[Federal Register Volume 64, Number 57 (Thursday, March 25, 1999)]
[Rules and Regulations]
[Pages 14538-14553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6862]
[[Page 14537]]
_______________________________________________________________________
Part III
Department of Labor
_______________________________________________________________________
Office of the Secretary
_______________________________________________________________________
29 CFR Parts 96 and 99
Audit Requirement: Grants, Contacts and Other Agreements and States,
Local Governments, and Non-Profit Organizations; Interim Final Rules
Federal Register / Vol. 64, No. 57 / Thursday, March 25, 1999 / Rules
and Regulations
[[Page 14538]]
DEPARTMENT OF LABOR
Office of the Secretary
29 CFR Parts 96 and 99
RIN 1291-AA26 and 1291-AA27
Audit Requirements: Grants, Contracts, and Other Agreements and
States, Local Governments, and Non-Profit Organizations
AGENCY: Office of the Secretary, Labor.
ACTION: Interim final rules; request for comment.
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SUMMARY: The Department of Labor hereby revises its regulation on
``Audit Requirements For Grants, Contracts, and Other Agreements,'' to
ensure consistency with previously published amendments to ``Grants and
Agreements with Institutions of Higher Education, Hospitals, and Other
Non-Profit Organizations, and with Commercial Organizations, Foreign
Governments, Organizations Under the Jurisdiction of Foreign
Governments and International Organizations'' and ``Uniform
Administrative Requirements for Grants, and Cooperative Agreements to
State and Local Governments.'' In addition, ``Audits of States, Local
Governments, and Non-Profit Organizations,'' is published as a new
regulation which codifies in (DOL) regulations the revised Office of
Management and Budget (OMB) Circular A-133 in its entirety.
DATES: This rule will be effective on March 25, 1999. Written or
electronic comments are invited on this Interim Final Rule. All written
or electronic comments submitted on or before May 24, 1999 will be
considered. Appropriate changes to the regulations will be made when
the Final Rule is published, which adopts this interim rule as final.
ADDRESSES: Send written comments to Al Stewart, Director, Office of the
Acquisition Advocate, U.S. Department of Labor, 200 Constitution
Avenue, N.W., Room S-1522, Washington, D.C. 20210. Send electronic
comments to: Stewart-Milton@dol.gov.
FOR FURTHER INFORMATION CONTACT: Al Stewart, Director, Office of the
Acquisition Advocate, telephone number (202) 693-4025, facsimile (202)
693-4019.
SUPPLEMENTARY INFORMATION: The Single Audit Act Amendments of 1996,
(Public Law 104-156, 110 Stat. 1396), and the June 24, 1997, revision
of OMB Circular A-133, ``Audits of States, Local Governments, and Non-
Profit Organizations'' (62 FR 35278, June 30, 1997), required agencies
to adopt in codified regulations the standards in the revised Circular
A-133 by August 29, 1997, so that they will apply to audits of fiscal
years beginning after June 30, 1996. The revised Circular A-133 co-
located audit requirements for States, local governments, and non-
profit organizations. As a consequence, OMB rescinded OMB Circular A-
128, ``Audits of State and Local Governments.'' On August 29, 1997, the
Department of Labor amended its grants common rules at 29 CFR 95 and 29
CFR 97 in accordance with OMB guidance. Amendments to 29 CFR 96 are
required to ensure continuity and ameliorate conflicts with provisions
of 29 CFR Parts 95 and 97.
EFFECTIVE DATE AND ABSENCE OF NOTICE AND COMMENT: The Office of the
Assistant Secretary for Administration and Management (OASAM) has
determined that pursuant to the Administrative Procedure Act, the
Single Audit Act Amendments of 1996, and the revised OMB Circular A-
133, which provide standards applicable to non-Federal entities, are
effective for audits of fiscal years beginning after June 30, 1996,
provides good cause for waiving the customary requirement to delay the
effective date of a final rule for 30 days following its publication.
Accordingly, the issuance of a proposed rule, which would delay the
effective date of a final rule for 30 days, would be contrary to the
public interest. This Interim Final Rule sets a comment period to
elicit any concerns raised by the Rule. OASAM has limited the comment
period to 60 days so that input is received in time for the Agency to
develop any revisions and promulgate a final rule to allow for the
expeditious incorporation of the grants common rules at CFR Parts 95
and 97 and the new regulation at CFR Part 99.
I. Regulatory Procedures
Executive Order 12866
Executive Order 12866 requires that a regulatory impact analysis be
prepared for ``major'' rules, which are defined in the Order as any
rule that has an annual effect on the national economy of $100 million
or more, or certain other specified effects. This modification will not
have an annual impact of $100 million or more or the other effects
listed in the Order. However, the interim final rule would result in
some savings to organizations administering grants or subgrants,
primarily due to the increase in the threshold (from $25,000 to
$300,000) that triggers an audit requirement. In addition, the due date
for submission of the audit report by auditors has been reduced from 13
to 9 months. For these reasons, the participating agencies have
determined that this interim final rule would not create a major rule
within the meaning of the Order.
Regulatory Flexibility Act of 1980
The Regulatory Flexibility Act (5 U.S.C. 605(b)) requires that, for
each rule with a ``significant economic impact on a substantial number
of small entities,'' an analysis must be prepared describing the rule's
impact on small entities and identifying any significant alternatives
to the rule that would minimize the economic impact on small entities.
This interim final rule will not have a significant economic impact on
a substantial number of small entities. The interim final rule does not
affect the amount of funds provided in the covered programs, but rather
increases the threshold for non-Federal entities subject to audit,
thereby reducing burden on some small entities. The Assistant Secretary
of the Office for Administration and Management has certified to this
effect to the Chief Counsel for the Advocacy of the Small Business
Administration.
Unfunded Mandates Act of 1995
The Unfunded Mandates Act of 1995 (Pub. L. 104-4) requires agencies
to prepare several analytic statements before proposing any rule that
may result in annual expenditures of $100 million of State, local, and
Indian tribal governments or the private sector. Since this interim
final rule will not result in expenditures of this magnitude, such
statements are not necessary.
Paperwork Reduction Act
This interim final rule will impose additional reporting or
recordkeeping requirements under the Paperwork Reduction Act of 1995
(44 U.S.C. Chapter 35) after OMB finalizes the new SF-SAC, ``Data
Collection Form for Reporting on Audits of States, Local Governments,
and Non-Profit Organizations.'' On June 30, 1997, OMB requested public
comments on the proposed SF-SAC (62 FR 35302).
Small Business Regulatory Enforcement Fairness Act of 1996
This rule is not a major rule as defined by section 804 of the
Small Business Regulatory Enforcement Fairness Act of 1996. This rule
will not result in an annual effect on the economy of $100,000,000 or
more; a major increase in costs or prices; or significant adverse
effects on competition, employment, investment, productivity,
innovation, or on the ability of the United States-based companies to
compete with foreign-based companies in domestic and export markets.
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II. Congressional Notification
Consistent with the Small Business Regulatory Enforcement Fairness
Act of 1996, the Department will submit to Congress a report regarding
the issuance of the final rule prior to the Effective Date set forth in
the outset of this document. The report will note the Office of
Management and Budget's determination that this rule does not
constitute a ``major rule'' under the Act. 5 U.S.C. 801, 805.
List of Subjects
29 CFR Part 96
Accounting, Audit requirements, Contract programs, Grant programs,
Reporting and recordkeeping.
29 CFR Part 99
Accounting, Audit requirements, Contract programs, Grant programs,
Reporting and recordkeeping requirements.
For the reasons delineated in the preamble, Subtitle A of Title 29
of the Code of Federal Regulations is amended by revising Part 96 and
by adding Part 99, as follows:
PART 96--AUDIT REQUIREMENTS FOR GRANTS, CONTRACTS, AND OTHER
AGREEMENTS
Sec.
96.0 Purpose and scope of part.
96.1 Terminology.
Subpart A--Audits of States, Local Governments, and Non-profit
Organizations
96.11 Purpose and scope of subpart.
96.12 Audits requirements.
Subpart B--[Reserved]
Subpart C--Audits of Entities Not Covered by Subpart A
96.31 Purpose and scope of subpart.
96.32 Audit requirement.
Subpart D--Access to Records, Audit Standards, and Relation of
Organization-wide Audits to Other Audit Requirements
96.41 Access to records.
96.42 Audit standards.
96.43 Relation of organization-wide audits to other audit
requirements.
Subpart E--Audit Resolution
96.51 Purpose and scope of subpart.
96.52 Pre-resolution phase activities.
96.53 Audit resolution generally.
96.54 Responsibility for subrecipient audits.
Subpart F--Appeals
96.61 Purpose and scope of subpart.
96.62 Contracts.
96.63 Federal financial assistance.
Authority: 31 U.S.C. 7500 et seq.; and OMB Circular No. A-133.
Sec. 96.0 Purpose and scope of part.
This part identifies the audit requirements for recipients and
subrecipients of Department of Labor (DOL) awards and contains DOL's
procedures for the resolution of audits. It applies to all grants and
contracts and other Federal awards provided by or on behalf of the DOL.
Sec. 96.1 Terminology.
As used in this part, the terms ``Federal award,'' ``Federal
financial assistance,'' ``recipient,'' and ``subrecipient'' have the
same meanings as the definitions in 29 CFR 99.105 of this title.
Subpart A--Audits of States, Local Governments, and Non-profit
Organizations
Sec. 96.11 Purpose and scope of subpart.
The regulations in this subpart and in 29 CFR part 99 implement
Office of Management and Budget (OMB) Circular A-133, ``Audits of
States, Local Governments, and Non-Profit Organizations,'' which was
issued pursuant to The Single Audit Act Amendments of 1996 (Act). The
Act builds upon earlier efforts to improve audits of Federal financial
assistance programs. This subpart establishes uniform audit
requirements and policy for recipients and subrecipients that receive
Federal financial assistance from DOL.
Sec. 96.12 Audit requirements.
(a) Organizations covered by this subpart are responsible for
arranging for independent audits that meet the requirements of this
section.
(b) The audit requirements contained in 29 CFR part 99 shall be
followed for audits of all fiscal years beginning after June 30, 1996.
(c) Except as provided in paragraph (d) of this section, the audit
requirements applicable to earlier fiscal years under regulations and
award conditions in force when the awards were made shall continue in
force.
(d) The Secretary or his/her designee may provide written notice to
recipients/subrecipients subject to paragraph (c) of this section
directing them to follow the requirements of 29 CFR 99.320, which
provides for submission of audit data collection forms and reporting
packages to a Federal clearinghouse designated by OMB.
Subpart B--[Reserved]
Subpart C--Audits of Entities Not Covered by Subpart A
Sec. 96.31 Purpose and scope of subpart.
This subpart prescribes the requirement for audits of recipients,
subrecipients, contractors, and subcontractors that receive funds from
the DOL and are not covered by subpart A.
Sec. 96.32 Audit requirement.
The Secretary of Labor is responsible for the survey, audit or
examination of recipients, subrecipients, contractors, and
subcontractors covered by this subpart. Such surveys, audits, or
examinations shall be conducted at the Secretary's discretion.
Subpart D--Access to Records, Audit Standards and Relation of
Organization-wide Audits to Other Audit Requirements
Sec. 96.41 Access to records.
The Secretary of Labor, the DOL Inspector General, the Comptroller
General of the United States, or any of their duly authorized
representatives (including certified public accountants under
contract), shall have access to any books, documents, papers, and
records (manual and automated) of the entity receiving funds from DOL
and its subrecipients/subcontractors for the purpose of making surveys,
audits, examinations, excerpts, and transcripts.
Sec. 96.42 Audit standards.
Surveys, audits, and examinations will conform to the Government
auditing standards, issued by the Comptroller General of the United
States, and guides issued by the Secretary. For purposes of meeting
audit requirements under subparts A and C, only the standards for
financial and compliance audits need apply.
Sec. 96.43 Relation of organization-wide audits to other audit
requirements.
To the extent that audits conducted in accordance with subpart A
provide DOL officials with the information needed to carry out their
responsibilities under Federal law or DOL regulations, the Secretary
shall rely upon and use the information. Additional audit efforts are
not precluded, but such efforts must build upon the organization-wide
audit and not duplicate it. The provisions of subpart A do not
authorize a covered entity, after having complied with those
requirements, to constrain, in any manner, the Secretary from carrying
out additional surveys, audits, or examinations as deemed necessary.
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Subpart E--Audit Resolution
Sec. 96.51 Purpose and scope of subpart.
This subpart prescribes standards for resolution of audit findings,
including, but not limited to, questioned costs and administrative
deficiencies, identified as a result of the audit of grant agreements,
contracts, and other agreements awarded by or on behalf of DOL. In
cases where these standards conflict with statutes or other DOL
regulations, the latter shall be controlling. The DOL Office of
Inspector General (OIG) is available to assist agencies in the audit
resolution process.
Sec. 96.52 Pre-resolution phase activities.
(a) Submission of reports. Recipients and subrecipients of DOL
funds that are audited in accordance with the requirements of subpart A
shall comply in all respects with the report submission requirements of
29 CFR part 99. Failure to submit a complete audit package will result
in the return of the submitted package by the Clearinghouse, which will
assign a delinquency classification until the completed package is
submitted.
(b) Quality control. The Office of Inspector General, in
conjunction with other Federal agencies, will implement an audit
quality program which may include random, planned, or directed reviews
of audits submitted in compliance with OMB Circular A-133. When audits
are found not to be performed in compliance with the requirements, the
OIG may share the findings with the auditor, the auditee, and the
funding agencies, and may work with the local licensing authorities to
achieve corrective action.
Sec. 96.53 Audit resolution generally.
The DOL official(s) responsible for audit resolution shall promptly
evaluate findings and recommendations reported by auditors and the
corrective action plan developed by the recipient to determine proper
actions in response to audit findings and recommendations. The process
of audit resolution includes at a minimum an initial determination, an
informal resolution period, and a final determination.
(a) Initial determination. After the conclusion of any comment
period for audits provided the recipient/contractor, the responsible
DOL official(s) shall make an initial determination on the allowability
of questioned costs or activities, administrative or systemic findings,
and the corrective actions outlined by the recipient. Such
determination shall be based on applicable statutes, regulations,
administrative directives, or terms and conditions of the grant/
contract award instrument.
(b) Informal resolution. The recipient/contractor shall have a
reasonable period of time (as determined by the DOL official(s)
responsible for audit resolution) from the date of issuance of the
initial determination to informally resolve those matters in which the
recipient/contractor disagrees with the decisions of the responsible
DOL official(s).
(c) Final determination. After the conclusion of the informal
resolution period, the responsible DOL official(s) shall issue a final
determination that:
(1) As appropriate, indicate that efforts to informally resolve
matters contained in the initial determination have either been
successful or unsuccessful;
(2) Lists those matters upon which the parties continue to
disagree;
(3) Lists any modifications to the factual findings and conclusions
set forth in the initial determination;
(4) Lists any sanctions and required corrective actions; and
(5) Sets forth any appeal rights.
(d) Time limit. Insofar as possible, the requirements of this
section should be met within 180 days of the date the final approved
audit report is received by the DOL official(s) responsible for audit
resolution.
Sec. 96.54 Responsibility for subrecipient audits.
Recipients of Federal assistance from DOL are responsible for
ensuring that subrecipient organizations who expend $300,000 or more in
a fiscal year are audited and that any audit findings are resolved in
accordance with this part. The recipient shall:
(a) Determine whether appropriate audit requirements outlined in
subpart A have been met;
(b) Determine whether the subrecipient spent Federal assistance
funds provided in accordance with applicable laws and regulations;
(c) Ensure that appropriate corrective action is taken within six
months after receipt of the audit report in instances of non-compliance
with Federal law and regulations;
(d) Consider whether subrecipient audits necessitate adjustment of
the recipient's own records; and
(e) Require that each subrecipient permit independent auditors to
have access to the records and financial statements necessary to comply
with this part.
Subpart F--Appeals
Sec. 96.61 Purpose and scope of subpart.
(a) The purpose of this subpart is to set forth procedures by which
recipients and contractors may appeal final determinations by the DOL
officials responsible for audit resolution as a result of audits.
(b) Subrecipients and subcontractors shall have only such appeal
rights as may exist in subgrants or subcontracts with the respective
recipients or contractors.
Sec. 96.62 Contracts.
(a) For the purpose of this subpart, the term ``contract'' includes
all agreements described in sec. 602(a) of the Contract Disputes Act
(Applicability of Law--Executive agency contracts) (41 U.S.C. 602(a)).
(b) Upon a contractor's receipt of the DOL contracting officer's
final determination as a result of an audit, the contractor may appeal
the final determination to the DOL Board of Contract Appeals, pursuant
to 41 CFR part 29-60 and 48 CFR part 2933 or pursue such other remedies
as may be available under the Contract Disputes Act.
Sec. 96.63 Federal financial assistance.
The DOL grantor agencies shall determine which of the two appeal
options set forth in paragraphs (a) and (b) of this section the
recipient may use to appeal the final determination of the grant
officer. All awards within the same Federal financial assistance
program shall follow the same appeal procedure.
(a) Appeal to the head of the grantor agency, or his/her designee,
for which the audit was conducted.
(1) Jurisdiction. (i) Request for hearing. Within 21 days of
receipt of the grant officer's final determination, the recipient may
transmit, by certified mail, return receipt requested, a request for
hearing to the head of the grantor agency, or his/her designee, as
noted in the final determination. A copy must also be sent to the grant
officer who signed the final determination.
(ii) Statement of issues. The request for a hearing shall be
accompanied by a copy of the final determination, if issued, and shall
specifically state those portions of the final determination upon which
review is requested. Those portions of the final determination not
specified for review shall be considered resolved and not subject to
further review.
(iii) Failure to request review. When no timely request for a
hearing is made, the final determination shall constitute final action
by the Secretary of Labor and shall not be subject to further review.
(2) Conduct of hearings. The grantor agency shall establish
procedures for the
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conduct of hearings by the head of the grantor agency, or his/her
designee.
(3) Decision of the head of the grantor agency, or his/her
designee. The head of the grantor agency, or his/her designee, should
render a written decision no later than 90 days after the closing of
the record. This decision constitutes final action of the Secretary.
(b) Appeal to the DOL Office of Administrative Law Judges.
(1) Jurisdiction. (i) Request for hearing. Within 21 days of
receipt of the grant officer's final determination, the recipient may
transmit by certified mail, return receipt requested, a request for
hearing to the Chief Administrative Law Judge, United States Department
of Labor, 800 K Street NW, Suite 400, Washington, DC 20001, with a copy
to the grant officer who signed the final determination. The Chief
Administrative Law Judge shall designate an administrative law judge to
hear the appeal.
(ii) Statement of issues. The request for a hearing shall be
accompanied by a copy of the final determination, if issued, and shall
specifically state those portions of the final determination upon which
review is requested. Those portions of the final determination not
specified for review shall be considered resolved and not subject to
further review.
(iii) Failure to request review. When no timely request for a
hearing is made, the final determination shall constitute final action
by the Secretary and shall not be subject to further review.
(2) Conduct of hearings. The DOL Rules of Practice and Procedure
for Administrative Hearings Before the Office of Administrative Law
Judges, set forth at 29 CFR part 18, shall govern the conduct of
hearings under paragraph (b) of this section.
(3) Decision of the administrative law judge. The administrative
law judge should render a written decision no later than 90 days after
the closing of the record.
(4) Filing exceptions to decision. The decision of the
administrative law judge shall constitute final action by the Secretary
of Labor, unless, within 21 days after receipt of the decision of the
administrative law judge, a party dissatisfied with the decision or any
part thereof has filed exceptions with the Secretary, specifically
identifying the procedure or finding of fact, law, or policy with which
exception is taken. Any exceptions not specifically urged shall be
deemed to have been waived. Thereafter, the decision of the
administrative law judge shall become the decision of the Secretary,
unless the Secretary, within 30 days of such filing, has notified the
parties that the case has been accepted for review.
(5) Review by the Secretary of Labor. Any case accepted for review
by the Secretary shall be decided within 180 days of such acceptance.
If not so decided, the decision of the administrative law judge shall
become the final decision of the Secretary.
PART 99--AUDITS OF STATES, LOCAL GOVERNMENTS, AND NON-PROFIT
ORGANIZATIONS
Subpart A--General
Sec.
99.100 Purpose.
99.105 Definitions.
Subpart B--Audits
99.200 Audit requirements.
99.205 Basis for determining Federal awards expended.
99.210 Subrecipient and vendor determinations.
99.215 Relation to other audit requirements.
99.220 Frequency of audits.
99.225 Sanctions.
99.230 Audit costs.
99.235 Program-specific audits.
Subpart C--Auditees
99.300 Auditee responsibilities.
99.305 Auditor selection.
99.310 Financial statements.
99.315 Audit findings follow-up.
99.320 Report submission.
Subpart D--Federal Agencies and Pass-through Entities
99.400 Responsibilities.
99.405 Management decision.
Subpart E--Auditors
99.500 Scope of audit.
99.505 Audit reporting.
99.510 Audit findings.
99.515 Audit working papers.
99.520 Major program determination.
99.525 Criteria for Federal program risk.
99.530 Criteria for a low-risk auditee.
Authority: Public Law 104-156, 110 Stat. 1396 (31 U.S.C. 7500 et
seq.), and OMB Circular A-133 revised June 24, 1997.
Subpart A--General
Sec. 99.100 Purpose.
This part sets forth standards for obtaining consistency and
uniformity among Federal agencies for the audit of non-Federal entities
expending Federal awards.
Sec. 99.105 Definitions.
Audit finding means deficiencies which the auditor is required by
Sec. 99.510(a) to report in the schedule of findings and questioned
costs.
Auditee means any non-Federal entity that expends Federal awards
which must be audited under this part.
Auditor means an auditor that is a public accountant or a Federal,
State, or local government audit organization, which meets the general
standards specified in generally accepted government auditing standards
(GAGAS). The term auditor does not include internal auditors of non-
profit organizations.
CFDA number means the number assigned to a Federal program in the
Catalog of Federal Domestic Assistance (CFDA).
Cluster of programs means a grouping of closely related programs
that share common compliance requirements. The types of clusters of
programs are research and development (R&D), student financial aid
(SFA), and other clusters. ``Other clusters'' are as defined by the
Office of Management and Budget (OMB) in the compliance supplement or
as designated by a State for Federal awards the State provides to its
subrecipients that meet the definition of a cluster of programs. When
designating an ``other cluster,'' a State shall identify the Federal
awards included in the cluster and advise the subrecipients of
compliance requirements applicable to the cluster, consistent with
Sec. 99.400(d)(1) and Sec. 99.400(d)(2), respectively. A cluster of
programs shall be considered as one program for determining major
programs, as described in Sec. 99.520, and, with the exception of R&D
as described in Sec. 99.200(c), whether a program-specific audit may be
elected.
Cognizant agency for audit means the Federal agency designated to
carry out the responsibilities described in Sec. 99.400(a).
Compliance supplement refers to the Circular A-133 Compliance
Supplement, included as Appendix B to Circular A-133, or such documents
as OMB or its designee may issue to replace it. This document is
available from the Government Printing Office, Superintendent of
Documents, Washington, DC 20402-9325.
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 that non-Federal entities receive directly from
Federal awarding agencies or indirectly from pass-through entities. It
does not include procurement contracts, under grants or contracts, used
to buy goods or services from vendors. Any audits of such vendors shall
be covered by the
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terms and conditions of the contract. Contracts to operate Federal
Government-owned, contractor-operated (GOCOs) facilities are excluded
from the requirements of this part.
Federal awarding agency means the Federal agency that provides an
award directly to the recipient.
Federal financial assistance means assistance that non-Federal
entities receive or administer in the form of grants, loans, loan
guarantees, property (including donated surplus property), cooperative
agreements, interest subsidies, insurance, food commodities, direct
appropriations, and other assistance, but does not include amounts
received as reimbursement for services rendered to individuals as
described in Sec. 99.205(h) and Sec. 99.205(i).
Federal program means: (1) All Federal awards to a non-Federal
entity assigned a single number in the CFDA. (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.)
(2) Notwithstanding paragraph (1) of this definition, a cluster of
programs. The types of clusters of programs are:
(i) Research and development (R&D);
(ii) Student financial aid (SFA); and
(iii) ``Other clusters'' as described in the definition of cluster
of programs in this section.
GAGAS means generally accepted government auditing standards issued
by the Comptroller General of the United States, which are applicable
to financial audits.
Generally accepted accounting principles has the meaning specified
in generally accepted auditing standards issued by the American
Institute of Certified Public Accountants (AICPA).
Indian tribe means any Indian tribe, band, nation, or other
organized group or community, including any Alaskan Native village or
regional or village corporation (as defined in, or established under,
the Alaskan Native Claims Settlement Act) that is recognized by the
United States as eligible for the special programs and services
provided by the United States to Indians because of their status as
Indians.
Internal control means a process, effected by an entity's
management and other personnel, designed to provide reasonable
assurance regarding the achievement of objectives in the following
categories:
(1) Effectiveness and efficiency of operations;
(2) Reliability of financial reporting; and
(3) Compliance with applicable laws and regulations.
Internal control pertaining to the compliance requirements for
Federal programs (Internal control over Federal programs) means a
process--effected by an entity's management and other personnel--
designed to provide reasonable assurance regarding the achievement of
the following objectives for Federal programs:
(1) Transactions are properly recorded and accounted for to:
(i) Permit the preparation of reliable financial statements and
Federal reports;
(ii) Maintain accountability over assets; and
(iii) Demonstrate compliance with laws, regulations, and other
compliance requirements;
(2) Transactions are executed in compliance with:
(i) Laws, regulations, and the provisions of contracts or grant
agreements that could have a direct and material effect on a Federal
program; and
(ii) Any other laws and regulations that are identified in the
compliance supplement; and
(3) Funds, property, and other assets are safeguarded against loss
from unauthorized use or disposition.
Loan means a Federal loan or loan guarantee received or
administered by a non-Federal entity.
Local government means any unit of local government within a State,
including a county, borough, municipality, city, town, township,
parish, local public authority, special district, school district,
intrastate district, council of governments, and any other
instrumentality of local government.
Major program means a Federal program determined by the auditor to
be a major program in accordance with Sec. 99.520 or a program
identified as a major program by a Federal agency or pass-through
entity in accordance with Sec. 99.215(c).
Management decision means the evaluation by the Federal awarding
agency or pass-through entity of the audit findings and corrective
action plan and the issuance of a written decision as to what
corrective action is necessary.
Non-Federal entity means a State, local government, or non-profit
organization.
Non-profit organization means:
(1) Any corporation, trust, association, cooperative, or other
organization that:
(i) Is operated primarily for scientific, educational, service,
charitable, or similar purposes in the public interest;
(ii) Is not organized primarily for profit; and
(iii) Uses its net proceeds to maintain, improve, or expand its
operations; and
(2) The term non-profit organization includes non-profit
institutions of higher education and hospitals.
OMB means the Executive Office of the President, Office of
Management and Budget.
Oversight agency for audit means the Federal awarding agency that
provides the predominant amount of direct funding to a recipient not
assigned a cognizant agency for audit. When there is no direct funding,
the Federal agency with the predominant indirect funding shall assume
the oversight responsibilities. The duties of the oversight agency for
audit are described in Sec. 99.400(b).
Pass-through entity means a non-Federal entity that provides a
Federal award to a subrecipient to carry out a Federal program.
Program-specific audit means an audit of one Federal program as
provided for in Sec. 99.200(c) and Sec. 99.235.
Questioned cost means a cost that is questioned by the auditor
because of an audit finding:
(1) Which resulted from a violation or possible violation of a
provision of a law, regulation, contract, grant, cooperative agreement,
or other agreement or document governing the use of Federal funds,
including funds used to match Federal funds;
(2) Where the costs, at the time of the audit, are not supported by
adequate documentation; or
(3) Where the costs incurred appear unreasonable and do not reflect
the actions a prudent person would take in the circumstances.
Recipient means a non-Federal entity that expends Federal awards
received directly from a Federal awarding agency to carry out a Federal
program.
Research and development (R&D) means all research activities, both
basic and applied, and all development activities that are performed by
a non-Federal entity. Research is defined as a systematic study
directed toward fuller scientific knowledge or understanding of the
subject studied. The term research also includes activities involving
the training of individuals in research techniques where such
activities utilize the same facilities as other research and
development activities and where such activities are not included in
the instruction function. Development is the systematic use of
knowledge and understanding gained from research directed toward the
production of useful materials, devices, systems, or methods, including
design and development of prototypes and processes.
Single audit means an audit which includes both the entity's
financial statements and the Federal awards as described in
Sec. 99.500.
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State means any State of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam,
American Samoa, the Commonwealth of the Northern Mariana Islands, and
the Trust Territory of the Pacific Islands, any instrumentality
thereof, any multi-State, regional, or interstate entity which has
governmental functions, and any Indian tribe as defined in this
section.
Student Financial Aid (SFA) includes those programs of general
student assistance, such as those authorized by Title IV of the Higher
Education Act of 1965, as amended, (20 U.S.C. 1070 et seq.), which is
administered by the U.S. Department of Education, and similar programs
provided by other Federal agencies. It does not include programs which
provide fellowships or similar Federal awards to students on a
competitive basis, or for specified studies or research.
Subrecipient means a non-Federal entity that expends Federal awards
received from a pass-through entity to carry out a Federal program, but
does not include an individual that is a beneficiary of such a program.
A subrecipient may also be a recipient of other Federal awards directly
from a Federal awarding agency. Guidance on distinguishing between a
subrecipient and a vendor is provided in Sec. 99.210.
Types of compliance requirements refers to the types of compliance
requirements listed in the compliance supplement. Examples include:
activities allowed or unallowed; allowable costs/cost principles; cash
management; eligibility; matching, level of effort, earmarking; and,
reporting.
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. 99.210.
Subpart B--Audits
Sec. 99.200 Audit requirements.
(a) Audit required. Non-Federal entities that expend $300,000 or
more in a year in Federal awards shall have a single or program-
specific audit conducted for that year in accordance with the
provisions of this part. Guidance on determining Federal awards
expended is provided in Sec. 99.205.
(b) Single audit. Non-Federal entities that expend $300,000 or more
in a year in Federal awards shall have a single audit conducted in
accordance with Sec. 99.500 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. 99.235.
A program-specific audit may not be elected for R&D unless all of the
Federal awards expended were received from the same Federal agency, or
the same Federal agency and the same pass-through entity, and that
Federal agency, or pass-through entity in the case of a subrecipient,
approves in advance a program-specific audit.
(d) Exemption when Federal awards expended are less than $300,000.
Non-Federal entities that expend less than $300,000 a year in Federal
awards are exempt from Federal audit requirements for that year, except
as noted in Sec. 99.215(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. 99.205 Basis for determining Federal awards expended.
(a) Determining Federal awards expended. The determination of when
an award is expended should be based on when the activity related to
the award occurs. Generally, the activity pertains to events that
require the non-Federal entity to comply with laws, regulations, and
the provisions of contracts or grant agreements, such as: expenditure/
expense transactions associated with grants, cost-reimbursement
contracts, cooperative agreements, and direct appropriations; the
disbursement of funds passed through to subrecipients; the use of loan
proceeds under loan and loan guarantee programs; the receipt of
property; the receipt of surplus property; the receipt or use of
program income; the distribution or consumption of food commodities;
the disbursement of amounts entitling the non-Federal entity to an
interest subsidy; and, the period when insurance is in force.
(b) Loan and loan guarantees (loans). Since the Federal Government
is at risk for loans until the debt is repaid, the following guidelines
shall be used to calculate the value of Federal awards expended under
loan programs, except as noted in paragraphs (c) and (d) of this
section:
(1) Value of new loans made or received during the fiscal year;
plus
(2) Balance of loans from previous years for which the Federal
Government imposes continuing compliance requirements; plus
(3) Any interest subsidy, cash, or administrative cost allowance
received.
(c) Loan and loan guarantees (loans) at institutions of higher
education. When loans are made to students of an institution of higher
education but the institution does not make the loans, then only the
value of loans made during the year shall be considered Federal awards
expended in that year. The balance of loans for previous years is not
included as Federal awards expended because the lender accounts for the
prior balances.
(d) Prior loan and loan guarantees (loans). Loans, the proceeds of
which were received and expended in prior-years, are not considered
Federal awards expended under this part when the laws, regulations, and
the provisions of contracts or grant agreements pertaining to such
loans impose no continuing compliance requirements other than to repay
the loans.
(e) Endowment funds. The cumulative balance of Federal awards for
endowment funds which are federally restricted are considered awards
expended in each year in which the funds are still restricted.
(f) Free rent. Free rent received by itself is not considered a
Federal award expended under this part. However, free rent received as
part of an award to carry out a Federal program shall be included in
determining Federal awards expended and subject to audit under this
part.
(g) Valuing non-cash assistance. Federal non-cash assistance, such
as free rent, food stamps, food commodities, donated property, or
donated surplus property, shall be valued at fair market value at the
time of receipt or the assessed value provided by the Federal agency.
(h) Medicare. Medicare payments to a non-Federal entity for
providing patient care services to Medicare eligible individuals are
not considered Federal awards expended under this part.
(i) Medicaid. Medicaid payments to a subrecipient for providing
patient care services to Medicaid eligible individuals are not
considered Federal awards expended under this part unless a State
requires the funds to be treated as Federal awards expended because
reimbursement is on a cost-reimbursement basis.
[[Page 14544]]
(j) Certain loans provided by the National Credit Union
Administration. For purposes of this part, loans made from the National
Credit Union Share Insurance Fund and the Central Liquidity Facility
that are funded by contributions from insured institutions are not
considered Federal awards expended.
Sec. 99.210 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. 99.215 Relation to other audit requirements.
(a) Audit under this part in lieu of other audits. An audit made in
accordance with this part shall be in lieu of any financial audit
required under individual Federal awards. To the extent this audit
meets a Federal agency's needs, it shall rely upon and use such audits.
The provisions of this part neither limit the authority of Federal
agencies, including their Inspectors General, or GAO to conduct or
arrange for additional audits (e.g., financial audits, performance
audits, evaluations, inspections, or reviews) nor authorize any auditee
to constrain Federal agencies from carrying out additional audits. Any
additional audits shall be planned and performed in such a way as to
build upon work performed by other auditors.
(b) Federal agency to pay for additional audits. A Federal agency
that conducts or contracts for additional audits shall, consistent with
other applicable laws and regulations, arrange for funding the full
cost of such additional audits.
(c) Request for a program to be audited as a major program. A
Federal agency may request an auditee to have a particular Federal
program audited as a major program in lieu of the Federal agency
conducting or arranging for the additional audits. To allow for
planning, such requests should be made at least 180 days prior to the
end of the fiscal year to be audited. The auditee, after consultation
with its auditor, should promptly respond to such request by informing
the Federal agency whether the program would otherwise be audited as a
major program using the risk-based audit approach described in
Sec. 99.520 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. 99.220 Frequency of audits.
Except for the provisions for biennial audits provided in
paragraphs (a) and (b) of this section, audits required by this part
shall be performed annually. Any biennial audit shall cover both years
within the biennial period.
(a) A State or local government that is required by constitution or
statute, in effect on January 1, 1987, to undergo its audits less
frequently than annually, is permitted to undergo its audits pursuant
to this part biennially. This requirement must still be in effect for
the biennial period under audit.
(b) Any non-profit organization that had biennial audits for all
biennial periods ending between July 1, 1992, and January 1, 1995, is
permitted to undergo its audits pursuant to this part biennially.
Sec. 99.225 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
[[Page 14545]]
(d) Terminating the Federal award.
Sec. 99.230 Audit costs.
(a) Allowable costs. Unless prohibited by law, the cost of audits
made in accordance with the provisions of this part are allowable
charges to Federal awards. The charges may be considered a direct cost
or an allocated indirect cost, as determined in accordance with the
provisions of applicable OMB cost principles circulars, the Federal
Acquisition Regulation (FAR)(48 CFR parts 30 and 31), or other
applicable cost principles or regulations.
(b) Unallowable costs. A non-Federal entity shall not charge the
following to a Federal award:
(1) The cost of any audit under the Single Audit Act Amendments of
1996 (31 U.S.C. 7501 et seq.) not conducted in accordance with this
part.
(2) The cost of auditing a non-Federal entity which has Federal
awards expended of less than $300,000 per year and is thereby exempted
under Sec. 99.200(d) from having an audit conducted under this part.
However, this does not prohibit a pass-through entity from charging
Federal awards for the cost of limited scope audits to monitor its
subrecipients in accordance with Sec. 99.400(d)(3), provided the
subrecipient does not have a single audit. For purposes of this part,
limited scope audits only include agreed-upon procedures engagements
conducted in accordance with either the AICPA's generally accepted
auditing standards or attestation standards, that are paid for and
arranged by a pass-through entity and address only one or more of the
following types of compliance requirements: activities allowed or
unallowed; allowable costs/cost principles; eligibility; matching;
level of effort; earmarking; and, reporting.
Sec. 99.235 Program-specific audits.
(a) Program-specific audit guide available. In many cases, a
program-specific audit guide will be available to provide specific
guidance to the auditor with respect to internal control, compliance
requirements, suggested audit procedures, and audit reporting
requirements. The auditor should contact the Office of Inspector
General of the Federal agency to determine whether such a guide is
available. When a current program-specific audit guide is available,
the auditor shall follow GAGAS and the guide when performing a program-
specific audit.
(b) Program-specific audit guide not available. (1) When a program-
specific audit guide is not available, the auditee and auditor shall
have basically the same responsibilities for the Federal program as
they would have for an audit of a major program in a single audit.
(2) The auditee shall prepare the financial statement(s) for the
Federal program that includes, at a minimum, a schedule of expenditures
of Federal awards for the program and notes that describe the
significant accounting policies used in preparing the schedule, a
summary schedule of prior audit findings consistent with the
requirements of Sec. 99.315(b), and a corrective action plan consistent
with the requirements of Sec. 99.315(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. 99.500(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. 99.500(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. 99.500(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 conformity with the stated accounting
policies;
(ii) A report on internal control related to the Federal program,
which shall describe the scope of testing of internal control and the
results of the tests;
(iii) A report on compliance which includes an opinion (or
disclaimer of opinion) as to whether the auditee complied with laws,
regulations, and the provisions of contracts or grant agreements which
could have a direct and material effect on the Federal program; and
(iv) A schedule of findings and questioned costs for the Federal
program that includes a summary of the auditor's results relative to
the Federal program in a format consistent with Sec. 99.505(d)(1), and
findings and questioned costs consistent with the requirements of
Sec. 99.505(d)(3).
(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 the earlier of 30 days after
receipt of the auditor's report(s), or nine months after the end of the
audit period, unless a longer period is agreed to in advance by the
Federal agency that provided the funding or a different period is
specified in a program-specific audit guide. (However, for fiscal years
beginning on or before June 30, 1998, the audit shall be completed and
the required reporting shall be submitted within the earlier of 30 days
after receipt of the auditor's report(s), or 13 months after the end of
the audit period, unless a different period is specified in a program-
specific audit guide.) Unless restricted by law or regulation, the
auditee shall make report copies available for public inspection.
(2) When a program-specific audit guide is available, the auditee
shall submit to the Federal clearinghouse designated by the OMB, the
data collection form prepared in accordance with Sec. 99.320(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
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. The data collection form prepared
in accordance with Sec. 99.320(b), as applicable to a program-specific
audit, and one copy of this reporting package shall be submitted to the
Federal clearinghouse designated by the 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 Federal clearinghouse
on
[[Page 14546]]
behalf of the Federal awarding agency, or directly to the pass-through
entity in the case of a subrecipient. Instead of submitting the
reporting package to the pass-through entity, when a subrecipient is
not required to submit a reporting package to the pass-through entity,
the subrecipient shall provide written notification to the pass-through
entity, consistent with the requirements of Sec. 99.320(e)(2). A
subrecipient may submit a copy of the reporting package to the pass-
through entity to comply with this notification requirement.
(d) Other sections of this part may apply. Program-specific audits
are subject to Sec. 99.100 through Sec. 99.215(b), Sec. 99.220 through
Sec. 99.230, Sec. 99.300 through Sec. 99.305, Sec. 99.315,
Sec. 99.320(f) through Sec. 99.320(j), Sec. 99.400 through Sec. 99.405,
Sec. 99.510 through Sec. 99.515, 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. 99.300 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. 99.310.
(e) Ensure that the audits required by this part are properly
performed and submitted when due. When extensions to the report
submission due date required by Sec. 99.320(a) are granted by the
cognizant or oversight agency for audit, promptly notify the Federal
clearinghouse designated by OMB and each pass-through entity providing
Federal awards of the extension.
(f) Follow up and take corrective action on audit findings,
including preparation of a summary schedule of prior audit findings and
a corrective action plan in accordance with Sec. 99.315(b) and
Sec. 99.315(c), respectively.
Sec. 99.305 Auditor selection.
(a) Auditor procurement. In procuring audit services, auditees
shall follow the procurement standards prescribed by the Grants
Management Common Rule (hereinafter referred to as the ``A-102 Common
Rule'') published March 11, 1988, and amended April 19, 1995; 29 CFR
part 97, Uniform Administrative Requirements for Grants and Cooperative
Agreements to State and Local Governments; Circular A-110, ``Uniform
Administrative Requirements for Grants and Agreements with Institutions
of Higher Education, Hospitals and Other Non-Profit Organizations;'' or
the FAR (48 CFR part 42), as applicable (OMB Circulars are available
from the Office of Administration, Publications Office, Room 2200, New
Executive Office Building, Washington, DC 20503). 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 the A-102 Common Rule, OMB Circular A-110,
or the FAR (48 CFR part 42), as applicable. In requesting proposals for
audit services, the objectives and scope of the audit should be made
clear. Factors to be considered in evaluating each proposal for audit
services include the responsiveness to the request for proposal,
relevant experience, availability of staff with professional
qualifications and technical abilities, the results of external quality
control reviews, and price.
(b) Restriction on auditor preparing indirect cost proposals. An
auditor who prepares the indirect cost proposal or cost allocation plan
may not also be selected to perform the audit required by this part
when the indirect costs recovered by the auditee during the prior year
exceeded $1 million. This restriction applies to the base year used in
the preparation of the indirect cost proposal or cost allocation plan
and any subsequent years in which the resulting indirect cost agreement
or cost allocation plan is used to recover costs. To minimize any
disruption in existing contracts for audit services, this paragraph
applies to audits of fiscal years beginning after June 30, 1998.
(c) Use of Federal auditors. Federal auditors may perform all or
part of the work required under this part if they comply fully with the
requirements of this part.
Sec. 99.310 Financial statements.
(a) Financial statements. The auditee shall prepare financial
statements that reflect its financial position, results of operations
or changes in net assets, 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. However, organization-wide financial
statements may also include departments, agencies, and other
organizational units that have separate audits in accordance with
Sec. 99.500(a) and prepare separate financial statements.
(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, the auditee may choose to provide information requested by
Federal awarding agencies and pass-through entities to make the
schedule easier to use. For example, when a Federal program has
multiple award years, the auditee may list the amount of Federal awards
expended for each award year separately. At a minimum, the schedule
shall:
(1) List individual Federal programs by Federal agency. For Federal
programs included in a cluster of programs, list individual Federal
programs within a cluster of programs. For R&D, total Federal awards
expended shall be shown either by individual award or 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.
(2) 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.
(3) Provide total Federal awards expended for each individual
Federal program and the CFDA number or other identifying number when
the CFDA information is not available.
(4) Include notes that describe the significant accounting policies
used in preparing the schedule.
(5) To the extent practical, pass-through entities should identify
in the schedule the total amount provided to subrecipients from each
Federal program.
(6) Include, in either the schedule or a note to the schedule, the
value of the Federal awards expended in the form of non-cash
assistance, the amount of insurance in effect during the year, and
loans or loan guarantees outstanding at year end. While not required,
it is preferable to present this information in the schedule.
[[Page 14547]]
Sec. 99.315 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. 99.510(c).
Since the summary schedule may include audit findings from multiple
years, it shall include the fiscal year in which the finding initially
occurred.
(b) Summary schedule of prior audit findings. The summary schedule
of prior audit findings shall report the status of all audit findings
included in the prior audit's schedule of findings and questioned costs
relative to Federal awards. The summary schedule shall also include
audit findings reported in the prior audit's summary schedule of prior
audit findings except audit findings listed as corrected in accordance
with paragraph (b)(1) of this section, or no longer valid or not
warranting further action in accordance with paragraph (b)(4) of this
section.
(1) When audit findings were fully corrected, the summary schedule
need only list the audit findings and state that corrective action was
taken.
(2) When audit findings were not corrected or were only partially
corrected, the summary schedule shall describe the planned corrective
action as well as any partial corrective action taken.
(3) When corrective action taken is significantly different from
corrective action previously reported in a corrective action plan or in
the Federal agency's or pass-through entity's management decision, the
summary schedule shall provide an explanation.
(4) When the auditee believes the audit findings are no longer
valid or do not warrant further action, the reasons for this position
shall be described in the summary schedule. A valid reason for
considering an audit finding as not warranting further action is that
all of the following have occurred:
(i) Two years have passed since the audit report in which the
finding occurred was submitted to the Federal clearinghouse;
(ii) The Federal agency or pass-through entity is not currently
following up with the auditee on the audit finding; and
(iii) A management decision was not issued.
(c) Corrective action plan. At the completion of the audit, the
auditee shall prepare a corrective action plan to address each audit
finding included in the current year auditor's reports. The corrective
action plan shall provide the name(s) of the contact person(s)
responsible for corrective action, the corrective action planned, and
the anticipated completion date. If the auditee does not agree with the
audit findings or believes corrective action is not required, then the
corrective action plan shall include an explanation and specific
reasons.
Sec. 99.320 Report submission.
(a) General. The audit shall be completed and the data collection
form described in paragraph (b) of this section and reporting package
described in paragraph (c) of this section shall be submitted within
the earlier of 30 days after receipt of the auditor's report(s), or
nine months after the end of the audit period, unless a longer period
is agreed to in advance by the cognizant or oversight agency for audit.
(However, for fiscal years beginning on or before June 30, 1998, the
audit shall be completed and the data collection form and reporting
package shall be submitted within the earlier of 30 days after receipt
of the auditor's report(s), or 13 months after the end of the audit
period.) Unless restricted by law or regulation, the auditee shall make
copies available for public inspection.
(b) Data collection. (1) The auditee shall submit a data collection
form which states whether the audit was completed in accordance with
this part and provides information about the auditee, its Federal
programs, and the results of the audit. The form shall be approved by
OMB, available from the Federal clearinghouse designated by OMB, and
include data elements similar to those presented in this paragraph. A
senior level representative of the auditee (e.g., State controller,
director of finance, chief executive officer, or chief financial
officer) shall sign a statement to be included as part of the form
certifying that: the auditee complied with the requirements of this
part, the form was prepared in accordance with this part (and the
instructions accompanying the form), and the information included in
the form, in its entirety, are accurate and complete.
(2) The data collection form shall include the following data
elements:
(i) The type of report the auditor issued on the financial
statements of the auditee (i.e., unqualified opinion, qualified
opinion, adverse opinion, or disclaimer of opinion).
(ii) Where applicable, a statement that reportable conditions in
internal control were disclosed by the audit of the financial
statements and whether any such conditions were material weaknesses.
(iii) A statement as to whether the audit disclosed any
noncompliance which is material to the financial statements of the
auditee.
(iv) Where applicable, a statement that reportable conditions in
internal control over major programs were disclosed by the audit and
whether any such conditions were material weaknesses.
(v) The type of report the auditor issued on compliance for major
programs (i.e., unqualified opinion, qualified opinion, adverse
opinion, or disclaimer of opinion).
(vi) A list of the Federal awarding agencies which will receive a
copy of the reporting package pursuant to Sec. 99.320(d)(2).
(vii) A yes or no statement as to whether the auditee qualified as
a low-risk auditee under Sec. 99.530.
(viii) The dollar threshold used to distinguish between Type A and
Type B programs as defined in Sec. 99.520(b).
(ix) The Catalog of Federal Domestic Assistance (CFDA) number for
each Federal program, as applicable.
(x) The name of each Federal program and identification of each
major program. Individual programs within a cluster of programs should
be listed in the same level of detail as they are listed in the
schedule of expenditures of Federal awards.
(xi) The amount of expenditures in the schedule of expenditures of
Federal awards associated with each Federal program.
(xii) For each Federal program, a yes or no statement as to whether
there are audit findings in each of the following types of compliance
requirements and the total amount of any questioned costs:
(A) Activities allowed or unallowed.
(B) Allowable costs/cost principles.
(C) Cash management.
(D) Davis-Bacon Act.
(E) Eligibility.
(F) Equipment and real property management.
(G) Matching, level of effort, earmarking.
(H) Period of availability of Federal funds.
(I) Procurement and suspension and debarment.
(J) Program income.
(K) Real property acquisition and relocation assistance.
(L) Reporting.
(M) Subrecipient monitoring.
(N) Special tests and provisions.
(xiii) Auditee Name, Employer Identification Number(s), Name and
Title of Certifying Official, Telephone Number, Signature, and Date.
[[Page 14548]]
(xiv) Auditor Name, Name and Title of Contact Person, Auditor
Address, Auditor Telephone Number, Signature, and Date.
(xv) Whether the auditee has either a cognizant or oversight agency
for audit.
(xvi) The name of the cognizant or oversight agency for audit
determined in accordance with Sec. 99.400(a) and Sec. 99.400(b),
respectively.
(3) Using the information included in the reporting package
described in paragraph (c) of this section, the auditor shall complete
the applicable sections of the form. The auditor shall sign a statement
to be included as part of the data collection form that indicates, at a
minimum, the source of the information included in the form, the
auditor's responsibility for the information, that the form is not a
substitute for the reporting package described in paragraph (c) of this
section, and that the content of the form is limited to the data
elements prescribed by OMB.
(c) Reporting package. The reporting package shall include the:
(1) Financial statements and schedule of expenditures of Federal
awards discussed in Sec. 99.310(a) and Sec. 99.310(b), respectively;
(2) Summary schedule of prior audit findings discussed in
Sec. 99.315(b);
(3) Auditor's report(s) discussed in Sec. 99.505; and
(4) Corrective action plan discussed in Sec. 99.315(c).
(d) Submission to clearinghouse. All auditees shall submit to the
Federal clearinghouse designated by OMB the data collection form
described in paragraph (b) of this section and one copy of the
reporting package described in paragraph (c) of this section for:
(1) The Federal clearinghouse to retain as an archival copy; and
(2) Each Federal awarding agency when the schedule of findings and
questioned costs disclosed audit findings relating to Federal awards
that the Federal awarding agency provided directly or the summary
schedule of prior audit findings reported the status of any audit
findings relating to Federal awards that the Federal awarding agency
provided directly.
(e) Additional submission by subrecipients. (1) In addition to the
requirements discussed in paragraph (d) of this section, auditees that
are also subrecipients shall submit to each pass-through entity one
copy of the reporting package described in paragraph (c) of this
section for each pass-through entity when the schedule of findings and
questioned costs disclosed audit findings relating to Federal awards
that the pass-through entity provided or the summary schedule of prior
audit findings reported the status of any audit findings relating to
Federal awards that the pass-through entity provided.
(2) Instead of submitting the reporting package to a pass-through
entity, when a subrecipient is not required to submit a reporting
package to a pass-through entity pursuant to paragraph (e)(1) of this
section, the subrecipient shall provide written notification to the
pass-through entity that: an audit of the subrecipient was conducted in
accordance with this part (including the period covered by the audit
and the name, amount, and CFDA number of the Federal award(s) provided
by the pass-through entity); the schedule of findings and questioned
costs disclosed no audit findings relating to the Federal award(s) that
the pass-through entity provided; and, the summary schedule of prior
audit findings did not report on the status of any audit findings
relating to the Federal award(s) that the pass-through entity provided.
A subrecipient may submit a copy of the reporting package described in
paragraph (c) of this section to a pass-through entity to comply with
this notification requirement.
(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 data collection form described in paragraph (b) of this section and
one copy of the reporting package described in paragraph (c) of this
section on file for three years from the date of submission to the
Federal clearinghouse designated by OMB. Pass-through entities shall
keep subrecipients' submissions on file for three years from date of
receipt.
(h) Clearinghouse responsibilities. The Federal clearinghouse
designated by OMB shall distribute the reporting packages received in
accordance with paragraph (d)(2) of this section and Sec. 99.235(c)(3)
to applicable Federal awarding agencies, maintain a data base of
completed audits, provide appropriate information to Federal agencies,
and follow up with known auditees which have not submitted the required
data collection forms and reporting packages.
(i) Clearinghouse address. The address of the Federal clearinghouse
currently designated by OMB is: Federal Audit Clearinghouse, Bureau of
the Census, 1201 E. 10th Street, Jeffersonville, IN 47132.
(j) Electronic filing. Nothing in this part shall preclude
electronic submissions to the Federal clearinghouse in such manner as
may be approved by OMB. With OMB approval, the Federal clearinghouse
may pilot test methods of electronic submissions.
Subpart D--Federal Agencies and Pass-through Entities
Sec. 99.400 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. 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
1997 through 2000 will be determined based on Federal awards expended
in 1995. (However, for States and local governments that expend more
than $25 million a year in Federal awards and have previously assigned
cognizant agencies for audit, the requirements of this paragraph are
not applicable until fiscal years beginning after June 30, 2000.)
Notwithstanding the manner in which audit cognizance is determined, 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. 99.320(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.
[[Page 14549]]
(5) Advise the auditor and, where appropriate, the auditee of any
deficiencies found in the audits when the deficiencies require
corrective action by the auditor. When advised of deficiencies, the
auditee shall work with the auditor to take corrective action. If
corrective action is not taken, the cognizant agency for audit shall
notify the auditor, the auditee, and applicable Federal awarding
agencies and pass-through entities of the facts and make
recommendations for follow-up action. Major inadequacies or repetitive
substandard performance by auditors shall be referred to appropriate
State licensing agencies and professional bodies for disciplinary
action.
(6) Coordinate, to the extent practical, audits or reviews made by
or for Federal agencies that are in addition to the audits made
pursuant to this part, so that the additional audits or reviews build
upon audits performed in accordance with this part.
(7) Coordinate a management decision for audit findings that affect
the Federal programs of more than one agency.
(8) Coordinate the audit work and reporting responsibilities among
auditors to achieve the most cost-effective audit.
(9) For biennial audits permitted under Sec. 99.220, consider
auditee requests to qualify as a low-risk auditee under Sec. 99.530(a).
(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. 99.105. The oversight agency for audit:
(1) Shall provide technical advice to auditees and auditors as
requested.
(2) May assume all or some of the responsibilities normally
performed by a cognizant agency for audit.
(c) Federal awarding agency responsibilities. The Federal awarding
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) Advise recipients of requirements imposed on them by Federal
laws, regulations, and the provisions of contracts or grant agreements.
(3) Ensure that audits are completed and reports are received in a
timely manner and in accordance with the requirements of this part.
(4) Provide technical advice and counsel to auditees and auditors
as requested.
(5) 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.
(6) Assign a person responsible for providing annual updates of the
compliance supplement to OMB.
(d) Pass-through entity responsibilities. A pass-through entity
shall perform the following for the Federal awards it makes:
(1) Identify Federal awards made by informing each subrecipient of
CFDA title and number, award name and number, award year, if the award
is R&D, and name of Federal agency. When some of this information is
not available, the pass-through entity shall provide the best
information available to describe the Federal award.
(2) Advise subrecipients of requirements imposed on them by Federal
laws, regulations, and the provisions of contracts or grant agreements
as well as any supplemental requirements imposed by the pass-through
entity.
(3) Monitor the activities of subrecipients as necessary to ensure
that Federal awards are used for authorized purposes in compliance with
laws, regulations, and the provisions of contracts or grant agreements
and that performance goals are achieved.
(4) Ensure that subrecipients expending $300,000 or more in Federal
awards during the subrecipient's fiscal year have met the audit
requirements of this part for that fiscal year.
(5) Issue a management decision on audit findings within six months
after receipt of the subrecipient's audit report and ensure that the
subrecipient takes appropriate and timely corrective action.
(6) Consider whether subrecipient audits necessitate adjustment of
the pass-through entity's own records.
(7) Require each subrecipient to permit the pass-through entity and
auditors to have access to the records and financial statements as
necessary for the pass-through entity to comply with this part.
Sec. 99.405 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 for auditor assurance related to the
documentation, 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. 99.400(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. 99.400(c)(5), 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. 99.400(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
after receipt of the audit report 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. 99.510(c).
Subpart E--Auditors
Sec. 99.500 Scope of audit.
(a) General. The audit shall be conducted in accordance with GAGAS.
The audit shall cover the entire operations of the auditee; or, at the
option of the auditee, such audit shall include a series of audits that
cover departments, agencies, and other organizational units which
expended or otherwise administered Federal awards during such fiscal
year, provided that each such audit shall encompass the financial
statements and schedule of expenditures of Federal awards for each such
department, agency, and other organizational unit, which shall be
considered to be a non-Federal entity. The financial statements and
schedule of expenditures of Federal awards shall be for the same fiscal
year.
(b) Financial statements. The auditor shall determine whether the
financial statements of the auditee are presented fairly in all
material respects in conformity with generally accepted accounting
principles. The auditor shall
[[Page 14550]]
also determine whether the schedule of expenditures of Federal awards
is presented fairly in all material respects in relation to the
auditee's financial statements taken as a whole.
(c) Internal control. (1) In addition to the requirements of GAGAS,
the auditor shall perform procedures to obtain an understanding of
internal control over Federal programs sufficient to plan the audit to
support a low assessed level of control risk for major programs.
(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
support a low assessed level of control risk for the assertions
relevant to the compliance requirements for each major program; and
(ii) Perform testing of internal control as planned in paragraph
(c)(2)(i) of this section.
(3) When internal control over some or all of the compliance
requirements for a major program 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 (including whether any such condition is a
material weakness) in accordance with Sec. 99.510, assess the related
control risk at the maximum, and consider whether additional compliance
tests are required because of ineffective internal control.
(d) Compliance. (1) In addition to the requirements of GAGAS, the
auditor shall determine whether the auditee has complied with laws,
regulations, and the provisions of contracts or grant agreements that
may have a direct and material effect on each of its major programs.
(2) The principal compliance requirements applicable to most
Federal programs and the compliance requirements of the largest Federal
programs are included in the compliance supplement.
(3) For the compliance requirements related to Federal programs
contained in the compliance supplement, an audit of these compliance
requirements will meet the requirements of this part. Where there have
been changes to the compliance requirements and the changes are not
reflected in the compliance supplement, the auditor shall determine the
current compliance requirements and modify the audit procedures
accordingly. For those Federal programs not covered in the compliance
supplement, the auditor should use the types of compliance requirements
contained in the compliance supplement 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.
(4) 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.
(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. 99.315(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) Data collection form. As required in Sec. 99.320(b)(3), the
auditor shall complete and sign specified sections of the data
collection form.
Sec. 99.505 Audit reporting.
The auditor's report(s) may be in the form of either combined or
separate reports and may be organized differently from the manner
presented in this section. The auditor's report(s) shall state that the
audit was conducted in accordance with this part and include the
following:
(a) An opinion (or disclaimer of opinion) as to whether the
financial statements are presented fairly in all material respects in
conformity with generally accepted accounting principles and an opinion
(or disclaimer of opinion) as to whether the schedule of expenditures
of Federal awards is presented fairly in all material respects in
relation to the financial statements taken as a whole.
(b) A report on internal control related to the financial
statements 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 schedule of findings and questioned
costs described in paragraph (d) of this section.
(c) A report on compliance with laws, regulations, and the
provisions of contracts or grant agreements, noncompliance with which
could have a material effect on the financial statements. This report
shall also include an opinion (or disclaimer of opinion) as to whether
the auditee complied with laws, regulations, and the provisions of
contracts or grant agreements which could have a direct and material
effect on each major program, and, where applicable, refer to the
separate schedule of findings and questioned costs described in
paragraph (d) of this section.
(d) A schedule of findings and questioned costs which shall include
the following three components:
(1) A summary of the auditor's results which shall include:
(i) The type of report the auditor issued on the financial
statements of the auditee (i.e., unqualified opinion, qualified
opinion, adverse opinion, or disclaimer of opinion);
(ii) Where applicable, a statement that reportable conditions in
internal control were disclosed by the audit of the financial
statements and whether any such conditions were material weaknesses;
(iii) A statement as to whether the audit disclosed any
noncompliance which is material to the financial statements of the
auditee;
(iv) Where applicable, a statement that reportable conditions in
internal control over major programs were disclosed by the audit and
whether any such conditions were material weaknesses;
(v) The type of report the auditor issued on compliance for major
programs (i.e., unqualified opinion, qualified opinion, adverse
opinion, or disclaimer of opinion);
(vi) A statement as to whether the audit disclosed any audit
findings which the auditor is required to report under Sec. 99.510(a);
(vii) An identification of major programs;
(viii) The dollar threshold used to distinguish between Type A and
Type B programs, as described in Sec. 99.520(b); and
(ix) A statement as to whether the auditee qualified as a low-risk
auditee under Sec. 99.530.
(2) Findings relating to the financial statements which are
required to be reported in accordance with GAGAS.
(3) Findings and questioned costs for Federal awards which shall
include audit findings as defined in Sec. 99.510(a).
(i) Audit findings (e.g., internal control findings, compliance
findings, questioned costs, or fraud) which relate to the same issue
should be presented as a single audit finding. Where practical, audit
findings should be organized by Federal agency or pass-through entity.
(ii) Audit findings which relate to both the financial statements
and Federal awards, as reported under paragraphs (d)(2) and (d)(3) of
this
[[Page 14551]]
section, respectively, should be reported in both sections of the
schedule. However, the reporting in one section of the schedule may be
in summary form with a reference to a detailed reporting in the other
section of the schedule.
Sec. 99.510 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 a deficiency in internal control
is a reportable condition for the purpose of reporting an audit finding
is in relation to a type of compliance requirement for a major program
or an audit objective identified in the compliance supplement. The
auditor shall identify reportable conditions which are individually or
cumulatively material weaknesses.
(2) Material noncompliance with the provisions of laws,
regulations, contracts, or grant agreements related to a major program.
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 supplement.
(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, 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) Known questioned costs which are greater than $10,000 for a
Federal program which is not audited as a major program. Except for
audit follow-up, the auditor is not required under this part to perform
audit procedures for such a Federal program; therefore, the auditor
will normally not find questioned costs for a program which is not
audited as a major program. However, if the auditor does become aware
of questioned costs for a Federal program which is not audited as a
major program (e.g., as part of audit follow-up or other audit
procedures) and the known questioned costs are greater than $10,000,
then the auditor shall report this as an audit finding.
(5) The circumstances concerning why the auditor's report on
compliance for major programs is other than an unqualified opinion,
unless such circumstances are otherwise reported as audit findings in
the schedule of findings and questioned costs for Federal awards.
(6) Known fraud affecting a Federal award, unless such fraud is
otherwise reported as an audit finding in the schedule of findings and
questioned costs for Federal awards. This paragraph does not require
the auditor to make an additional reporting when the auditor confirms
that the fraud was reported outside of the auditor's reports under the
direct reporting requirements of GAGAS.
(7) Instances where the results of audit follow-up procedures
disclosed that the summary schedule of prior audit findings prepared by
the auditee in accordance with Sec. 99.315(b) materially misrepresents
the status of any prior audit finding.
(b) Audit finding detail. Audit findings shall be presented in
sufficient detail for the auditee to prepare a corrective action plan
and take corrective action and for Federal agencies and pass-through
entities to arrive at a management decision. The following specific
information shall be included, as applicable, in audit findings:
(1) Federal program and specific Federal award identification
including the CFDA title and number, Federal award number and year,
name of Federal agency, and name of the applicable pass-through entity.
When information, such as the CFDA title and number or Federal award
number, is not available, the auditor shall provide the best
information available to describe the Federal award.
(2) The criteria or specific requirement upon which the audit
finding is based, including statutory, regulatory, or other citation.
(3) The condition found, including facts that support the
deficiency identified in the audit finding.
(4) Identification of questioned costs and how they were computed.
(5) Information to provide proper perspective for judging the
prevalence and consequences of the audit findings, such as whether the
audit findings represent an isolated instance or a systemic problem.
Where appropriate, instances identified shall be related to the
universe and the number of cases examined and be quantified in terms of
dollar value.
(6) The possible asserted effect to provide sufficient information
to the auditee and Federal agency, or pass-through entity in the case
of a subrecipient, to permit them to determine the cause and effect to
facilitate prompt and proper corrective action.
(7) Recommendations to prevent future occurrences of the deficiency
identified in the audit finding.
(8) Views of responsible officials of the auditee when there is
disagreement with the audit findings, to the extent practical.
(c) Reference numbers. Each audit finding in the schedule of
findings and questioned costs shall include a reference number to allow
for easy referencing of the audit findings during follow-up.
Sec. 99.515 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, as part of a quality review, to
resolve audit findings, or to carry out oversight responsibilities
consistent with the purposes of this part. Access to working papers
includes the right of Federal agencies to obtain copies of working
papers, as is reasonable and necessary.
Sec. 99.520 Major program determination.
(a) General. The auditor shall use a risk-based approach to
determine which Federal programs are major programs. This risk-based
approach shall include consideration of: Current and prior audit
experience, oversight by Federal agencies and pass-through entities,
and the inherent risk of the Federal program. The process in paragraphs
(b) through (i) of this section shall be followed.
(b) Step 1. (1) The auditor shall identify the larger Federal
programs,
[[Page 14552]]
which shall be labeled Type A programs. Type A programs are defined as
Federal programs with Federal awards expended during the audit period
exceeding the larger of:
(i) $300,000 or three percent (.03) of total Federal awards
expended in the case of an auditee for which total Federal awards
expended equal or exceed $300,000 but are less than or equal to $100
million.
(ii) $3 million or three-tenths of one percent (.003) of total
Federal awards expended in the case of an auditee for which total
Federal awards expended exceed $100 million but are less than or equal
to $10 billion.
(iii) $30 million or 15 hundredths of one percent (.0015) of total
Federal awards expended in the case of an auditee for which total
Federal awards expended exceed $10 billion.
(2) Federal programs not labeled Type A under paragraph (b)(1) of
this section shall be labeled Type B programs.
(3) The inclusion of large loan and loan guarantees (loans) should
not result in the exclusion of other programs as Type A programs. When
a Federal program providing loans significantly affects the number or
size of Type A programs, the auditor shall consider this Federal
program as a Type A program and exclude its values in determining other
Type A programs.
(4) For biennial audits permitted under Sec. 99.220, the
determination of Type A and Type B programs shall be based upon the
Federal awards expended during the two-year period.
(c) Step 2. (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 (in the most recent audit period in the case of a
biennial audit), and, in the most recent audit period, it shall have
had no audit findings under Sec. 99.510(a). However, the auditor may
use judgment and consider that audit findings from questioned costs
under Sec. 99.510(a)(3) and Sec. 99.510(a)(4), fraud under
Sec. 99.510(a)(6), and audit follow-up for the summary schedule of
prior audit findings under Sec. 99.510(a)(7) do not preclude the Type A
program from being low-risk. The auditor shall consider: the criteria
in Sec. 99.525(c), Sec. 99.525(d)(1), Sec. 99.525(d)(2), and
Sec. 99.525(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 180 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. 99.525. However, should the auditor select Option 2 under Step 4
(paragraph (e)(2)(i)(B) of this section), the auditor is not required
to identify more high-risk Type B programs than the number of low-risk
Type A programs. Except for known reportable conditions in internal
control or compliance problems as discussed in Sec. 99.525(b)(1),
Sec. 99.525(b)(2), and Sec. 99.525(c)(1), a single criteria in
Sec. 99.525 would seldom cause a Type B program to be considered high-
risk.
(2) The auditor is not expected to perform risk assessments on
relatively small Federal programs. Therefore, the auditor is only
required to perform risk assessments on Type B programs that exceed the
larger of:
(i) $100,000 or three-tenths of one percent (.003) of total Federal
awards expended when the auditee has less than or equal to $100 million
in total Federal awards expended.
(ii) $300,000 or three-hundredths of one percent (.0003) of total
Federal awards expended when the auditee has more than $100 million in
total Federal awards expended.
(e) Step 4. At a minimum, the auditor shall audit all of the
following as major programs:
(1) All Type A programs, except the auditor may exclude any Type A
programs identified as low-risk under Step 2 (paragraph (c)(1) of this
section).
(2)(i) High-risk Type B programs as identified under either of the
following two options:
(A) Option 1. At least one half of the Type B programs identified
as high-risk under Step 3 (paragraph (d) of this section), except this
paragraph (e)(2)(i)(A) does not require the auditor to audit more high-
risk Type B programs than the number of low-risk Type A programs
identified as low-risk under Step 2.
(B) Option 2. One high-risk Type B program for each Type A program
identified as low-risk under Step 2.
(ii) When identifying which high-risk Type B programs to audit as
major under either Option 1 or 2 in paragraph (e)(2)(i)(A) or (B), the
auditor is encouraged to use an approach which provides an opportunity
for different high-risk Type B programs to be audited as major over a
period of time.
(3) Such additional programs as may be necessary to comply with the
percentage of coverage rule discussed in paragraph (f) of this section.
This paragraph (e)(3) may require the auditor to audit more programs as
major than the number of Type A programs.
(f) Percentage of coverage rule. The auditor shall audit as major
programs Federal programs with Federal awards expended that, in the
aggregate, encompass at least 50 percent of total Federal awards
expended. If the auditee meets the criteria in Sec. 99.530 for a low-
risk auditee, the auditor need only audit as major programs Federal
programs with Federal awards expended that, in the aggregate, encompass
at least 25 percent of total Federal awards expended.
(g) Documentation of risk. The auditor shall document in the
working papers the risk analysis process used in determining major
programs.
(h) Auditor's judgment. When the major program determination was
performed and documented in accordance with this part, the auditor's
judgment in applying the risk-based approach to determine major
programs shall be presumed correct. Challenges by Federal agencies and
pass-through entities shall only be for clearly improper use of the
guidance in this part. However, Federal agencies and pass-through
entities may provide auditors guidance about the risk of a particular
Federal program and the auditor shall consider this guidance in
determining major programs in audits not yet completed.
(i) Deviation from use of risk criteria. For first-year audits, the
auditor may elect to determine major programs as all Type A programs
plus any Type B programs as necessary to meet the percentage of
coverage rule discussed in paragraph (f) of this section. Under this
option, the auditor would not be required to perform the procedures
discussed in paragraphs (c), (d), and (e) of this section.
(1) A first-year audit is the first year the entity is audited
under this part or the first year of a change of auditors.
(2) To ensure that a frequent change of auditors would not preclude
audit of high-risk Type B programs, this election for first-year audits
may not be used by an auditee more than once in every three years.
[[Page 14553]]
Sec. 99.525 Criteria for Federal program risk.
(a) General. The auditor's determination should be based on an
overall evaluation of the risk of noncompliance occurring which could
be material to the Federal program. The auditor shall use auditor
judgment and consider criteria, such as described in paragraphs (b),
(c), and (d) of this section, to identify risk in Federal programs.
Also, as part of the risk analysis, the auditor may wish to discuss a
particular Federal program with auditee management and the Federal
agency or pass-through entity.
(b) Current and prior audit experience. (1) Weaknesses in internal
control over Federal programs would indicate higher risk. Consideration
should be given to the control environment over Federal programs and
such factors as the expectation of management's adherence to applicable
laws and regulations and the provisions of contracts and grant
agreements and the competence and experience of personnel who
administer the Federal programs.
(i) A Federal program administered under multiple internal control
structures may have higher risk. When assessing risk in a large single
audit, the auditor shall consider whether weaknesses are isolated in a
single operating unit (e.g., one college campus) or pervasive
throughout the entity.
(ii) When significant parts of a Federal program are passed through
to subrecipients, a weak system for monitoring subrecipients would
indicate higher risk.
(iii) The extent to which computer processing is used to administer
Federal programs, as well as the complexity of that processing, should
be considered by the auditor in assessing risk. New and recently
modified computer systems may also indicate risk.
(2) Prior audit findings would indicate higher risk, particularly
when the situations identified in the audit findings could have a
significant impact on a Federal program or have not been corrected.
(3) Federal programs not recently audited as major programs may be
of higher risk than Federal programs recently audited as major programs
without audit findings.
(c) Oversight exercised by Federal agencies and pass-through
entities. (1) Oversight exercised by Federal agencies or pass-through
entities could indicate risk. For example, recent monitoring or other
reviews performed by an oversight entity which disclosed no significant
problems would indicate lower risk. However, monitoring which disclosed
significant problems would indicate higher risk.
(2) Federal agencies, with the concurrence of OMB, may identify
Federal programs which are higher risk. The OMB plans to provide this
identification in the compliance supplement.
(d) Inherent risk of the Federal program. (1) The nature of a
Federal program may indicate risk. Consideration should be given to the
complexity of the program and the extent to which the Federal program
contracts for goods and services. For example, Federal programs that
disburse funds through third party contracts or have eligibility
criteria may be of higher risk. Federal programs primarily involving
staff payroll costs may have a high-risk for time and effort reporting,
but otherwise be at low-risk.
(2) The phase of a Federal program in its life cycle at the Federal
agency may indicate risk. For example, a new Federal program with new
or interim regulations may have higher risk than an established program
with time-tested regulations. Also, significant changes in Federal
programs, laws, regulations, or the provisions of contracts or grant
agreements may increase risk.
(3) The phase of a Federal program in its life cycle at the auditee
may indicate risk. For example, during the first and last years that an
auditee participates in a Federal program, the risk may be higher due
to start-up or closeout of program activities and staff.
(4) Type B programs with larger Federal awards expended would be of
higher risk than programs with substantially smaller Federal awards
expended.
Sec. 99.530 Criteria for a low-risk auditee.
An auditee which meets all of the following conditions for each of
the preceding two years (or, in the case of biennial audits, preceding
two audit periods) shall qualify as a low-risk auditee and be eligible
for reduced audit coverage in accordance with Sec. 99.520:
(a) Single audits were performed on an annual basis in accordance
with the provisions of this part. A non-Federal entity that has
biennial audits does not qualify as a low-risk auditee, unless agreed
to in advance by the cognizant or oversight agency for audit.
(b) The auditor's opinions on the financial statements and the
schedule of expenditures of Federal awards were unqualified. However,
the cognizant or oversight agency for audit may judge that an opinion
qualification does not affect the management of Federal awards and
provide a waiver.
(c) There were no deficiencies in internal control which were
identified as material weaknesses under the requirements of GAGAS.
However, the cognizant or oversight agency for audit may judge that any
identified material weaknesses do not affect the management of Federal
awards and provide a waiver.
(d) None of the Federal programs had audit findings from any of the
following in either of the preceding two years (or, in the case of
biennial audits, preceding two audit periods) in which they were
classified as Type A programs:
(1) Internal control deficiencies which were identified as material
weaknesses;
(2) Noncompliance with the provisions of laws, regulations,
contracts, or grant agreements which have a material effect on the Type
A program; or
(3) Known or likely questioned costs that exceed five percent of
the total Federal awards expended for a Type A program during the year.
Signed at Washington, D.C. this 11th day of March, 1999.
Alexis M. Herman,
Secretary of Labor.
[FR Doc. 99-6862 Filed 3-24-99; 8:45 am]
BILLING CODE 4510-23-P
