[Federal Register Volume 60, Number 52 (Friday, March 17, 1995)]
[Notices]
[Pages 14594-14606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6662]
[[Page 14593]]
_______________________________________________________________________
Part VIII
Office of Management and Budget
_______________________________________________________________________
Audits of Institutions of Higher Education and Other Non-Profit
Institutions; Notice
Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 /
Notices
[[Page 14594]]
OFFICE OF MANAGEMENT AND BUDGET
Audits of Institutions of Higher Education and Other Non-Profit
Institutions
AGENCY: Office of Management and Budget.
ACTION: Proposed revisions to OMB Circular No. A-133.
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SUMMARY: This Notice offers interested parties an opportunity to
comment on proposed revisions to Office of Management and Budget (OMB)
Circular No. A-133, ``Audits of Institutions of Higher Education and
Other Non-Profit Institutions.''
Also, this action provides notice of OMB's intent, after
considering comments to this proposal, to seek modifications to the
Single Audit Act of 1984 (Act) and OMB Circular No. A-128, ``Audits of
State and Local Governments,'' consistent with this proposed revision.
OMB's intent is to obtain consistency between audits of State and local
governments and non-profit organizations such that one law and one
circular can cover both. This intent includes Indian tribal governments
which are currently covered under the Act and OMB Circular No. A-128.
Interested parties are encouraged to comment on this stated intent of
OMB.
The National State Auditors Association issued a position paper on
the single audit process in February 1993; the president's Council on
Integrity and Efficiency Standards Subcommittee issued a study titled
``Study on Improving the Single Audit Process'' in September 1993; the
General Accounting Office (GAO) issued a report titled ``Single Audit:
Refinements Can Improve Usefulness'' in June 1994. The recommendations
in these studies were considered in developing this proposed revision.
DATES: All comments on this proposal should be in writing, and must be
received by May 16, 1995. Late comments will be considered to the
extent practicable. Where possible, comments should reference
applicable paragraph numbers in the proposed revision. To facilitate
conversion of the comments into a computer format for analysis,
respondents are asked to send a copy of comments on either a 3.5 or
5.25 inch diskette in either WordPerfect 5.1, WordPerfect for Windows,
or ASCII format. When a diskette cannot be provided, it would be
helpful if the comments were printed in pica or an equivalent 10
characters per inch type on white paper so the document can be easily
scanned into a computer format. When comments are sent in by facsimile,
they should be followed up with a diskette or printed copy, as
indicated above.
ADDRESSES: Office of Management and Budget, Office of Federal Financial
Management, Financial Standards and Reporting Branch, Room 6025, New
Executive Office Building, Washington, DC 20503. For a copy of the
current Circular, contact Office of Administration, Publications
Office, room 2200, New Executive Office Building, Washington, DC 20503,
or telephone (202) 395-7332.
FOR FURTHER INFORMATION CONTACT: Sheila O. Conley, Office of Federal
Financial Management, Financial Standards and Reporting Branch,
telephone (202) 395-3993 and fax (202) 395-4915. A redline/strikeout
version showing the detailed changes between the current Circular and
the proposed revision is available by written request to the Office of
Federal Financial Management.
SUPPLEMENTARY INFORMATION: The proposed revision requires non-profit
organizations receiving $300,000 or more in a year in Federal awards to
have an annual audit, sets forth requirements for both the performance
and reporting of this audit, and provides for follow up on audit
findings. Each non-profit organization is responsible for having its
audit conducted and for reviewing audits of its subrecipients.
Significant Proposed Revisions
The substantive differences between the current Circular and the
proposed revision are indicated in the following:
A. Increased Threshold for Audit
The threshold for when a non-profit organization is required to
have an audit is proposed to be raised from $25,000 to $300,000 in
paragraph 2, ``Audit Requirements.'' This change is consistent with the
findings and recommendations of the General Accounting Office's (GAO)
single audit study that a threshold of $300,000 would cover 95 percent
of all direct Federal financial assistance to local governments. When
the total Federal awards received are small, the cost of audits
required by this Circular have often been high in proportion to the
awards received. This change will remove the requirement for non-profit
organizations to obtain an audit when the total Federal awards received
are small. However, non-profit organizations will continue to be
required to properly account for their Federal awards, comply with
applicable laws and regulations, and cooperate with any audits of
Federal awards that the Federal Government may choose to perform.
Respondents are encouraged to comment whether the proposed threshold
for audit of $300,000 is appropriate or whether the threshold for audit
should be different and, if so, what threshold you recommend (e.g.,
$500,000 or $1 million).
To mitigate risk to a Federal program which is structured such that
substantial service delivery and expenditure of Federal funds are made
by subrecipients receiving less than $300,000, paragraph 2 includes a
provision to allow Federal agencies, with the approval of the Office of
Management and Budget (OMB), to set appropriate audit requirements for
these Federal programs awarded to subrecipients receiving less than
$300,000.
The primary objective of revising the Circular is to reduce
regulatory burden on recipients of Federal awards, while maintaining an
appropriate level of accountability over Federal awards. The proposed
revision seeks to achieve this objective by raising the threshold for
audit to $300,000. However, OMB is also considering an additional
approach to reduce audit burden whereby non-profit organizations
meeting the criteria for low-risk auditees presented in Appendix 3
would be allowed, with the approval of the cognizant or oversight
agency, to conduct a full-scope audit in accordance with this Circular
on a triennial basis, which covers only the last year of the triennial
period.
In the ``off-years,'' or years in which a full-scope audit in
accordance with this Circular is not required, a non-profit
organization receiving $300,000 or more in Federal awards would be
required to have a financial statement audit conducted in accordance
with generally accepted government auditing standards (GAGAS). In
addition, the off-year audit would include such additional procedures
necessary to comply with the scope of work described in subparagraph
12.c, ``Internal Controls,'' of the proposed revision. If the results
of audit work conducted in an off-year identify conditions that prevent
the non-profit organization from meeting the criteria for a low-risk
auditee, then a full-scope audit in accordance with this Circular would
be required for the year in which the deficiencies occurred and
subsequent years until the non-profit organization met the criteria in
Appendix 3.
Respondents are encouraged to comment whether the triennial audit
approach would achieve its intended [[Page 14595]] objective and could
be feasibly implemented, particularly with respect to the application
of a risk-based audit approach to determine major programs, described
in the following section. Respondents are also encouraged to comment
whether the triennial audit approach should be: (1) Implemented with
the revised Circular, (2) phased in using pilot projects, or (3)
applicable to non-profit organizations receiving more or less than a
specified amount of Federal awards and, if so, what level of Federal
awards you recommend (e.g., $10,000,000).
B. New Risk-Based Approach To Determine Major Programs
A revised process for determining major programs is proposed in
Appendices 1 and 2. Currently the determination of major programs, the
programs which receive primary audit coverage under the Circular, is
based solely on the dollar amount of a Federal program's expenditures.
Under this proposal, major programs are determined based on a risk
assessment considering prior audit experience, oversight performed by
Federal agencies and others, and the inherent risk of the Federal
program. Also, a provision is made to require Federal programs that in
aggregate have expenditures that total at least 50 percent of total
Federal program expenditures to be covered as major programs. This 50
percent minimum is reduced to 25 percent for non-profit organizations
meeting the criteria in Appendix 3 and classified as low-risk auditees.
Respondents are encouraged to comment whether the Circular should be
revised to permit organizations that qualify as low-risk auditees to
reduce the scope of audit below the 50 percent minimum and, if so,
whether the proposed 25 percent minimum is appropriate for low-risk
auditees.
The proposed risk-based approach requires the use of judgment by
auditors in determining major programs. However, several controls are
included in the revised Circular to mitigate the risk of insufficient
audit coverage of Federal programs including:
(1) The requirement that Federal programs with aggregate
expenditures of at least 50 percent of total Federal program
expenditures be covered as major programs (25 percent for low-risk
auditees);
(2) The provision that allows Federal agencies and pass-thru
entities to require an auditee to have a particular Federal program
audited as a major program in lieu of conducting or contracting for
additional audits, provided that the requesting agency agrees to pay
the full incremental cost;
(3) The requirement that Federal programs with Federal expenditures
exceeding three percent of total Federal expenditures or $300,000,
whichever is greater, (Type A programs) shall be covered as major
programs at least once every three years; and
(4) The inclusion of a model or process for auditors to use to
determine major programs is provided in Appendices 1 and 2.
The objective of this change to a risk-based approach is to focus
the audit effort on areas of greatest risk of noncompliance, provide
audit coverage to high-risk programs previously below the dollar
threshold of major programs, and permit reduction of audit effort when
previous audits have not shown problems. An alternative to this risk-
based approach would be to continue using the current approach of
determining major programs based solely on dollar amount of a Federal
program's expenditures and implement voluntary pilot projects to test
the risk-based approach. Respondents are encouraged to comment whether
the risk-based approach should be implemented with the revised Circular
or phased in using pilot projects.
C. Required Level of Internal Control Testing
Clarification is provided in paragraph 12, ``Scope of Audit,'' that
the level of testing the auditor is required to perform on the internal
control structure over major programs is based upon the auditor's
planning for a low assessed level of control risk. Respondents who are
auditors are encouraged to comment and provide examples of how many
transactions they are currently testing for major programs and how many
transactions they would expect to test based upon the proposed
revision.
D. Guidance on the Schedule of Federal Awards
Guidance is added in paragraph 13, ``Financial Statements and
Auditor's Reporting,'' on the minimum requirements for the Schedule of
Federal Awards. Since GAO's single audit study recommended that OMB
prescribe the form and content of the schedule, respondents are
encouraged to comment whether the revised Circular should prescribe
additional requirements for the schedule and a description of such
additional requirements.
E. Attestation on Internal Controls and Compliance
GAO's single audit study recommended that, for entities receiving
in excess of $50 million a year in Federal awards, the entity should
publicly report the extent to which the entity has in place internal
controls over Federal awards and that the auditor should attest to the
fairness of such a representation. Similarly, others have suggested to
OMB that the work on compliance for Federal awards be an engagement
under the American Institute of Certified Public Accountants' (AICPA)
Statement on Standards for Attestation Engagements (SSAE) No. 3,
``Compliance Attestation.'' Under a SSAE No. 3 engagement, management
must perform an evaluation of the entity's compliance with the
specified requirements and make an assertion about compliance.
Respondents are encouraged to comment as to whether organization-wide
and program-specific audits should require a management assertion and
auditor attestation for internal controls and/or compliance. The
proposed revision does not require a management assertion or auditor
attestation on internal controls or compliance.
F. Modified Requirements Related to Audit Findings
The proposed revisions in paragraph 13, ``Financial Statements and
Auditor's Reporting,'' provide for reporting of audit findings related
to Federal awards in a single schedule of findings and questioned
costs, set thresholds for which audit findings will be included in the
audit report, describe what information the auditor should include in
an audit finding, and provide for audit follow-up on audit findings.
Paragraph 14, ``Audit Findings Follow-up,'' clarifies the non-profit
organization's responsibility for follow-up on audit findings which
includes preparing a corrective action plan for current audit findings
and a summary schedule of prior audit findings. Paragraph 15,
``Management Decision,'' provides guidance to improve the audit
resolution process.
G. Other Modified Requirements and Guidance
The definition of non-profit organization in paragraph 1 is changed
to include non-profit hospitals. However, under paragraph 3, ``Basis
for Determining Awards Received,'' Medicaid and Medicare are normally
excluded from awards received. Paragraph 3 also provides guidance on
[[Page 14596]] determining awards received for other types of Federal
programs.
New guidance is added in paragraph 4, ``Subrecipient and Vendor
Determination,'' paragraph 5, ``Auditee Responsibilities,'' paragraph
6, ``Federal Agency and Pass-Thru Entity Responsibilities,'' and
paragraph 18, ``Program-Specific Audit.''
Paragraph 6 makes provision for assignment of cognizant agencies
based on dollar thresholds of awards received. Under this proposal,
entities receiving more than $25 million a year in Federal awards shall
be assigned a cognizant agency based on which Federal agency provides
the predominant amount of direct funding to the recipient. Currently
OMB is responsible for assigning cognizant agencies and it has been
unable to make the assignments in a timely manner.
The importance of the compliance supplement is enhanced in
paragraph 6, ``Federal Agency and Pass-Thru Entity Responsibilities,''
by requiring Federal agencies to designate a person responsible for
annually informing OMB of updates needed, and in paragraph 12, ``Scope
of Audit,'' by clarifying the purpose and authority of the compliance
supplement. Also, in paragraph 1, ``Definitions,'' a provision is
included for the compliance supplement to designate clusters of Federal
programs which would be treated as one program.
In paragraph 11, ``Auditor Selection,'' OMB is considering adding a
restriction on auditor selection whereby an auditor who also prepares
the indirect cost proposal, cost allocation plan, or the disclosure
statement required by OMB Circular A-21, ``Cost Principles for
Educational Institutions,'' or the Cost Accounting Standards Board, as
appropriate, may not be selected when the indirect costs charged are
greater than five percent of expenditures of any one Type A program, as
defined in Appendix 1, or greater than five percent of expenditures for
all Federal programs. Respondents are encouraged to comment whether the
auditor restriction should be included in the revised Circular. Also,
current Circular paragraph 11, ``Small and Minority Audit Firms,'' is
deleted because these requirements are more fully covered in OMB
Circular A-110, ``Uniform Requirements for Grants and Agreements with
Institutions of Higher Education, Hospitals and Other Non-Profit
Organizations.''
In paragraph 16, ``Report Submission,'' the due date is shortened
for submitting reports required by this Circular from 13 months to 9
months. However, the provision for a cognizant or oversight agency to
grant an extension is retained. Also, the report submission process was
streamlined by providing for a certification form to be submitted in
lieu of the full audit report when there are no audit findings,
expanding the role of the central clearinghouse, and providing for the
clearinghouse to pilot test electronic filing of reports. Under this
expanded clearinghouse role, recipients will send all copies of reports
to the clearinghouse which will subsequently distribute them to Federal
agencies whose awards have audit findings.
Public Information Collection
The proposed revision includes a provision that will require the
central clearinghouse designated by OMB to collect certain information
about Federal awards and the audits of such awards. OMB is requesting
comments on the proposed information collection described in paragraph
16, ``Report Submission.'' The final collection requirement will be
submitted to OMB for clearance in accordance with the Paperwork
Reduction Act (44 U.S.C. Chapter 35).
John B. Arthur,
Associate Director for Administration.
Circular No. A-133--Revised
To the Heads of Executive Departments and Establishments
Subject: Audits of Non-Profit Organizations Receiving Federal Awards
1. Purpose. This Circular sets forth standards for obtaining
consistency and uniformity among Federal agencies for the audit of non-
profit organizations receiving Federal awards.
2. Authority. Circular A-133 is issued under the authority of
sections 503 and 1111 of title 31, United States Code, and Executive
Orders 8248 and 11541.
3. Supersession. This Circular supersedes the prior Circular A-133,
issued March 8, 1990. For effective dates, see paragraph 10.
4. Policy. Except as provided herein, the standards set forth in
this Circular shall be applied by all Federal agencies. If any statute
specifically prescribes policies or specific requirements that differ
from the standards provided herein, the provisions of the statute shall
govern.
Federal agencies shall apply the provisions of the sections of this
Circular to non-profit organizations, whether they are recipients
receiving awards directly from Federal awarding agencies, or are
subrecipients receiving awards from a pass-thru entity (a recipient or
another subrecipient). Therefore, whereas this Circular does not apply
to grants, contracts, or other agreements between the Federal
Government and units of State or local governments (which are covered
by OMB Circular A-128, ``Audits of State and Local Governments''), this
Circular does apply to awards that State and local governments make to
non-profit organizations covered by this Circular.
This Circular does not apply to non-U.S. based entities receiving
Federal awards either directly as a recipient or indirectly as a
subrecipient.
5. Definitions. Definitions of key terms used in this Circular are
contained in paragraph 1 in the Attachment.
6. Required Action. The specific requirements and responsibilities
of Federal agencies and non-profit organizations are set forth in the
Attachment and Appendices to this Circular. Federal agencies making
awards to non-profit organizations, either directly or indirectly,
shall adopt the language in the Circular in codified regulations,
unless different provisions are required by Federal statute or are
approved by OMB.
7. OMB Responsibilities. OMB will review agency regulations and
implementation of this Circular, and will provide interpretations of
policy requirements and assistance to ensure effective and efficient
implementation.
8. Information Contact. Further information concerning Circular A-
133 may be obtained by contacting the Financial Standards and Reporting
Branch, Office of Federal Financial Management, Office of Management
and Budget, Washington, DC 20503, telephone (202) 395-3993. Individual
copies of this Circular may be obtained by contacting the Executive
Office of the President, Publications Office, telephone (202) 395-7332.
9. Termination Review Date. This Circular will have a policy review
three years from the date of issuance.
10. Effective Dates. (a) The standards set forth in this Circular
that apply directly to Federal agencies will be effective 30 days after
publication of the final revision in the Federal Register.
(b) The standards set forth in this Circular that Federal agencies
are to apply to non-profit organizations will be adopted by Federal
agencies in codified regulations within six months after publication of
the final revision in the Federal Register, so that they will apply to
audits of non-profit organizations for fiscal years that begin on or
after January 1, 1996.
(c) In the interim period, until the standards in this Circular are
adopted and become applicable, the audit [[Page 14597]] provisions of
Circular A-133 issued March 8, 1990, shall continue in effect. However,
if a non-profit organization receives awards of more than one Federal
agency, and not all such agencies have adopted the standards in this
Circular in a timely fashion, then Federal agencies should permit the
non-profit organization to comply with the standards in this Circular
for all of its awards.
Alice M. Rivlin,
Director.
Attachment
Appendix 1
Appendix 2
Appendix 3
OMB Circular A-133--Audits of Non-Profit Organizations Receiving
Federal Awards
Attachment
Table of Contents
1. Definitions
2. Audit Requirements
3. Basis for Determining Awards Received
4. Subrecipient and Vendor Determination
5. Auditee Responsibilities
6. Federal Agency and Pass-Thru Entity Responsibilities
7. Relation to Other Audit Requirements
8. Frequency of Audit
9. Sanctions
10. Audit Costs
11. Auditor Selection
12. Scope of Audit
13. Financial Statements and Auditor's Reporting
14. Audit Findings Follow-up
15. Management Decision
16. Report Submission
17. Audit Working Papers and Reports
18. Program-Specific Audit
Appendix 1--Major Program Determination
Appendix 2--Criteria for Risk
Appendix 3--Criteria for a Low-Risk Auditee
1. Definitions. For the purposes of this Circular, the following
definitions apply:
a. Auditee means any non-profit organization receiving awards which
must be audited under this Circular. This term includes both
organizations which receive awards directly as a recipient or
indirectly as a subrecipient.
b. 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 because they do not meet the GAGAS
independence standards to report as external auditors.
c. Audit finding means deficiencies which the auditor is required
by paragraph 13.d(1) to include in the schedule of findings and
questioned costs.
d. Award means Federal financial assistance and Federal cost-type
contracts. It includes awards received directly from Federal awarding
agencies or indirectly from recipients of Federal awards or
subrecipients. It does not include procurement contracts, under grants
or contracts, used to buy goods or services from vendors. Audits of
such vendors shall be covered by the terms and conditions of the
contract.
e. CFDA number means the number assigned to a Federal program in
the Catalog of Federal Domestic Assistance (CFDA).
f. Cluster of programs means Federal programs with different CFDA
numbers that are defined as a cluster of programs in the compliance
supplements because they are closely related programs and share common
compliance requirements. A cluster of programs shall be considered as
one program for determining major programs as described in Appendix 1
and whether a program-specific audit may be elected under paragraph
2.c.
g. Cognizant agency means the Federal agency assigned by the Office
of Management and Budget (OMB) to carry out the responsibilities
described in paragraph 6.a.
h. Compliance supplements refers to the Compliance Supplement for
Audits of Institutions of Higher Learning and Other Non-Profit
Organizations and the Compliance Supplement for Single Audits of State
and Local Governments or such documents as OMB may issue to replace
them. These documents are available from the Government Printing
Office, telephone (202) 783-3238.
i. 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.
j. Federal agency has the same meaning as the term ``agency'' in
Section 551(1) of title 5, United States Code.
k. Federal awarding agency means the Federal agency that provides
an award directly to the recipient.
l. Federal financial assistance means assistance provided by a
Federal agency to a recipient or by a pass-thru entity to a
subrecipient to carry out a program. Such assistance may be in the form
of: Grants, cooperative agreements, donated surplus property, food
commodities, loans, loan guarantees, property, interest subsidies,
insurance, direct appropriations, and other assistance. Such assistance
does not include direct Federal cash assistance to individuals.
m. Federal program means:
(1) All Federal programs or awards under the same CFDA number. When
no CFDA number is assigned, all awards from the same agency made for
the same purpose may be combined. State governments may combine
different awards to their subrecipients when the awards are closely
related programs and share common compliance requirements. In this
case, the State government may require the subrecipient to treat the
combined awards as a single program.
A category of awards which is a group of awards in the categories
of (a) research and development, (b) student financial aid, or (c)
cluster of programs.
n. GAGAS means generally accepted government auditing standards
issued by the Comptroller General of the United States, which are
applicable to financial audits.
o. Generally accepted accounting principles has the meaning
specified in generally accepted auditing standards issued by the
American Institute of Certified Public Accountants.
p. Individual compliance requirements refers to the types of
compliance requirements as listed in the compliance supplements.
Examples include cash management, Federal financial reporting,
allowable costs/cost principles, types of services allowed or
unallowed, eligibility, and matching.
q. Internal control structure over Federal programs means the
policies and procedures established to provide reasonable assurance
that the following objectives will be achieved:
(1) Transactions are executed in compliance with: (a) Laws,
regulations, and the provisions of contracts or grant agreements that
could have a direct and material effect on a Federal program, and (b)
any other laws and regulations that OMB has identified in the
compliance supplements;
(2) Transactions are properly recorded and accounted for to: (a)
Permit the preparation of reliable financial statements and Federal
reports, (b) maintain accountability over assets, and (c) demonstrate
compliance with laws, regulations, and other compliance requirements;
and
(3) Funds, property, and other assets are safeguarded against loss
from unauthorized use or disposition.
r. Loans means Federal loans or loan guarantees received or
administered by an auditee.
s. Major program means a Federal program determined by the auditor
to be a major program in accordance with Appendix 1 or a program
identified as [[Page 14598]] a major program by a Federal agency or
pass-thru entity in accordance with paragraph 7.c.
t. Management decision means the evaluation by the Federal awarding
agency or pass-thru entity of the audit findings and corrective action
plan and the issuance of a written decision as to what corrective
action is necessary.
u. Non-profit organization means any corporation, trust,
association, cooperative, or other organization which: (1) Is operated
primarily for scientific, educational, service, charitable, or similar
purposes in the public interest; (2) is not organized primarily for
profit; and, (3) uses its net proceeds to maintain, improve, and/or
expand its operations. The term ``non-profit organization'' includes
non-profit institutions of higher education and hospitals, except those
that are audited as part of single audits in accordance with Circular
A-128, ``Audits of State and Local Governments.''
v.OMB means the Executive Office of the President, Office of
Management and Budget.
w. Organization-wide audit means an audit of a non-profit
organization which includes both the organization-wide financial
statements and the Federal awards as described in paragraph 12.
x. Oversight agency means the Federal awarding agency that provides
the predominant amount of direct funding to a recipient not assigned a
cognizant agency. 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 are described in
paragraph 6.b.
y. Pass-thru entity means a non-profit organization that provides a
Federal award to a subrecipient.
z. Program-specific audit means an audit of one Federal program as
provided for in paragraphs 2.c and 18.
aa. Questioned cost means a cost that is questioned by the auditor
because of:
(1) An audit finding, which occurred or is likely to have occurred,
from a 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) An audit finding where the costs, at the time of the audit, are
not supported by adequate documentation; or
(3) An audit finding where the costs incurred are unreasonable and
do not reflect the actions a prudent person would take in the
circumstances.
bb. Recipient means a non-profit organization receiving awards
directly from a Federal awarding agency to carry out a Federal program.
cc. Research and development (R&D) means all research activities,
both basic and applied, and all development activities that are
performed by a non-profit organization. ``Research'' is defined as a
systematic study directed toward fuller scientific knowledge or
understanding of the subject studied. The term research also includes
activities involving the training of individuals in research techniques
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.
dd. Student Financial Aid (SFA) includes those programs of general
student assistance in which a non-profit organization participates,
such as those authorized by Title IV of the Higher Education Act of
1965, as amended, 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 awards
to students on a competitive basis, or for specified studies or
research.
ee. Subrecipient means the legal entity that receives an award from
a pass-thru 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 awards directly from a Federal
awarding agency. Guidance on distinguishing between a subrecipient and
a vendor is provided in paragraph 4.
ff. Vendor means a dealer, distributor, merchant, or other seller
providing goods or services to an auditee that are required for the
conduct of a Federal program. These goods or services may be for a non-
profit 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 paragraph 4.
2. Audit Requirements.
a. Audit Required. Non-profit organizations that receive $300,000
or more in a year in awards shall have an organization-wide or program-
specific audit conducted for that year in accordance with the
provisions of this Circular.
b. Organization-wide Audit. Non-profit organizations that receive
$300,000 or more in a year in awards shall have an organization-wide
audit in accordance with paragraph 12 except when they elect to have a
program-specific audit in accordance with paragraph c.
c. Program-Specific Audit Election. When a non-profit organization
receives 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 non-profit organization, the non-
profit organization may elect to have a program-specific audit
conducted in accordance with paragraph 18. A program-specific audit may
not be elected for R&D unless all awards are received from the same
Federal agency, or the same Federal agency and the same pass-thru
entity, and that Federal agency or pass-thru entity approves in advance
a program-specific audit.
d. Exemption When Awards Are Less Than $300,000. Non-profit
organizations that receive less than $300,000 a year in awards are
exempt from Federal audit requirements for that year except as noted in
paragraphs e and 7.a, but records must be available for review or audit
by appropriate officials of the Federal awarding agency, pass-thru
entity, and/or General Accounting Office (GAO).
e. Special Provision for Certain Small Subrecipients. When a
Federal program is structured such that substantial service delivery
and expenditure of Federal funds occur at subrecipients which receive
awards of less than the $300,000 threshold for audit, the Federal
agency, with the approval of OMB, may require pass-thru entities to
arrange for audits of such subrecipients that would otherwise be exempt
from audit under paragraph d. Such audits may be of lesser scope than
audits required by this Circular.
3. Basis for Determining Awards Received.
a. Determining Awards Received. The determination of when an award
is received should be based on when the activity related to the award
occurs. Generally, the activity pertains to events that require the
non-profit organization to comply with laws, regulations, and the
provisions of contracts or grant agreements such as: Expenditure/
expense transactions associated with grants, cost-type contracts,
cooperative agreements, and direct appropriations; the use of loan
proceeds under loan programs; the receipt of property; the receipt of
surplus property; the distribution or consumption of food
[[Page 14599]] commodities; the disbursement of amounts entitling the
non-profit organization to an interest subsidy; and, the period when
insurance is in force.
b. Loans 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 awards received under loan
programs, except as noted in paragraphs c and d:
(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 or administrative costs allowance
received.
c. Loans 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 awards received
in that year. The balance of loans for previous years is not included
as awards received because the lender accounts for the prior balances.
d. Prior Loans and Loan Guarantees (Loans). Loans, the proceeds of
which were received and expended in prior-years, are not considered
awards under this Circular 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. Free Rent. Free rent received by itself is not considered an
award under this Circular. However, free rent received as part of an
award to carry out a Federal program shall be considered an award and
subject to audit under this Circular.
f. 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.
g. Medicare. Medicare payments to a non-profit organization for
providing patient care services to Medicare eligible individuals are
not considered awards under this Circular.
h. Medicaid. Medicaid payments to a non-profit organization for
providing patient care services to Medicaid eligible individuals are
not considered awards under this Circular unless a State requires the
funds to be treated as awards because reimbursement is on a cost-type
basis.
4. Subrecipient and Vendor Determination.
a. General. An auditee may be a recipient, a subrecipient, and a
vendor. The awards received as a recipient or a subrecipient would be
subject to audit under this Circular. The payments received for goods
or services provided by a vendor would not be considered Federal
awards. The guidance in paragraphs b and c should be considered in
determining whether payments constitute an award to a subrecipient or a
payment for goods and services to a vendor.
b. Subrecipient. Characteristics indicative of a subrecipient
include:
(1) Determining who is eligible to receive what Federal financial
assistance;
(2) Performance measured against meeting the objectives of the
Federal program;
(3) Responsibility for programmatic decision making;
(4) Responsibility for applicable Federal program compliance
requirements; and
(5) Use of funds to carry out a program of the subrecipient as
compared to providing goods or services for a program of the pass-thru
entity.
c. Vendor. Characteristics indicative of a vendor include:
(1) Providing goods and services within normal business operations;
(2) Providing similar goods or services to many different
purchasers;
(3) Operating in a competitive environment;
(4) Having compliance requirements that do not pertain to the goods
or services provided; and
(5) Providing goods or services that are ancillary to the operation
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 Circular does not apply to
for-profit subrecipients, the pass-thru 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. 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 compliance or the vendor's records must be reviewed to
determine 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.
5. Auditee Responsibilities. The auditee shall:
a. Identify, in its accounts, all awards received and expended and
the Federal programs under which they were received. Federal program
and award identification shall include the CFDA title and number, award
number and year, name of the Federal agency, and name of the pass-thru
entity.
b. Maintain an internal control structure over Federal programs
that provides reasonable assurance that the auditee is managing awards
in compliance with laws, regulations, and the provisions of contracts
or grant agreements that could have a material affect 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 Federal awards.
e. Ensure that the audits required by this Circular are properly
performed and submitted when due.
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 paragraphs 14.b and 14.c,
respectively.
6. Federal Agency and Pass-Thru Entity Responsibilities.
a. Cognizant Agency Responsibilities. Recipients receiving more
than $25 million a year in Federal awards shall have a cognizant
agency. The assigned cognizant agency shall be the Federal awarding
agency that provides the [[Page 14600]] predominant amount of direct
funding to a recipient unless OMB makes a specific cognizant agency
assignment and provides notice in the Federal Register. To provide for
continuity of cognizance, the determination of the predominant amount
of direct funding shall be based upon direct Federal awards received in
the recipient's fiscal years ending in 1990, 1995, 2000, and every
fifth year thereafter. A Federal awarding agency assigned cognizance
may reassign cognizance to another Federal awarding agency which
provides substantial direct funding and agrees to be the cognizant
agency. Within 30 days after any reassignment, both the old and the new
cognizant agency shall notify the auditee, and, if known, the auditor
of the reassignment. The cognizant agency shall:
(1) Provide technical audit advice and liaison to auditees and
auditors.
(2) Consider auditee requests for extensions to the nine month due
date of the reporting package required by paragraph 16a. The cognizant
agency 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 auditor of irregularities or illegal acts, as required by
GAGAS or laws and regulations, when such reporting is not included in
the reporting package described in paragraph 16.c.
(5) Advise the auditor and 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 shall notify the auditor, the auditee, Federal
awarding agencies, and the pass-thru entity 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 practicable, audits or reviews made
by or for Federal agencies that are in addition to the audits made
pursuant to this Circular, so that the additional audits or reviews
build upon audits performed in accordance with this Circular.
(7) Coordinate a management decision for audit findings that affect
the Federal programs of more than one agency.
(8) Help coordinate the audit work and reporting responsibilities
among auditors to achieve the most cost-effective audit.
b. Oversight Agency Responsibilities. An auditee not assigned a
cognizant agency will be under the general oversight of the Federal
agency providing it the predominant amount of direct funding as
discussed in paragraph 1.x. The oversight agency:
(1) Shall provide technical advice and counsel to auditees and
auditors as requested.
(2) May assume all or some of the responsibilities normally
performed by a cognizant agency.
c. Federal Awarding Agency Responsibilities. The Federal awarding
agency shall perform the following for the awards it makes:
(1) Identify awards made by informing each recipient of the CFDA
title and number, award name and number, and award year. When some of
this information is not available, the Federal agency shall provide
information necessary to clearly describe the Federal award.
(2) Ensure that audits are made and reports are received in a
timely manner and in accordance with the requirements of this Circular.
(3) Provide technical advice and counsel to auditees and auditors
as requested.
(4) Issue a management decision on audit findings within six months
after receipt of the audit report and ensure that the recipient takes
appropriate and timely corrective action.
(5) Assign a person responsible to inform OMB annually of any
updates needed to the compliance supplements.
d. Pass-Thru Entity Responsibilities. A pass-thru entity that
receives a Federal award and passes all or part of it through to
subrecipients shall perform the following for the awards it makes:
(1) Identify awards made by informing each subrecipient of CFDA
title and number, award name and number, award year, and name of
Federal agency. When some of this information is not available, the
pass-thru 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-thru
entity.
(3) Monitor the activities of subrecipients as necessary to ensure
that awards are used for authorized purposes in compliance with laws,
regulations, and the provisions of contracts or grant agreements and
that performance goals are achieved.
(4) Ensure that non-profit subrecipients receiving $300,000 or more
in awards during the subrecipient's fiscal year have met the audit
requirements of this Circular for that fiscal year, and that
subrecipients subject to Circular A-128 have met the requirements of
that Circular.
(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-thru entity's own records.
(7) Require each subrecipient to permit auditors to have access to
the records and financial statements as necessary for the pass-thru
entity to comply with this Circular.
7. Relation to Other Audit Requirements.
a. Audit Under This Circular in Lieu of Other Audits. An audit made
in accordance with this Circular shall be in lieu of any financial
audit required under individual awards. To the extent this audit meets
a Federal agency's needs, it shall rely upon and use such audits. The
provisions of this Circular neither limit the authority of Federal
agencies, their inspectors general, or GAO to conduct or contract for
additional audits (e.g., financial audits, performance audits,
evaluations, inspections, or reviews) nor authorize any auditee to
constrain Federal agencies from carrying out additional audits. Any
additional audits shall be planned and performed in such a way as to
build upon work performed by other auditors.
b. Federal Agency to Pay for Additional Audits. A Federal agency
that conducts or contracts for additional audits shall, consistent with
other applicable laws and regulations, arrange for funding the cost of
such additional audits.
c. Federal Agency Determination of Major Programs. 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 contracting
for the additional audits. To allow for planning, such requests should
be made at least 180 days prior to the end of the applicable audit
period. The auditee should promptly respond to such request by
informing the Federal agency whether the program would otherwise
[[Page 14601]] be audited as a major program 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. Since the Federal program audited as a result of this
request would not otherwise have been audited as a major program, the
expenditures of this Federal program shall not be included in the
numerator of the calculation to determine whether the requirements of
the 50 percent rule described in Appendix 1 were met. A pass-thru
entity may use the provisions of this paragraph for a subrecipient.
8. Frequency of Audit. Audits required by this Circular shall be
performed annually. However, a Federal agency or pass-thru entity may
allow an auditee who elects a program-specific audit under paragraph
2.c to perform the audit every two years. Two-year audits must cover
both years.
9. Sanctions. No audit costs may be charged to Federal awards when
audits required by this Circular have not been made or have been made
but not in accordance with this Circular. In cases of continued
inability or unwillingness to have an audit conducted in accordance
with this Circular, Federal agencies and pass-thru entities shall take
appropriate sanctions such as:
a. Withholding a percentage of awards until the audit is completed
satisfactorily;
b. Withholding or disallowing overhead costs;
c. Suspending awards until the audit is conducted; or
d. Terminating the award.
10. Audit Costs. Unless prohibited by law, the cost of audits made
in accordance with the provisions of this Circular are allowable
charges to awards. The charges may be considered a direct cost or an
allocated indirect cost, determined in accordance with the provisions
of Circular A-21, ``Cost Principles for Educational Institutions,''
Circular A-122, ``Cost Principles for Non-Profit Organizations,''
Federal Acquisition Regulations subpart 31, or other applicable cost
principles or regulations.
11. Auditor Selection. In arranging for audit services, auditees
shall follow the procurement standards prescribed by Circular A-110,
``Uniform Requirements for Grants and Agreements with Institutions of
Higher Education, Hospitals and Other Non-Profit Organizations.'' 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.
12. Scope of Audit.
a. General. The audit shall be conducted in accordance with GAGAS.
b. Financial Statements. The auditor shall determine whether the
financial statements of the auditee present fairly the auditee's
financial position, results of operations, and, where appropriate, the
cash flows in conformity with generally accepted accounting principles.
The auditor shall also determine whether the schedule of Federal awards
is fairly presented in all material respects in relation to the
auditee's financial statements taken as a whole.
c. Internal Controls.
(1) In addition to the requirements of GAGAS, the auditor shall
perform procedures to obtain an understanding of the internal control
structure over Federal programs sufficient to plan the audit to achieve
a low assessed level of control risk for major programs.
(2) Except as provided in paragraph (3), the auditor shall:
(a) Plan the testing of the internal control structure over major
programs to achieve a low assessed level of control risk for the
assertions relevant to the compliance requirements for each major
program.
(b) Perform testing of the internal control structure over major
programs as planned in paragraph (a).
(3) When the internal control structure over major programs is
likely to be ineffective in preventing or detecting noncompliance, the
planning and performing of testing described in paragraphs (2)(a) and
(2)(b) are not required. However, the auditor shall report a reportable
condition or a material weakness in accordance with paragraph 13.d,
assess the related control risk at the maximum, and consider whether
additional compliance tests are required because of the ineffective
internal control structure over major programs.
d. Compliance.
(1) In addition to the requirements of GAGAS, the auditor shall
determine whether the auditee has complied with laws, regulations, and
the provisions of contracts or grant agreements that may have a direct
and material effect on each of its major programs.
(2) The compliance testing shall include tests of transactions and
such other auditing procedures necessary to provide the auditor
sufficient evidence to support an opinion on compliance for each major
program.
(3) The principal compliance requirements of the largest Federal
programs are included in the compliance supplements.
(4) For Federal programs contained in the compliance supplements,
an audit of the compliance requirements contained in the compliance
supplements will meet the requirements of this Circular. Where there
have been changes to the compliance requirements and the changes are
not reflected in the compliance supplements, the auditor shall
determine the current compliance requirements and modify the audit
procedures accordingly. For those Federal programs not covered in the
compliance supplement, the auditor should use the elements of
compliance (e.g., allowability of cost, types of services, eligibility)
contained in the compliance supplements as guidance for identifying the
individual compliance requirements to test, and determine the
requirements governing the Federal program by reviewing the applicable
laws, regulations, and the provisions of contracts or grant agreements.
The auditor should consult with the applicable Federal agency to
determine the availability of agency-prepared supplements or audit
guides.
e. Audit Follow-up. The auditor shall follow-up on prior audit
findings, review the summary schedule of prior audit findings prepared
by the auditee in accordance with paragraph 14.b, and report, as an
audit finding, when the results of the auditor's follow-up are
different from those reported in the summary schedule of prior audit
findings. The auditor shall perform audit follow-up regardless of
whether a prior audit finding relates to a major program in the current
year.
f. Certification. The auditor shall read the certification prepared
by the auditee in accordance with paragraph 16.b and report as an audit
finding when the information in the certification is materially
inconsistent with the other parts of the reporting package.
13. Financial Statements and Auditor's Reporting.
a. Financial Statements. The auditee shall prepare financial
statements that reflect its financial position, results of operations,
and, where appropriate, cash flows for the fiscal year audited. The
financial statements shall be for the organizational unit chosen to
meet the requirements of this Circular. [[Page 14602]]
b. Schedule of Federal Awards. The auditee shall also prepare a
schedule of Federal awards for the period covered by the auditee's
financial statements. While not required, it is appropriate for the
auditee to provide information requested to make the schedule easier to
use by Federal awarding agencies and pass-thru entities. At a minimum,
the schedule shall:
(1) List total expenditures for each individual award and the CFDA
number or other identifying number when the CFDA information is not
available.
(2) Include notes that describe the significant accounting policies
used in preparing the schedule.
(3) Identify major programs.
(4) List individual awards by Federal agency and major subdivision
within a Federal agency. For awards received as a subrecipient, the
name of the pass-thru entity and identifying number assigned by the
pass-thru entity shall be included.
(5) List individual awards within a category of awards. However,
when it is not practical to list each individual award for R&D, total
expenditures shall be shown by Federal agency and major subdivision
within the Federal agency. For example, the National Institutes of
Health is a major subdivision in the Department of Health and Human
Services.
(6) Include, in either the schedule or a note to the schedule, the
value of non-cash assistance received, insurance programs in effect
during the year, and loans or loan guarantees outstanding at year end.
c. Auditor's Reporting. The auditor's report(s) shall include the
following:
(1) An opinion as to whether the financial statements are fairly
presented in conformity with generally accepted accounting principles
or a disclaimer of opinion and an opinion as to whether the schedule of
Federal awards is fairly presented in all material respects in relation
to the financial statements taken as a whole.
(2) A report on the auditee's internal control structure related to
the financial statements and major programs. This report shall describe
the scope of testing of this internal control structure and the results
of those tests, and, where applicable, refer to the separate schedule
of findings and questioned costs described in paragraph (4).
(3) A report on compliance with laws, regulations, and the
provisions of contracts or grant agreements, noncompliance with which
could have a material effect on the financial statements and major
programs. This report shall include an 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 (4).
(4) A schedule of findings and questioned costs which includes all
audit findings as defined in paragraph d.(1). Any internal control
findings, compliance findings, and questioned costs which relate to the
same issue should be presented as a single finding. Where practical,
audit findings should be organized by Federal agency or pass-thru
entity.
(5) A copy of any management letters issued by the auditor.
d. Audit Findings.
(1) The auditor shall report the following as audit findings in a
schedule of findings and questioned costs:
(a) Reportable conditions in the internal control structure over
major programs. The auditor's determination of a reportable condition
for major programs is in relation to an individual compliance
requirement for a major program. Auditors shall identify reportable
conditions which are individually or cumulatively material weaknesses.
(b) Known fraud affecting an award. Fraud is a type of illegal act
involving the obtaining of something of value through willful
misrepresentation. This paragraph does not require the auditor to make
an additional reporting when the auditor confirms the fraud has been
reported outside of the auditor's reports under the direct reporting
requirements of GAGAS.
(c) Material irregularities, illegal acts, and noncompliance with
the provisions of contracts or grant agreements which auditors
conclude, based on evidence obtained, have occurred or are likely to
have occurred. The auditor's determination of whether an irregularity,
an illegal act, or noncompliance with the provisions of contracts or
grant agreements is material is in relation to an individual compliance
requirement for a major program. An irregularity, an illegal act, or
noncompliance with the provisions of contracts or grant agreements
which could have a material effect on an audit objective identified in
the compliance supplements shall also be considered as material.
(d) Known questioned costs which are greater than $10,000 for an
individual compliance requirement for a major program. Known questioned
costs are those specifically identified by the auditor. In evaluating
the effect of questioned costs on the opinion on compliance for each
major program, the auditor considers the best estimate of total costs
questioned (likely questioned costs), not just the questioned costs
specifically identified (known questioned costs). The auditor shall
also report known questioned costs when likely questioned costs are
greater than $10,000 for an individual 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.
(e) Instances where the audit follow-up procedures disclosed that
the summary schedule of prior audit findings prepared by the auditee in
accordance with paragraph 14.b is other than as reported by the
auditee.
(f) Instances where the certification prepared by the auditee in
accordance with paragraph 16.b is materially inconsistent with the
reporting package described in paragraph 16.c.
(2) 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-thru entities to arrive at a
management decision. The following specific information shall be
included, as applicable, in audit findings:
(a) Federal program and specific award identification including the
CFDA title and number, award number and year, name of Federal agency,
and name of the pass-thru entity. When information, such as the CFDA
title and number or award number, is not available, the auditor shall
provide the best information available to describe the Federal award.
(b) The criteria or specific requirement upon which the audit
findings are based, including statutory, regulatory, or other citation.
(c) The condition found, including facts that indicate that the
audit findings occurred or are likely to have occurred.
(d) Identification of questioned costs and how they were computed.
(e) 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.
Instances identified shall be related to the universe and the number of
cases examined and be quantified in terms of dollar value, if
appropriate.
(f) The possible asserted effect to provide sufficient information
to Federal, State, or local officials to permit them to determine the
effect and [[Page 14603]] cause in order to take prompt and proper
corrective action.
(g) Recommendations to prevent future occurrences of the audit
finding.
(h) Explanations of responsible officials of the auditee when there
is disagreement with the audit findings.
(3) 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.
14. 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 paragraph 13.d(3). Since the summary
schedule may include audit findings from multiple years, it shall
include the fiscal year in which the finding initially occurred.
b. Summary Schedule of Prior Audit Findings. The summary schedule
of prior audit findings shall report the status of all audit findings
included in the prior audit's schedule of findings and questioned
costs. The summary schedule shall also include audit findings in the
prior audit's summary schedule of prior audit findings except audit
findings listed as corrected in accordance with paragraph (1) or no
longer valid in accordance with paragraph (4).
(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-thru 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.
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 names 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.
15. 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-thru entity
may request additional information or documentation from the auditee,
including a request that the documentation be audited, as a way of
mitigating disallowed costs. The management decision should describe
any appeal process available to the auditee.
b. Federal Agency. As provided in paragraph 6.a.(7), the cognizant
agency shall be responsible for coordinating a management decision for
audit findings that affect the programs of more than one Federal
agency. As provided in paragraph 6.c.(4), a Federal awarding agency is
responsible for issuing a management decision for findings that relate
to 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-Thru Entity. As provided in paragraph 6.d.(5), the pass-
thru entity shall be responsible for making the management decision for
audit findings that relate to 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 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 paragraph 13.d.(3).
16. Report Submission.
a. General. Within nine months after the end of the audit period,
unless a longer period is agreed to in advance by the cognizant or
oversight agency, the reporting package described in paragraph c shall
be submitted in accordance with this Circular. Unless restricted by law
or regulation, the auditee shall make copies available for public
inspection.
b. Certification. The auditee shall complete a certification form
which states whether the audit was completed in accordance with this
Circular and provides information about the auditee, its Federal
programs, and the results of the audit. The form shall be available
from the central clearinghouse designated by OMB. The auditee's chief
executive officer or chief financial officer shall sign a statement
that the information on the form is accurate and complete.
Certificate of Audit
This is to certify that, to the best of my knowledge and belief,
the (specify name of non-profit organization) has: (1) Engaged an
auditor to perform an audit in accordance with the provisions of OMB
Circular A-133 for the (specify number) months ended (specify date);
(2) the auditor has completed such audit and presented a signed audit
report which states that the audit was conducted in accordance with the
provisions of the Circular; and, (3) the information on the attached
form accurately and completely reflects the results of this audit, as
presented in the auditor's report. I declare that the foregoing is true
and correct.
Attachment
Information Accompanying Certificate of Audit
The following data elements will be included in a machine-readable
form to accompany the Certificate of Audit:
(1) Catalog of Federal Domestic Assistance (CFDA) number for each
covered Federal program
(2) name of each covered Federal program
(3) amount of expenditures for the current fiscal year associated
with each covered Federal program
(4) whether or not there are audit findings in the current audit
report related to the following:
(a) Amount of questioned costs
(b) Types of services allowed or unallowed
(c) Matching or cost sharing
(d) Maintenance of level of effort
(e) Earmarking
(f) Special reporting requirements
(g) Special tests and provisions
(h) Administrative requirements
(i) Cash management
(j) Federal financial reporting
(k) Program income
(l) Real property management
(m) Equipment management
(n) Procurement
(o) Subrecipient monitoring
(p) Uniform Relocation Assistance and Real Property Acquisition
Policies Act [[Page 14604]]
(q) Allowable costs/cost principles
(r) Davis-Bacon Act.
(5) Whether or not there is a summary schedule of prior audit
findings
(6) If applicable, the CFDA number(s) for prior audit finding(s)
reflected in the summary schedule of prior audit findings
(7) Non-Profit Organization Name:
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Employer Identification Number:
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Name and Title of Responsible Official:
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Telephone:
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Signature:
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Date of Execution:
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(8) Auditor Name:
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Name and Title of Contact Person:
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Auditor Address:
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Auditor Telephone:
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c. Reporting Package. The reporting package shall include the
following:
(1) Certification discussed in paragraph b.
(2) Financial statements and schedule of Federal awards discussed
in paragraphs 13.a and 13.b.
(3) Auditor's reporting discussed in paragraph 13.c.
(4) Summary schedule of prior audit findings discussed in paragraph
14.b.
(5) Corrective action plan discussed in paragraph 14.c.
d. Submission to Clearinghouse. All auditees shall submit to the
central clearinghouse designated by OMB one copy of the:
(1) Certification discussed in paragraph b, and
(2) Reporting package described in paragraph c for each Federal
awarding agency that provided direct awards when the schedule of
findings and questioned costs disclosed audit findings for those direct
awards or the summary schedule of prior audit findings reported the
status of any audit findings for those direct awards.
e. Additional Submission by Subrecipients. Subrecipients shall
submit to each pass-thru entity one copy of the:
(1) Certification discussed in paragraph b, and
(2) Reporting package described in paragraph c for each pass-thru
entity when either the schedule of findings and questioned costs
disclosed audit findings for awards that the pass-thru entity provided
or the summary schedule of prior audit findings reported the status of
any audit findings for awards that the pass-thru entity provided.
f. Requests for Report Copies. In response to requests by the
Federal agency or pass-thru entity, auditees shall submit the
appropriate copies of the reporting package described in paragraph c.
g. Report Retention Requirements. Auditees shall keep one copy of
the reporting package described in paragraph c on file for three years
from the date of submission to the central clearinghouse. Pass-thru
entities shall keep subrecipients' submissions on file for three years
from date of receipt.
h. Clearinghouse Responsibilities. The central clearinghouse
designated by OMB shall distribute the reporting package received in
accordance with paragraph d.(2) to applicable Federal awarding
agencies, maintain a data base of completed audits, provide appropriate
information to Federal agencies, and follow up with known auditees
which have not submitted the required certifications and reporting
packages.
i. Clearinghouse address. The address of the central clearinghouse
currently designated by OMB is Federal Audit Clearinghouse, Bureau of
the Census, 1201 E. 10th Street, Jeffersonville, IN 47132. If the
designated central clearinghouse or its address should change, OMB will
publish this information in the Federal Register.
j. Electronic Filing. Nothing in this Circular shall preclude
electronic submissions to the central clearinghouse in such manner as
may be approved by OMB. With OMB approval, the central clearinghouse
may pilot test methods of electronic submissions.
17. Audit Working Papers and Reports. The auditor shall retain
working papers and reports for a minimum of three years from the date
of the audit report, unless the auditor is notified in writing by the
cognizant agency, oversight agency, or pass-thru entity to extend the
retention period. When auditors are aware that the Federal awarding
agency, pass-thru entity, or auditee is contesting an audit finding,
the auditor shall contact the parties contesting the audit finding
prior to destruction of the working papers and reports. Audit working
papers shall be made available upon request to the cognizant or
oversight agency or their designee, the Office of Inspector General of
a Federal agency providing direct or indirect funding, or GAO at the
completion of the audit.
18. Program-Specific Audit.
a. Program Audit Guide Available. In many cases a program-specific
audit guide will be available to provide specific guidance to the
auditor on internal controls, 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 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 audited as they would have for a major program
audited under the requirements of this Circular.
(2) The auditee shall prepare the financial statement(s) for the
Federal program that includes, at a minimum, a schedule of the Federal
program expenditures and notes that describe the significant accounting
policies used in preparing the schedule, a summary schedule of prior
audit findings consistent with the requirements of paragraph 14.b, and
a corrective action plan consistent with the requirements of paragraph
14.c.
(3) The auditor shall: (a) Perform an audit of the financial
statement(s) for the Federal program in accordance with GAGAS; (b)
obtain an understanding of the internal control structure policies and
procedures and perform tests of the internal control structure for the
Federal program consistent with the guidance in paragraph 12.c for a
major program; (c) 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 guidance in paragraph 12.d for a
major program; (d) follow up on prior audit findings, review the
auditee's summary schedule of prior audit findings, and report, as an
audit finding, when the results of the auditor's follow-up are
different from those reported by the auditee consistent with the
requirements of paragraph 12.e; and, (e) read the certification
prepared by the auditee consistent with the requirements of paragraph
12.f.
(4) The auditor shall: (a) Render an opinion as to whether the
financial statement(s) of the Federal program is fairly presented in
accordance with the stated accounting policies; (b) issue a report on
the internal control structure [[Page 14605]] related to the Federal
program, which shall describe the scope of testing of that internal
control structure and the results of those tests; (c) issue a report on
compliance with laws and regulations which includes an 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, (d) issue a schedule of findings
and questioned costs which includes audit findings for the Federal
program as described in paragraph 13.d.
c. Reporting for Program-Specific Audits. Within nine months after
the end of the audit period, unless a longer period is approved in
advance by the Federal agency providing the funding, the auditee shall
submit to the central clearinghouse designated by OMB a certification
prepared in accordance with the requirements of paragraph 16.b. When a
program-specific audit guide is available, the financial statement(s)
and the audit report shall be submitted in accordance with that guide.
When a program-specific audit guide is not available and 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 to the Federal awarding agency
or pass-thru entity one copy of the financial statement(s), summary
status of prior audit findings, corrective action plan, and the
auditor's reporting described in paragraph b.(4). Unless restricted by
law or regulation, the auditee shall make report copies available for
public inspection.
d. Other Paragraphs of This Circular May Apply. The provisions of
paragraphs 1 through 11, 15, 17 and other referenced provisions of this
Attachment apply to program-specific audits unless contrary to a
program-specific audit guide or program laws and regulations.
Appendix 1--Major Program Determination
The auditor shall use a risk-based approach to determine which
Federal programs are major programs. This risk-based approach shall
include consideration of: (a) Current and prior audit experience, (b)
oversight by Federal agencies and pass-thru entities, and (c) the
inherent risk of the Federal program. The following process shall be
followed:
Step 1--The auditor shall identify the larger Federal programs,
which shall be labeled Type A programs. Type A programs are defined as
Federal programs with Federal expenditures exceeding three percent of
total Federal expenditures or $300,000, whichever is greater. The
remaining Federal programs shall be labeled Type B programs.
The inclusion of large non-cash assistance, insurance programs, or
loans and loan guarantees (loans), should not result in the exclusion
of other programs as Type A programs. When a Federal program providing
non-cash assistance, insurance, or loans significantly affects the
number or size of Type A programs, the auditor shall consider this
Federal program as a Type A program and exclude its values in
determining other Type A programs.
Step 2--The auditor shall identify Type A programs which are low-
risk. For a Type A program to be considered low-risk, it shall have
been audited as a major program in at least one of the two most recent
audit periods, and, in the most recent period audited, it shall have
had no audit findings from reportable conditions, irregularities,
illegal acts, or noncompliance with the provisions of contracts or
grant agreements as described in paragraphs 13.d.(1)(a) and 13.d.(1)(c)
of the Attachment. The auditor shall consider the criteria in D, E, F,
G, and H of Appendix 2 and 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.
Step 3--The auditor shall identify Type B programs which are high-
risk using professional judgment and the criteria in Appendix 2. Except
for known reportable conditions in internal controls or compliance
problems as discussed in criteria A, B, and D of Appendix 2, a single
criteria in Appendix 2 would seldom cause a Type B program to be
considered high-risk.
An audit under this Circular is not expected to test small Federal
programs. Therefore, programs with expenditures of less than $100,000
would not be considered high-risk unless it is necessary to audit a
program with expenditures of less than $100,000 as a major program to
meet the 50 percent rule discussed below.
Step 4--All Type A programs shall be audited as major programs,
except the auditor may exclude any Type A programs identified as low-
risk under step 2. All Type B programs identified as high-risk under
step 3 shall be audited as major programs.
50 Percent
Rule--The audit of Federal programs shall cover at least 50 percent
of total Federal expenditures unless the auditee meets the criteria in
Appendix 3 for a low-risk auditee, in which case the coverage shall be
at least 25 percent of total Federal expenditures.
Documentation of Risk
The auditor shall document in the working papers the risk analysis
process used in determining major programs.
Auditor's Judgment
When the major program determination has been performed and
documented in accordance with this Circular, the auditor's judgment in
applying the risk-based approach to determine major programs shall be
presumed correct. Challenges by Federal agencies and pass-thru entities
shall only be for clearly improper use of the guidance in this
Circular. However, Federal agencies and pass-thru 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.
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 higher risk Type B programs as
necessary to cover at least 50 percent of total Federal expenditures.
Under this option, the auditor would not be required to perform the
procedures discussed in steps 2, 3, and 4 of this Appendix.
A first-year audit is the first year the entity is audited under
this Circular or the first year of a change of auditors or a bona fide
procurement process which could result in a change of auditors.
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 a non-profit organization more than once in every
three years.
Appendix 2--Criteria for Risk
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 the following to identify risk in Federal
programs:
Current and Prior Audit Experience
A. Weaknesses in the internal control structure 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
[[Page 14606]] the competence and experience of personnel who process
transactions affecting Federal programs.
1. A Federal program administered under multiple internal control
structures may have a higher risk. When identifying risk in a large
organization-wide audit, the auditor shall consider whether weaknesses
are isolated in a single operating unit (e.g., one college campus) or
pervasive throughout the organization.
2. When significant parts of a Federal program are passed through
to subrecipients, a weak system for monitoring subrecipients would
indicate higher risk.
3. 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.
B. Prior audit findings would indicate higher risk, particularly
when the audit findings could have a significant impact on a Federal
program or have not been corrected.
C. Federal programs not recently audited as major programs may be
of higher risk than Federal programs recently audited as major programs
without audit findings.
Oversight Exercised by Federal Agencies and Pass-Thru Entities
D. Oversight exercised by Federal agencies or pass-thru 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.
E. Risk would be higher for Federal programs identified by the
Office of Management and Budget (OMB) as high-risk at the auditee
level. OMB plans to provide this identification in its compliance
supplements or by issuing an annual list of high-risk programs.
Inherent Risk of the Federal Program
F. 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.
G. 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.
H. The phase of a Federal program in its life cycle at the auditee
may indicate risk. For example, during the first and last years, an
auditee participates in a Federal program, the risk may be higher due
to start-up or closeout of program activities and staff.
I. Type B programs with larger expenditures would be of higher risk
than programs with substantially smaller expenditures.
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-thru entity.
Appendix 3--Criteria for a Low-Risk Auditee
An auditee which meets all of the following conditions for the
preceding two years shall qualify as a low-risk auditee under the 50
percent rule described in Appendix 1, unless the current year audit
does not meet the conditions described in paragraph 3 below:
1. The audits were performed in accordance with the provisions of
this Circular.
2. The auditor's opinions on the financial statements and the
schedule of Federal awards were unqualified. However, the cognizant or
oversight agency may judge that an opinion qualification does not
affect the management of Federal awards and provide a waiver.
3. There were no deficiencies in internal controls which were
identified as material weaknesses under the requirements of generally
accepted government auditing standards (GAGAS). However, the cognizant
or oversight agency may judge that the material weaknesses do not
affect the management of Federal awards and provide a waiver.
4. For any one Type A program, as defined in step 1 of Appendix 1,
there were no audit findings as described in paragraph of the
Attachment from:
a. Internal control deficiencies which were identified as material
weaknesses.
b. Irregularities, illegal acts, or noncompliance with the
provisions of contracts or grant agreements which either individually
or cumulatively have a material effect on the Type A program.
c. Known or likely questioned costs that exceed five percent of the
total expenditures for a Type A program during the year.
[FR Doc. 95-6662 Filed 3-16-95; 8:45 am]
BILLING CODE 3110-01-P