Audits of Institutions of Higher Education and Other Non-Profit Institutions

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:

----------------------------------------------------------------------

Employer Identification Number:

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Name and Title of Responsible Official:

----------------------------------------------------------------------

Telephone:

----------------------------------------------------------------------

Signature:

----------------------------------------------------------------------

Date of Execution:

----------------------------------------------------------------------

(8) Auditor Name:

----------------------------------------------------------------------

Name and Title of Contact Person:

----------------------------------------------------------------------

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