority-owned firms, and women's business
enterprises, as stated in OMB Circular A-110.
Restriction on Auditor Also Preparing Indirect Cost Proposal
Comment: The preamble to the proposed revision requested comments
on whether the auditor should also be permitted to prepare the indirect
cost proposal (including similar documents, such as the cost allocation
plan, or the disclosure statement required by OMB Circular A-21). All
Federal agency commenters and most State auditor commenters cited at
least an appearance of lack of independence when the same auditor both
performed the audit and prepared the indirect cost proposal. One
Federal agency commenter stated, ``In preparing the indirect cost
proposal, the auditor is an advocate for the client before the Federal
Government. We believe it stretches the bounds of standards for the
auditor to be considered independent to audit this same indirect cost
proposal for the purpose of providing assurances to the Federal
Government.'' In contrast, CPAs and non-profit organizations did not
see an independence problem and stated there were significant
efficiency advantages for the same firm to both perform the audit and
prepare the indirect cost proposal.
Response: A provision (Sec. ______.305(b)) has been added to
preclude the same auditor from preparing the indirect cost proposal or
cost allocation plan when indirect costs exceeded $1 million in the
prior year. This threshold was chosen to limit this restriction to a
relatively small number of entities, while still protecting the Federal
interest. The prior year was chosen because non-profit organizations
often engage the auditor before the end of the year and at this time it
may be unknown whether the current year's indirect costs will exceed
the $1 million threshold. Based on available data, OMB estimates that
entities with indirect costs exceeding $1 million cumulatively receive
approximately 90 percent of the total indirect costs charged by non-
profit organizations.
This restriction applies to the base year from which financial data
is used to compute the rates even though the audit of the base year
financial statements is often completed before the indirect cost
proposal or cost allocation plan is prepared. The base year was
included to enhance the appearance of independence to the Federal
agencies which rely upon the auditor's testing of information used in
both the calculation and application of indirect cost rates.
The disclosure statements required by OMB Circular A-21 have been
excluded from this restriction because the disclosure statement is new,
many of the statements will be submitted before the effective date of
this Circular A-133 revision, and the disclosure statements are
expected to have a long life. Under these circumstances, it does not
seem appropriate public policy to restrict auditors who prepared the
original disclosure statements from performing the audit for a long
period of time. Therefore, the disclosure statements required by OMB
Circular A-21 have been excluded from this restriction on auditor
selection. OMB will monitor these disclosure statements and may revisit
this issue again at a later date.
The implementation date for this provision is delayed two years
until audits of fiscal years ending on or after June 30, 1999, to
minimize any effect this provision could have on existing contracts for
audit services. For example, an auditor that prepared an indirect cost
proposal or cost allocation which is used as the basis for charging
indirect costs in the fiscal year ending June 30, 1999, is not
permitted to perform the 1999 audit.
[[Page 19138]]
Report Due Date
Comment: Most State auditor and college and university commenters
expressed opposition to shortening the due date for reports from 13 to
9 months. However, most State manager and non-profit organization
commenters supported the change. The view appeared to be that those
receiving and relying on the reports and those currently completing the
audit in 9 months liked the change. By contrast, it appears that those
who were not currently completing the audit in 9 months opposed the
change.
Response: This proposal has been adopted, with a change. The
provision retains the requirement in the Circular that, when the audit
is completed earlier than the due date, the reporting package must be
submitted within 30 days of audit report issuance.
Certification
Comment: Comments were mixed on the certification form. Most State
auditor and CPA commenters opposed the certification form, citing it as
an increased burden on them to prepare and duplicative of information
in the audit reports. Most college and university commenters supported
the use of the certification form as a method of reducing the volume of
paper in single audits.
On a related issue, some State auditor and CPA commenters cited a
possible logistical problem that the auditor would not be able to
complete the audit report until the certification form was prepared
(because the auditor must read the certification form and report as an
audit finding material inconsistencies with the audit) and the
certification form could not be prepared until the audit is completed.
Response: The requirements for the auditor to read the
certification form and report as an audit finding any material
inconsistencies has not been adopted. As a preventive control to ensure
proper distribution of audit reports, a requirement
(Sec. ______.500(f)) has been added for the auditor to identify to the
auditee those Federal awarding agencies and pass-through entities which
are required to receive a copy of the reporting package. Also, a
requirement (Sec. ______.505(b)) was added for the schedule of findings
and questioned costs prepared by the auditor to include a summary of
the auditor's results. This summary will facilitate preparation of the
certification form by the auditee.
Management Letter
Comment: Most commenters expressed concern that routinely including
management letters as part of a public filing of the auditor's reports
could reduce the effectiveness of management letters.
Response: OMB agrees that it is not necessary to routinely include
auditor's management letters as part of the report submission.
Therefore, this provision has not been adopted. However, because
management letters may contain information relevant to the needs of
Federal agencies and pass-through entities to monitor Federal awards, a
provision has been added that Federal agencies and pass-through
entities can request a copy of management letters.
Coordinated Audit Approach
Comment: A few commenters expressed concern that the term
coordinated audit approach was not used in the proposed revision and
whether the removal of this term precluded Federal auditors from
participating in audits required by this Circular.
Response: The proposed revision does not prohibit the participation
of Federal auditors in audits required by the Circular, a concept
referred to as the coordinated audit approach. This term was not
included in the proposed revision because the definition of auditor
clearly includes Federal audit organizations and further reference to
the term coordinated audit approach was not considered necessary. A
provision (Sec. ______.305(c)) has been added to clarify that Federal
auditors may perform all or part of the work required under the
Circular if they fully comply with the requirements of the Circular.
GOCOs and FFRDCs
Comment: A few Federal agency and non-profit organization
commenters expressed concern that the proposed revision did not
specifically address Federal Government owned, contractor operated
facilities (GOCOs) or Federally Funded Research and Development Centers
(FFRDCs).
Response: A provision has been added to the definition of the term
Federal award that contracts to operate GOCOs are excluded from the
requirements of this Circular. Also, paragraph Sec. ______.200(e) has
been added to allow management of an auditee that owns or operates a
FFRDC to elect to treat the FFRDC as a separate entity for purposes of
this Circular. If the FFRDC is treated as a separate entity, the
determination of cognizant agency for audit would be based upon this
separate entity.
Questions and Answers on OMB Circular A-133
Comment: In May 1992, the Standards Subcommittee of the President's
Council on Integrity and Efficiency (PCIE) issued PCIE Position
Statement No. 6, titled ``Questions and Answers on OMB Circular A-133''
(A-133 Q&A). A commenter inquired whether this document could be used
as guidance in performing audits under the revised Circular A-133.
Response: Since this revision makes significant changes in OMB
Circular A-133, the May 1992 A-133 Q&A should not be used as a primary
source of guidance for audits performed under this revision. However,
many items in the A-133 Q&A were incorporated in this revision and the
A-133 Q&A may be a useful historical reference of the single audit
process. If there are significant questions concerning the revised
Circular A-133, OMB will consider issuing a revised A-133 Q&A.
Compliance Supplements
Comment: Some CPA and State auditor commenters expressed concern
that Federal agencies should keep the compliance supplements current.
Response: OMB recognizes the need for updated compliance
supplements and is working with Federal agencies and the PCIE to
complete this task. OMB's current plans are to issue a revised
compliance supplement by the end of 1996.
Public Information Collection
The revision includes an information collection requirement for
reports from auditors concerning their audit findings to auditees
(Sec. ______.235(b)(4), Sec. ______.505, and Sec. ______.510) and
reports from auditees to the Federal Government concerning these report
(Sec. ______.235(c) and Sec. ______.320). OMB requested comments on the
proposed information collection described in the Circular in a April 1,
1996 Federal Register notice (61 FR 14338) in accordance with the
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35 et seq). The
proposed information collection requirement will not be effective until
another notice is published in the Federal Register. The subsequent
notice will provide the effective date and the OMB control number.
Alice M. Rivlin,
Director.
April 22, 1996.
Circular No. A-133, Revised
TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
[[Page 19139]]
SUBJECT: Audits of Institutions of Higher Education and Other Non-
Profit Institutions
1. Purpose. This Circular sets forth standards for obtaining
consistency and uniformity among Federal agencies for the audit of non-
profit organizations expending Federal awards.
2. Authority. Circular A-133 is issued under the authority of
sections 503 and 1111 of title 31, United States Code, and Executive
Orders 8248 and 11541.
3. Supersession. This Circular supersedes the prior Circular A-133,
issued March 8, 1990. 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-profit organizations, 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). Therefore,
whereas this Circular does not apply to grants, contracts, or other
agreements between the Federal Government and State or local
governments (which are covered by Circular A-128, ``Audits of State and
Local Governments''), this Circular does apply to awards that State and
local governments make to non-profit organizations covered by this
Circular. This Circular does not apply to public institutions of higher
education and hospitals which are audited under Office of Management
and Budget (OMB) Circular A-128.
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-profit organizations are set forth in the
Attachment to this Circular. Federal agencies making awards to non-
profit organizations, either directly or indirectly, shall adopt the
language in the Circular in codified regulations not later than
November 30, 1996, 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 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. Termination 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 ending on or after June 30, 1997.
The standards set forth in this Circular that Federal agencies are
to apply to non-profit organizations shall be adopted by Federal
agencies in codified regulations not later than November 30, 1996, so
that they will apply to audits of fiscal years ending on or after June
30, 1997, with the exception that Sec. ______.305(b) of the Attachment
applies to audits of fiscal years ending on or after June 30, 1999. In
the interim period, until the standards in this Circular are adopted
and become applicable, the audit provisions of Circular A-133, issued
March 8, 1990, shall continue in effect.
Alice M. Rivlin,
Director.
Attachment
PART____--AUDITS OF INSTITUTIONS OF HIGHER EDUCATION AND OTHER NON-
PROFIT INSTITUTIONS
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.
Authority: [Each Federal agency should insert its own rule
making authority using appropriate United States Code citations.]
Subpart A--General
Sec. ______.100 Purpose.
This part sets forth standards for obtaining consistency and
uniformity among Federal agencies for the audit of non-profit
organizations expending Federal awards.
Sec. ______.105 Definitions.
Auditee means any organization 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 Federal programs with different CFDA
numbers that are defined as a cluster of programs in the compliance
supplements because they are closely related programs and share common
compliance requirements. A cluster of programs shall be considered as
one program for determining major programs, as described in
Sec. ______.520, and whether a program-specific audit may be elected
under Sec. ______.200(c).
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
[[Page 19140]]
Audits of State and Local Governments or such documents as the Office
of Management and Budget (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-
reimbursement contracts. It includes Federal awards made directly by
Federal awarding agencies or indirectly by recipients of Federal awards
or subrecipients. 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 received or
administered to carry out a program. Such assistance may be in the form
of grants, cooperative agreements, donated surplus property, food
commodities, loans, loan guarantees, property, interest subsidies,
insurance, direct appropriations, and other assistance.
Federal program means:
(1) All Federal awards under the same CFDA number. 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. State
governments may combine funding from different Federal awards in
providing assistance to their subrecipients when the awards are closely
related programs and share common compliance requirements. In this
case, the State government may require the subrecipient to treat the
combined Federal awards as a single program.
(2) A category of Federal awards which is a group of awards in the
categories of:
(i) Research and development;
(ii) Student financial aid; or
(iii) Cluster of programs.
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).
Internal control has the meaning specified in generally accepted
auditing standards issued by the AICPA.
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-profit organization.
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-profit organization means: (1) any corporation, trust,
association, cooperative, or other organization which:
(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 both non-profit
institutions of higher education and hospitals, and public institutions
of higher education and hospitals that are not audited in accordance
with Circular A-128, ``Audits of State and Local Governments''
(Available from Office of Administration, Publications Office, room
2200, New Executive Office Building, Washington, DC 20503; telephone
(202) 395-7332).
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-profit organization or other entity
that provides a Federal award to a subrecipient.
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-profit organization 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-profit organization. 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 techniques
[[Page 19141]]
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.
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 the 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-profit organizations 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-profit organizations 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 expenditures are for Federal awards 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 expenditures are less than $300,000. Non-profit
organizations 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 a 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-profit organization 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-profit
organization 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 an
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
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-profit organization for
providing patient care services to Medicare eligible individuals are
not considered Federal awards expended under this part.
[[Page 19142]]
(i) Medicaid. Medicaid payments to a non-profit organization 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 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.
Audits required by this part shall be performed annually. However,
a Federal agency or pass-through entity may allow an auditee that
elects a program-specific audit under Sec. ______.200(c) to perform the
audit every two years. Two-year audits must cover both years.
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 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.
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
[[Page 19143]]
applicable OMB cost principles circulars, Federal Acquisition
Regulation (48 CFR part 31), or other applicable cost principles or
regulations.
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 the Federal
program's expenditures 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 is consistent with the requirements of
Sec. ______.505(a)(4) and includes a summary of the auditor's results
applicable to the audit of the Federal program and in a format
consistent with Sec. ______.505(b).
(c) Report submission for program-specific audits. (1) 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. Also, 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 central clearinghouse designated by OMB one copy of
the certification 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
certification 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 central clearinghouse designated by OMB to be retained as an
archival copy. Also, when the schedule of findings and questioned 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 central 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.
[[Page 19144]]
(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 central
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 Circular A-110,
``Uniform Requirements for Grants and Agreements with Institutions of
Higher Education, Hospitals and Other Non-Profit Organizations,'' or
the Federal Acquisition Regulation (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
OMB Circular A-110 or the Federal Acquisition Regulation (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 ending on or after June 30, 1999.
(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 expenditures 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 category of Federal
awards. However, when it is not practical to list each individual
Federal award for R&D, total expenditures 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 non-cash assistance expended, 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 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. 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),
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 central clearinghouse;
(ii) The Federal agency or pass-through entity is not currently
following up with the auditee on the audit finding; and
[[Page 19145]]
(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. Also, 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) Certification. The auditee shall complete a certification 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 central 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 accurately and completely 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
Information Accompanying Certificate of Audit
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) 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 category of awards 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, maintenance of 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:
----------------------------------------------------------------------
Auditor Telephone Number:
----------------------------------------------------------------------
(c) Reporting Package. The reporting package shall include the:
(1) Certification 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
central clearinghouse designated by OMB one copy of the reporting
package described in paragraph (c) of this section for:
(1) The central 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) Certification 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 passthrough 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 central
clearinghouse designated by OMB. Pass-through entities shall keep
subrecipients' submissions on file for three years from date of
receipt.
(h) Clearinghouse responsibilities. The central clearinghouse
designated by OMB shall distribute the reporting packages received in
accordance with
[[Page 19146]]
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
certifications and reporting packages.
(i) Clearinghouse address. The address of the central 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 central clearinghouse in such manner as
may be approved by OMB. With OMB approval, the central 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, when such reporting is not included
in the reporting package described in Sec. ______.320(c).
(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 costeffective 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
Sec. ______.105 (Oversight agency for audit). 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
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 non-profit 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 non-profit 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, and that
subrecipients subject to Circular A-128 have met the requirements of
Circular A-128.
(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.
[[Page 19147]]
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.
(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
achieve a low assessed level of control risk for major programs.
(2) Except as provided in paragraph (c)(3) of this section, the
auditor shall:
(i) Plan the testing of internal control over major programs to
achieve 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 over major programs 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 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 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 over the major program.
(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.
(2) The compliance testing shall include tests of transactions and
such other auditing procedures necessary to provide the auditor
sufficient evidence to support an opinion on compliance for each major
program.
(3) The principal compliance requirements of the largest Federal
programs are included in the compliance supplements.
(4) For Federal programs contained in the compliance supplements,
an audit of the compliance requirements contained in the compliance
supplements 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.
(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
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.
(a) Auditor's reports. 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:
(1) 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.
(2) A report on internal control related to the financial
statements and major programs. This report shall describe the scope of
testing of internal control and the results of the tests, and, where
applicable, refer to the separate
[[Page 19148]]
schedule of findings and questioned costs described in paragraph (a)(4)
of this section.
(3) 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, where applicable, refer to the
separate schedule of findings and questioned costs described in
paragraph (a)(4) of this section.
(4) A schedule of findings and questioned costs which includes a
summary of the auditor's results as described in paragraph (b) of this
section and all audit findings as defined in Sec. ______.510(a). Any
findings (e.g., internal control findings, compliance findings,
questioned costs, or fraud) which relate to the same issue should be
presented as a single finding. Where practical, audit findings should
be organized by Federal agency or pass-through entity.
(b) Summary of the auditor's results. The summary of the auditor's
results shall include:
(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) Where applicable, a statement that 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) Where applicable, a statement that reportable conditions in
internal control over major programs were disclosed by the audit and
whether any such conditions were material weaknesses, as described in
Sec. ______.510(a)(1);
(5) A statement as to whether the audit disclosed any material
noncompliance in major programs, as described in Sec. ______.510(a)(2);
(6) A statement as to whether the audit disclosed any questioned
costs, as described in Sec. ______.510(a)(3);
(7) Where applicable, a statement that the schedule of findings and
questioned costs contains instances of known fraud, as described in
Sec. ______.510(a)(5); and
(8) Where applicable, a statement that the audit follow-up
procedures disclosed that the summary schedule of prior audit findings
materially misrepresents the status of any prior audit finding, as
described in Sec. ______.510(a)(6).
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.
The auditor's determination of whether to report a deficiency in
internal control as a reportable condition is in relation to a type of
compliance requirement for a major program 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 which the auditor
concludes, based on evidence obtained, has occurred or is likely to
have occurred. 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 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. Known questioned
costs are those specifically identified by the auditor. In evaluating
the effect of questioned costs on the opinion on compliance for each
major program, 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. In reporting questioned costs, the auditor shall include
information to provide proper perspective for judging the prevalence
and consequences of the questioned costs.
(4) The circumstances concerning why the auditor's report on
compliance for major programs is other than an unqualified opinion,
unless such circumstances are otherwise reported as audit findings in
the schedule of findings and questioned costs.
(5) Known fraud affecting a Federal award, unless such fraud is
otherwise reported as an audit finding in the schedule of findings and
questioned costs. Fraud is a type of illegal act involving the
obtaining of something of value through willful misrepresentation. 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.
(6) 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.
[[Page 19149]]
(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 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 passthrough 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. (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 expenditures during the audit
period exceeding the larger of:
(i) $300,000 or three percent (.03) of total Federal expenditures
in the case of an auditee for which total Federal expenditures 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 expenditures in the case of an auditee for which total Federal
expenditures 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 expenditures in the case of an auditee for which total Federal
expenditures 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 insurance programs or loan and loan
guarantees (loans) should not result in the exclusion of other programs
as Type A programs. When a Federal program providing insurance or 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.
(c) Step 2. (1) 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, 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), fraud under
Sec. ______.510(a)(5), and audit follow-up for the summary schedule of
prior audit findings under Sec. ______.510(a)(6) do not preclude the
Type A program from being lowrisk. 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. (1) The auditor shall identify Type B programs which
are high-risk using professional judgment and the criteria in
Sec. ______.525. 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 50 percent 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
expenditures when the auditee has less than or equal to $100 million in
total Federal expenditures.
(ii) $300,000 or three-hundredths of one percent (.0003) of total
Federal expenditures when the auditee has more than $100 million in
total Federal expenditures.
(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) 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) 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; and
(3) Such additional programs as may be necessary to comply with the
50 percent 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) 50 percent rule. The auditor shall audit as major programs
Federal programs with expenditures that, in the aggregate, encompass at
least 50 percent of total Federal expenditures. 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 expenditures
that, in the aggregate, encompass at least 25 percent of total Federal
expenditures.
(g) Documentation of risk. The auditor shall document in the
working papers the risk analysis process used in determining major
programs.
(h) Auditor's judgment. When the major program determination was
performed and documented in accordance with this part, the auditor's
[[Page 19150]]
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 50 percent 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 passthrough 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 expenditures would be of higher
risk than programs with substantially smaller expenditures.
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) The audits were performed in accordance with the provisions of
this part.
(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 the
material weaknesses do not affect the management of Federal awards and
provide a waiver.
(d) None of the Type A programs, as defined in Sec. ______.520(b),
had audit findings from any of the following:
(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 expenditures for a Type A program during the year.
[FR Doc. 96-10330 Filed 4-29-96; 8:45 am]
BILLING CODE 3110-01-P
