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

SUMMARY: This revision of Office of Management and Budget (OMB)

Circular A-133 establishes a uniform system of auditing for

institutions of higher education and other non-profit organizations.

One of the more significant revisions is that the threshold for when an

entity is required to have an audit is raised from $25,000 to $300,000.

This will significantly reduce audit costs for many small non-profit

organizations. Other significant changes are: additional guidance for

program-specific audits (Sec. ______.235), audit findings

(Sec. ______.510), and audit findings follow-up (Sec. ______.315); a

report submission due date which is shortened from 13 to 9 months and a

report submission process that includes a certification form and

streamlined filing requirements (Sec. ______.320); and, a new risk-

based approach for major program determination (Sec. ______.520).

DATES: The standards set forth in Sec. ______.400 of the Attachment to

this Circular, which apply directly to Federal agencies, shall be

effective July 1, 1996, and shall apply to audits of fiscal years

ending on or after June 30, 1997. The standards set forth in this

Circular that Federal agencies are to apply to non-profit organizations

shall be adopted by Federal agencies in codified regulations not later

than November 30, 1996, so that they will apply to audits of fiscal

years ending on or after June 30, 1997, with the exception that

Sec. ______.305(b) of the Attachment applies to audits of fiscal years

ending on or after June 30, 1999.

ADDRESSES: A copy of the Circular may be obtained from the OMB fax

information line, 202-395-9068, document number 1133; OMB home page on

the internet which is currently located at http://www.whitehouse.gov/

WH/EOP/omb; or by writing or calling the Office of Administration,

Publications Office, room 2200, New Executive Office Building,

Washington, DC 20503, telephone (202) 395-7332.

FOR FURTHER INFORMATION CONTACT: Recipients should contact their

cognizant or oversight agency for audit, or Federal awarding agency, as

may be appropriate in the circumstances. Subrecipients should contact

their pass-through entity. Federal agencies should contact Sheila O.

Conley, Office of Management and Budget, Office of Federal Financial

Management, Financial Standards and Reporting Branch, telephone (202)

395-3993, fax (202) 395-4915.

SUPPLEMENTARY INFORMATION:

A. Background

The Office of Management and Budget (OMB) received approximately

150 letters providing approximately 1600 individual comments in

response to the Federal Register proposal of March 17, 1995 (60 FR

14594-14606). Letters came from Federal agencies (including Offices of

Inspectors General), State governments (including State auditors),

certified public accountants (CPAs), internal auditors, non-profit

organizations (including colleges and universities), professional

organizations, and others. All comments were considered in developing

this final revision.

Section B presents a summary of the major public comments grouped

by subject and a response to each comment. Other changes were made to

increase clarity and readability.

B. Public Comments and Responses

Common Rule Format

Comment: Several commenters suggested that the implementation of

the Circular be done using the ``common rule'' format so that all

affected Federal agencies could codify the provisions of the Circular

without change and prior to the effective date.

Response: Circular A-133 was reformatted to facilitate codification

by Federal agencies.

Uniform Audit Requirements

Comment: In the preamble of the proposed revision, OMB stated a

plan to seek modifications to the Single Audit Act of 1984 (31 U.S.C.

Chapter 75) and OMB Circular No. A-128, ``Audits of State and Local

Governments,'' such that one law and one circular could cover both

State and local governments and non-profit organizations. Commenters

strongly supported this change.

Responses: Even though Circular A-133 does not apply to State and

local governments, provisions were made to easily adapt Circular A-133

to include State and local governments if the Single Audit Act is

amended. For example, changes were made to the risk-based approach to

determine major programs for circumstances that most likely will only

occur in large Statewide single audits.

Increased Threshold for Audit

Comment: Commenters overwhelmingly supported raising the threshold

for audit, with the majority supporting the proposed threshold of

$300,000. A common statement in favor of this change was that it would

reduce audit costs, while still providing adequate audit coverage of

Federal programs.

Response: This final revision raises the audit threshold to

$300,000. Pass-through entities should make appropriate changes in

their agreements with subrecipients to reflect that Circular A-133 no

longer requires an audit for entities expending less than the $300,000

threshold. Also, pass-through entities will need to consider this

change, review their overall subrecipient monitoring process, and

decide what, if any, additional monitoring procedures may be necessary

to ensure subrecipient compliance for the subrecipients not required to

have a Circular A-133 audit. It is expected these monitoring procedures

could be more targeted and less costly than the full Circular A-133

audit.

Special Provision for Certain Small Subrecipients

Comment: Most commenters opposed the provision to allow Federal

agencies to require pass-through entities to arrange for audits of

subrecipients receiving less than the $300,000. A reason often cited

was that this provision defeats the purpose of raising the audit

threshold.

Response: This provision was included in the proposed revision to

provide audit coverage of Federal programs, such as the Job Training

Partnership Act (JTPA) programs, which are structured such that

substantial service delivery and expenditure of Federal funds are made

by subrecipients that expend less than $300,000 in Federal awards.

The provision has not been added to the Circular. However, it is

important to note that both the pass-through entity and the pass-

through entity's auditor have responsibilities for these funds even

when an audit of the subrecipient is not required. The pass-through

entity is still responsible to monitor the activities of the

subrecipient and ensure that Federal awards are only used for

authorized purposes. Additional monitoring procedures may be necessary

when a material amount of program funds is passed through to

subrecipients which are not audited.

[[Page 19135]]

The pass-through entity's auditor is responsible for performing

sufficient tests to support an opinion on compliance for each major

program. When subrecipients which are not audited expend a material

amount of funds from a major program, the auditor will need to consider

obtaining compliance assurances by reviewing the pass-through entity's

records and monitoring procedures, performing additional procedures to

determine compliance, such as testing the subrecipient's records, or a

combination of procedures. In addition, the pass-through entity's

auditor is responsible for determining whether the pass-through

entity's system for monitoring subrecipients is adequate and whether

subrecipient noncompliance necessitates adjustment of the pass-through

entity's records.

Consideration of Triennial Audit

Comment: In the preamble of the proposed revision, OMB stated it

was considering a triennial audit approach and requested comments on

its feasibility. Commenters from non-profit organizations supported a

triennial audit approach. Reasons cited were relief of audit burden and

a reduction in the number of audits required to be reviewed as part of

subrecipient monitoring.

However, Federal agency commenters were opposed to a triennial

audit approach and cited problems, such as it would alert the non-

profit organization in advance of which years should be audited,

significantly complicate the risk-based approach for selecting major

programs (e.g., under the risk-based approach a large program is only

required to be audited once every three years and with triennial audits

this could be once in every nine years), and result in only limited

cost savings (e.g., under the triennial audit approach a financial

statement audit and testing of internal control would still be

required).

Response: The triennial audit approach was not added to the

Circular. However, the Circular does provide significant audit relief

to non-profit organizations by raising the audit threshold from $25,000

to $300,000, allowing a risk-based approach to selecting major

programs, and streamlining the report distribution process by use of a

certification form. The risk-based approach will permit low-risk non-

profit organizations to reduce the percentage of Federal expenditures

required to be covered as major programs. The certification form, as

discussed later in this supplementary information, will simplify the

pass-through entity's review of subrecipient reports which have no

audit findings.

Risk-Based Approach To Determine Major Programs

Comment: Except for comments from CPAs, the commenters supported

the risk-based approach as presented. CPA commenters opposed the risk-

based approach and cited as reasons that it was inappropriate for the

auditor to determine major programs, there could be problems in

submitting a proposal to conduct a Circular A-133 audit when it is not

known in advance which programs will be audited, and there would

possibly be cost increases for the auditor to perform risk assessments.

While State auditor commenters supported the risk-based approach, those

from the larger States cited implementation problems in performing risk

assessments on a large number of Type B programs.

Response: The auditor is best suited to determine major programs

for reasons, such as independence and the understanding of risk to

Federal programs obtained as part of the audit. Therefore, the proposal

has been adopted, with no changes made to the requirement for the

auditor to determine major programs. However, in recognition of the

concerns expressed relative to larger audits, Appendix 1

(Sec. ______.520), Major Program Determination, was modified as

follows:

Step 1 (Sec. ______.520(b)(1)) was modified to provide a sliding

scale in determining Type A programs. This change only affects auditees

with Federal expenditures over $100 million.

Step 2 (Sec. ______.520(c)(2)) was modified to permit a Federal

agency, with OMB approval, to designate that a low-risk Type A program

could not be considered low-risk. This designation could be for

reasons, such as to help the Federal agency comply with Section 405 of

the Government Management Reform Act (P.L. 103-356).

Step 3 (Sec. ______.520(d)(2)) was modified to add a sliding scale

which defines relatively small Federal programs in terms of a

percentage of total Federal expenditures. This benefits very large

audits by reducing the number of Type B programs for which the auditor

must perform risk assessments. The decrease in the total amount of

Federal expenditures subject to audit will be relatively small because

of the wide difference in size between the largest and smallest Federal

programs.

Step 4 (Sec. ______.520(e)) was modified to only require one-half

of the high-risk Type B programs to be audited as major and provide a

limit that the number of these Type B programs audited as major need

not exceed the number of low-risk Type A programs.

However, should the auditor choose not to exclude a low-risk Type A

program, this would not affect the limit. The limit is on the number of

low-risk Type A programs, not the number excluded. Also, even though

larger dollar Type A programs may be excluded as low-risk, they may

still need to be audited to meet the 50 percent rule.

To mitigate any implementation problems with the risk-based

approach, the provision for deviation from use of risk criteria

provided in Sec. ______.520(i) applies to the first year this Circular

is applicable and permits auditors to defer implementation of the risk-

based approach for one year.

Implementation of the Risk-Based Approach To Determining Major Programs

Comment: A commenter inquired whether a Type A program may be

considered low-risk when it was audited as a major program in

accordance with the prior Circular A-133, issued March 8, 1990, and

otherwise met the criteria in Appendix 1, step 2 to be classified as

low-risk.

Response: The reference in Appendix 1, step 2

(Sec. ______.520(c)(1)) to the two most recent audit periods means

audit periods in which the audit was performed either under the prior

Circular A-133 or this revision. Therefore, a Type A program which

meets the Appendix 1, step 2 (Sec. ______.520(c)(1)) criteria for low-

risk based on the results of an audit performed in accordance with the

prior Circular A-133 may be considered low-risk. Similarly, the

reference in the criteria for a low-risk auditee in Appendix 3

(Sec. ______.530) to the preceding two years applies to audits

performed either under the prior Circular A-133 or this revision.

Request for a Program To Be Audited as a Major Program

Comment: Several commenters expressed concern that the provision

for a Federal agency or pass-through entity to request a program to be

audited as a major program would significantly increase the work

required for single audits and requested that it be removed. A few

commenters also expressed concern that these programs would not count

towards meeting the 50 percent rule.

Response: This provision has been adopted; however, a change was

made to allow programs audited as major under this process to count

towards

[[Page 19136]]

meeting the 50 percent rule. This process does not significantly change

the authority Federal agencies and pass-through entities now have to

perform additional audits as long as they pay for them. The addition is

that these audits may be incorporated within the framework of the

single audit and thereby eliminate duplicative audit planning and

reporting. Since the Federal agency or pass-through entity must still

pay the full incremental audit cost, OMB does not expect a significant

increase in major programs from this provision.

It should be pointed out that any Type A program selected to be

audited under this provision must be low-risk. If it were not low-risk,

it would have been audited as a major program under the risk-based

approach. Therefore, this provision will not reduce the number of high-

risk Type B programs audited as major.

Required Level of Internal Control Testing

Comment: All CPA commenters and over half of the State auditor

commenters opposed the proposed requirement for the auditor to plan the

testing of internal control over Federal programs to achieve a low

assessed level of control risk. Concerns included that it increases the

amount of audit work, limits auditor's judgment, and is arbitrary. By

contrast, one commenter stated support for the proposed requirement

because it would force the auditor to look at internal control over

Federal programs and to note reportable conditions when internal

control is not adequate.

Response: The proposal has been adopted, with no changes. Some

commenters appeared to understand this provision to mean that, when

control exceptions are found, the auditor is required to continue

testing until a low level of risk is achieved. This is not the case.

The auditor is not required to expand testing to try to achieve a low

level of risk. The auditor is only required to plan the audit for a low

level of assessed risk and report the results of this testing.

It has been a longstanding Federal policy that the recipient of

Federal funds is required to establish internal control systems to

provide reasonable assurance that it is managing Federal funds in

compliance with applicable laws and regulations. Also, the Single Audit

Act (31 U.S.C. Chapter 75) requires the auditor to test internal

control over Federal funds subject to that Act. Therefore, it is

reasonable to require the auditor to plan the audit consistent with the

level of internal control the recipient of Federal funds is required to

maintain. Also, the Circular permits the auditor to not test internal

controls which are inadequate and instead disclose a reportable

condition or material weakness and perform additional tests of

compliance as necessary in the auditor's judgment.

Schedule of Expenditures of Federal Awards

Comment: Most commenters supported the level of detail included in

the proposal for the schedule of expenditures of Federal awards. One

commenter suggested that it would be beneficial for pass-through

entities to identify in the schedule the amount passed-through to

subrecipients. This disclosure would tell program managers the amount

of program expenditures that was subject to audit at the pass-through

entity level.

Response: A provision has been added to encourage, but not require,

pass-through entities to disclose in the schedule the total amount

provided to subrecipients from each Type A program and from each Type B

program which is audited as a major program. In most cases this

information should be readily available and would improve the

usefulness of the schedule.

Attestation on Internal Control and Compliance

Comment: The preamble to the proposed revision requested comments

as to whether a requirement should be added for the audits to include a

management assertion and auditor attestation for internal control or

compliance. The majority of commenters were opposed to this change

because it would impose additional requirements on entity management

and increase audit cost.

Response: In light of the concerns raised, this proposed revision

has not been added to the Circular.

Criteria for Reporting Questioned Costs

Comment: Commenters' views on the proposed $10,000 threshold for

reporting known or likely questioned costs varied from describing it as

too high, too low, or just right. Commenters expressed concern that the

concept of likely questioned costs needed further clarification.

Response: OMB believes that the $10,000 threshold for reporting

questioned costs provides the appropriate balance between reporting all

questioned costs and only reporting large questioned costs. Also, audit

findings which do not result in questioned costs but are material to

the types of compliance requirements or an audit objective in the

compliance supplements will still be reported as reportable conditions

under Sec. ______.510(a)(1) or material noncompliance under

Sec. ______.510(a)(2).

Generally accepted auditing standards require the auditor to

project the amount of known questioned costs identified in the sample

to the items in the major program and to consider the best estimate of

total questioned costs (both known and likely) in determining an

opinion on compliance. The Circular does not require the auditor to

report an exact amount or statistical projection of likely questioned

costs, but rather to include an audit finding when the auditor's

extrapolation of these likely questioned costs is greater than $10,000.

Since the requirement for the auditor to consider likely questioned

costs is not new, and since likely questioned costs which are greater

than $10,000 may be significant to a Federal program, OMB believes they

should be included in audit findings. In reporting likely questioned

costs, it is important that the auditor follows the requirements of

Sec. ______.510(b) and provides appropriate information for judging the

prevalence and consequences of the audit finding.

Requirement To Follow Up on Prior Audit Findings

Comment: One commenter expressed concern that the requirement for

the summary schedule of prior audit findings to include audit findings

from before the prior year may result in many old audit findings being

reported year after year.

Response: As a practical matter, unless an audit finding is

repeated in a subsequent year, there is limited value in continuing to

follow up on an audit finding when the Federal agency or pass-through

entity chooses to take no action. Therefore, a provision has been added

stating that a valid reason for considering an audit finding as not

warranting further action is that: (a) two years have passed since the

audit report was filed with the central clearinghouse designated by

OMB, (b) the Federal agency or pass-through entity is not currently

following up on the audit finding, and (c) a management decision was

not issued.

Also, for the first year the entity is audited under this Circular,

the prior year report may not have included the equivalent of a summary

schedule of prior audit findings. In these cases, the auditee may

exercise judgment and only include, to the extent practical, audit

findings before the prior year.

[[Page 19137]]

Corrective Action Plan

Comment: Some college and university commenters expressed concern

that the requirement to list the name of the contact person responsible

for corrective action precluded a non-profit organization from naming

one person responsible for all audit findings.

Response: The proposal has been adopted, with no changes. Some

commenters appeared to misunderstand this provision. It is important

that a non-profit organization name a contact person or persons to be

responsible for corrective action. However, contrary to the commenters'

understanding, the non-profit organization has discretion to determine

whether one person should be responsible for all or a group of audit

findings or whether a separate person should be responsible for each

audit finding.

Pass-Through Entity's Responsibility for Subrecipient Audit

Comment: A few commenters expressed concern that, unless the pass-

through entity gave the subrecipient $300,000, it would be difficult to

determine whether the subrecipient was required to have an audit under

the Circular. Specifically, the commenters asked for guidance on how

the pass-through entity could determine if the subrecipient received

other Federal awards which cumulatively added up to the $300,000

threshold for audit.

Response: This provision has been adopted, with no changes. There

was no intention that this provision require the passthrough entity to

perform extensive verification procedures to determine the total

Federal expenditures of a subrecipient. OMB expects that, in many

cases, the pass-through entity will have knowledge of the subrecipient

sufficient to estimate the subrecipient's total Federal expenditures.

Another technique would be for the pass-through entity to clearly

explain the audit requirements to the subrecipient and then ask the

subrecipient the amount of its total Federal expenditures.

Audit Cognizance

Comment: Some college and university commenters expressed concern

that the cognizant agency determination was not consistent with the

proposed revision to OMB Circular A-21, ``Cost Principles for

Educational Institutions'' (60 FR 7105; February 6, 1995), and could

result in an entity having one cognizant agency for audit purposes and

another for indirect cost rate negotiation.

Response: The responsibilities for audit cognizance and indirect

cost negotiation are different and, therefore, the same Federal agency

does not need to be cognizant for both. The name for the cognizant

agency has been changed to the cognizant agency for audit to clearly

distinguish it from the cognizant agency for indirect cost rate

negotiation.

Provision for Small and Minority Audit Firms

Comment: One commenter expressed concern that the provision for

small and minority audit firms was proposed for deletion.

Response: As explained in the preamble to the proposed revision,

this provision was proposed to be deleted because the requirements

related to small and minority audit firms are more fully covered in

Sec. ______.44(b)(4) of OMB Circular A-110, ``Uniform Requirements for

Grants and Agreements With Institutions of Higher Education, Hospitals

and Other Non-Profit Organizations'' (58 FR 62992; November 29, 1993).

There was no intention to change or diminish the requirements for using

small and minority audit firms. To ensure that these requirements

continue to receive consideration, a provision has been added to the

auditor selection paragraph that, whenever possible in procuring audit

services, non-profit organizations shall make positive efforts to

utilize small businesses, minority-owned firms, and women's business

enterprises, as stated in OMB Circular A-110.

Restriction on Auditor Also Preparing Indirect Cost Proposal

Comment: The preamble to the proposed revision requested comments

on whether the auditor should also be permitted to prepare the indirect

cost proposal (including similar documents, such as the cost allocation

plan, or the disclosure statement required by OMB Circular A-21). All

Federal agency commenters and most State auditor commenters cited at

least an appearance of lack of independence when the same auditor both

performed the audit and prepared the indirect cost proposal. One

Federal agency commenter stated, ``In preparing the indirect cost

proposal, the auditor is an advocate for the client before the Federal

Government. We believe it stretches the bounds of standards for the

auditor to be considered independent to audit this same indirect cost

proposal for the purpose of providing assurances to the Federal

Government.'' In contrast, CPAs and non-profit organizations did not

see an independence problem and stated there were significant

efficiency advantages for the same firm to both perform the audit and

prepare the indirect cost proposal.

Response: A provision (Sec. ______.305(b)) has been added to

preclude the same auditor from preparing the indirect cost proposal or

cost allocation plan when indirect costs exceeded $1 million in the

prior year. This threshold was chosen to limit this restriction to a

relatively small number of entities, while still protecting the Federal

interest. The prior year was chosen because non-profit organizations

often engage the auditor before the end of the year and at this time it

may be unknown whether the current year's indirect costs will exceed

the $1 million threshold. Based on available data, OMB estimates that

entities with indirect costs exceeding $1 million cumulatively receive

approximately 90 percent of the total indirect costs charged by non-

profit organizations.

This restriction applies to the base year from which financial data

is used to compute the rates even though the audit of the base year

financial statements is often completed before the indirect cost

proposal or cost allocation plan is prepared. The base year was

included to enhance the appearance of independence to the Federal

agencies which rely upon the auditor's testing of information used in

both the calculation and application of indirect cost rates.

The disclosure statements required by OMB Circular A-21 have been

excluded from this restriction because the disclosure statement is new,

many of the statements will be submitted before the effective date of

this Circular A-133 revision, and the disclosure statements are

expected to have a long life. Under these circumstances, it does not

seem appropriate public policy to restrict auditors who prepared the

original disclosure statements from performing the audit for a long

period of time. Therefore, the disclosure statements required by OMB

Circular A-21 have been excluded from this restriction on auditor

selection. OMB will monitor these disclosure statements and may revisit

this issue again at a later date.

The implementation date for this provision is delayed two years

until audits of fiscal years ending on or after June 30, 1999, to

minimize any effect this provision could have on existing contracts for

audit services. For example, an auditor that prepared an indirect cost

proposal or cost allocation which is used as the basis for charging

indirect costs in the fiscal year ending June 30, 1999, is not

permitted to perform the 1999 audit.

[[Page 19138]]

Report Due Date

Comment: Most State auditor and college and university commenters

expressed opposition to shortening the due date for reports from 13 to

9 months. However, most State manager and non-profit organization

commenters supported the change. The view appeared to be that those

receiving and relying on the reports and those currently completing the

audit in 9 months liked the change. By contrast, it appears that those

who were not currently completing the audit in 9 months opposed the

change.

Response: This proposal has been adopted, with a change. The

provision retains the requirement in the Circular that, when the audit

is completed earlier than the due date, the reporting package must be

submitted within 30 days of audit report issuance.

Certification

Comment: Comments were mixed on the certification form. Most State

auditor and CPA commenters opposed the certification form, citing it as

an increased burden on them to prepare and duplicative of information

in the audit reports. Most college and university commenters supported

the use of the certification form as a method of reducing the volume of

paper in single audits.

On a related issue, some State auditor and CPA commenters cited a

possible logistical problem that the auditor would not be able to

complete the audit report until the certification form was prepared

(because the auditor must read the certification form and report as an

audit finding material inconsistencies with the audit) and the

certification form could not be prepared until the audit is completed.

Response: The requirements for the auditor to read the

certification form and report as an audit finding any material

inconsistencies has not been adopted. As a preventive control to ensure

proper distribution of audit reports, a requirement

(Sec. ______.500(f)) has been added for the auditor to identify to the

auditee those Federal awarding agencies and pass-through entities which

are required to receive a copy of the reporting package. Also, a

requirement (Sec. ______.505(b)) was added for the schedule of findings

and questioned costs prepared by the auditor to include a summary of

the auditor's results. This summary will facilitate preparation of the

certification form by the auditee.

Management Letter

Comment: Most commenters expressed concern that routinely including

management letters as part of a public filing of the auditor's reports

could reduce the effectiveness of management letters.

Response: OMB agrees that it is not necessary to routinely include

auditor's management letters as part of the report submission.

Therefore, this provision has not been adopted. However, because

management letters may contain information relevant to the needs of

Federal agencies and pass-through entities to monitor Federal awards, a

provision has been added that Federal agencies and pass-through

entities can request a copy of management letters.

Coordinated Audit Approach

Comment: A few commenters expressed concern that the term

coordinated audit approach was not used in the proposed revision and

whether the removal of this term precluded Federal auditors from

participating in audits required by this Circular.

Response: The proposed revision does not prohibit the participation

of Federal auditors in audits required by the Circular, a concept

referred to as the coordinated audit approach. This term was not

included in the proposed revision because the definition of auditor

clearly includes Federal audit organizations and further reference to

the term coordinated audit approach was not considered necessary. A

provision (Sec. ______.305(c)) has been added to clarify that Federal

auditors may perform all or part of the work required under the

Circular if they fully comply with the requirements of the Circular.

GOCOs and FFRDCs

Comment: A few Federal agency and non-profit organization

commenters expressed concern that the proposed revision did not

specifically address Federal Government owned, contractor operated

facilities (GOCOs) or Federally Funded Research and Development Centers

(FFRDCs).

Response: A provision has been added to the definition of the term

Federal award that contracts to operate GOCOs are excluded from the

requirements of this Circular. Also, paragraph Sec. ______.200(e) has

been added to allow management of an auditee that owns or operates a

FFRDC to elect to treat the FFRDC as a separate entity for purposes of

this Circular. If the FFRDC is treated as a separate entity, the

determination of cognizant agency for audit would be based upon this

separate entity.

Questions and Answers on OMB Circular A-133

Comment: In May 1992, the Standards Subcommittee of the President's

Council on Integrity and Efficiency (PCIE) issued PCIE Position

Statement No. 6, titled ``Questions and Answers on OMB Circular A-133''

(A-133 Q&A). A commenter inquired whether this document could be used

as guidance in performing audits under the revised Circular A-133.

Response: Since this revision makes significant changes in OMB

Circular A-133, the May 1992 A-133 Q&A should not be used as a primary

source of guidance for audits performed under this revision. However,

many items in the A-133 Q&A were incorporated in this revision and the

A-133 Q&A may be a useful historical reference of the single audit

process. If there are significant questions concerning the revised

Circular A-133, OMB will consider issuing a revised A-133 Q&A.

Compliance Supplements

Comment: Some CPA and State auditor commenters expressed concern

that Federal agencies should keep the compliance supplements current.

Response: OMB recognizes the need for updated compliance

supplements and is working with Federal agencies and the PCIE to

complete this task. OMB's current plans are to issue a revised

compliance supplement by the end of 1996.

Public Information Collection

The revision includes an information collection requirement for

reports from auditors concerning their audit findings to auditees

(Sec. ______.235(b)(4), Sec. ______.505, and Sec. ______.510) and

reports from auditees to the Federal Government concerning these report

(Sec. ______.235(c) and Sec. ______.320). OMB requested comments on the

proposed information collection described in the Circular in a April 1,

1996 Federal Register notice (61 FR 14338) in accordance with the

Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35 et seq). The

proposed information collection requirement will not be effective until

another notice is published in the Federal Register. The subsequent

notice will provide the effective date and the OMB control number.

Alice M. Rivlin,

Director.

April 22, 1996.

Circular No. A-133, Revised

TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS

[[Page 19139]]

SUBJECT: Audits of Institutions of Higher Education and Other Non-

Profit Institutions

1. Purpose. This Circular sets forth standards for obtaining

consistency and uniformity among Federal agencies for the audit of non-

profit organizations expending Federal awards.

2. Authority. Circular A-133 is issued under the authority of

sections 503 and 1111 of title 31, United States Code, and Executive

Orders 8248 and 11541.

3. Supersession. This Circular supersedes the prior Circular A-133,

issued March 8, 1990. For effective dates, see paragraph 10.

4. Policy. Except as provided herein, the standards set forth in

this Circular shall be applied by all Federal agencies. If any statute

specifically prescribes policies or specific requirements that differ

from the standards provided herein, the provisions of the statute shall

govern.

Federal agencies shall apply the provisions of the sections of this

Circular to non-profit organizations, whether they are recipients

expending Federal awards received directly from Federal awarding

agencies, or are subrecipients expending Federal awards received from a

pass-through entity (a recipient or another subrecipient). Therefore,

whereas this Circular does not apply to grants, contracts, or other

agreements between the Federal Government and State or local

governments (which are covered by Circular A-128, ``Audits of State and

Local Governments''), this Circular does apply to awards that State and

local governments make to non-profit organizations covered by this

Circular. This Circular does not apply to public institutions of higher

education and hospitals which are audited under Office of Management

and Budget (OMB) Circular A-128.

This Circular does not apply to non-U.S. based entities expending

Federal awards received either directly as a recipient or indirectly as

a subrecipient.

5. Definitions. The definitions of key terms used in this Circular

are contained in Sec. ______.105 in the Attachment to this Circular.

6. Required Action. The specific requirements and responsibilities

of Federal agencies and non-profit organizations are set forth in the

Attachment to this Circular. Federal agencies making awards to non-

profit organizations, either directly or indirectly, shall adopt the

language in the Circular in codified regulations not later than

November 30, 1996, unless different provisions are required by Federal

statute or are approved by OMB.

7. OMB Responsibilities. OMB will review Federal agency regulations

and implementation of this Circular, and will provide interpretations

of policy requirements and assistance to ensure effective and efficient

implementation.

8. Information Contact. Further information concerning Circular A-

133 may be obtained by contacting the Financial Standards and Reporting

Branch, Office of Federal Financial Management, Office of Management

and Budget, Washington, DC 20503, telephone (202) 395-3993.

9. Termination Review Date. This Circular will have a policy review

three years from the date of issuance.

10. Effective Dates. The standards set forth in Sec. ______.400 of

the Attachment to this Circular, which apply directly to Federal

agencies, shall be effective July 1, 1996, and shall apply to audits of

fiscal years ending on or after June 30, 1997.

The standards set forth in this Circular that Federal agencies are

to apply to non-profit organizations shall be adopted by Federal

agencies in codified regulations not later than November 30, 1996, so

that they will apply to audits of fiscal years ending on or after June

30, 1997, with the exception that Sec. ______.305(b) of the Attachment

applies to audits of fiscal years ending on or after June 30, 1999. In

the interim period, until the standards in this Circular are adopted

and become applicable, the audit provisions of Circular A-133, issued

March 8, 1990, shall continue in effect.

Alice M. Rivlin,

Director.

Attachment

PART____--AUDITS OF INSTITUTIONS OF HIGHER EDUCATION AND OTHER NON-

PROFIT INSTITUTIONS

Subpart A--General

Sec.

____.100 Purpose.

____.105 Definitions.

Subpart B--Audits

____.200 Audit requirements.

____.205 Basis for determining Federal awards expended.

____.210 Subrecipient and vendor determinations.

____.215 Relation to other audit requirements.

____.220 Frequency of audits.

____.225 Sanctions.

____.230 Audit costs.

____.235 Program-specific audits.

Subpart C--Auditees

____.300 Auditee responsibilities.

____.305 Auditor selection.

____.310 Financial statements.

____.315 Audit findings follow-up.

____.320 Report submission.

Subpart D--Federal Agencies and Pass-Through Entities

____.400 Responsibilities.

____.405 Management decision.

Subpart E--Auditors

____.500 Scope of audit.

____.505 Audit reporting.

____.510 Audit findings.

____.515 Audit working papers.

____.520 Major program determination.

____.525 Criteria for Federal program risk.

____.530 Criteria for a low-risk auditee.

Authority: [Each Federal agency should insert its own rule

making authority using appropriate United States Code citations.]

Subpart A--General

Sec. ______.100 Purpose.

This part sets forth standards for obtaining consistency and

uniformity among Federal agencies for the audit of non-profit

organizations expending Federal awards.

Sec. ______.105 Definitions.

Auditee means any organization that expends Federal awards which

must be audited under this part.

Auditor means an auditor, that is a public accountant or a Federal,

State or local government audit organization, which meets the general

standards specified in generally accepted government auditing standards

(GAGAS). The term auditor does not include internal auditors of non-

profit organizations.

Audit finding means deficiencies which the auditor is required by

Sec. ______.510(a) to report in the schedule of findings and questioned

costs.

CFDA number means the number assigned to a Federal program in the

Catalog of Federal Domestic Assistance (CFDA).

Cluster of programs means Federal programs with different CFDA

numbers that are defined as a cluster of programs in the compliance

supplements because they are closely related programs and share common

compliance requirements. A cluster of programs shall be considered as

one program for determining major programs, as described in

Sec. ______.520, and whether a program-specific audit may be elected

under Sec. ______.200(c).

Cognizant agency for audit means the Federal agency designated to

carry out the responsibilities described in Sec. ______.400(a).

Compliance supplements refers to the Compliance Supplement for

Audits of Institutions of Higher Learning and Other Non-Profit

Institutions and the Compliance Supplement for Single

[[Page 19140]]

Audits of State and Local Governments or such documents as the Office

of Management and Budget (OMB) or its designee may issue to replace

them. These documents are available from the Government Printing

Office, Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA

15250-7954, telephone (202) 512-1800.

Corrective action means action taken by the auditee that:

(1) Corrects identified deficiencies;

(2) Produces recommended improvements; or

(3) Demonstrates that audit findings are either invalid or do not

warrant auditee action.

Federal agency has the same meaning as the term agency in Section

551(1) of title 5, United States Code.

Federal award means Federal financial assistance and Federal cost-

reimbursement contracts. It includes Federal awards made directly by

Federal awarding agencies or indirectly by recipients of Federal awards

or subrecipients. It does not include procurement contracts, under

grants or contracts, used to buy goods or services from vendors. Any

audits of such vendors shall be covered by the terms and conditions of

the contract. Contracts to operate Federal Government owned, contractor

operated facilities (GOCOs) are excluded from the requirements of this

part.

Federal awarding agency means the Federal agency that provides an

award directly to the recipient.

Federal financial assistance means assistance received or

administered to carry out a program. Such assistance may be in the form

of grants, cooperative agreements, donated surplus property, food

commodities, loans, loan guarantees, property, interest subsidies,

insurance, direct appropriations, and other assistance.

Federal program means:

(1) All Federal awards under the same CFDA number. When no CFDA

number is assigned, all Federal awards from the same agency made for

the same purpose should be combined and considered one program. State

governments may combine funding from different Federal awards in

providing assistance to their subrecipients when the awards are closely

related programs and share common compliance requirements. In this

case, the State government may require the subrecipient to treat the

combined Federal awards as a single program.

(2) A category of Federal awards which is a group of awards in the

categories of:

(i) Research and development;

(ii) Student financial aid; or

(iii) Cluster of programs.

GAGAS means generally accepted government auditing standards issued

by the Comptroller General of the United States, which are applicable

to financial audits.

Generally accepted accounting principles has the meaning specified

in generally accepted auditing standards issued by the American

Institute of Certified Public Accountants (AICPA).

Internal control has the meaning specified in generally accepted

auditing standards issued by the AICPA.

Internal control over Federal programs means a process--effected by

an entity's management and other personnel--designed to provide

reasonable assurance regarding the achievement of the following

objectives for Federal programs:

(1) Transactions are properly recorded and accounted for to:

(i) Permit the preparation of reliable financial statements and

Federal reports;

(ii) Maintain accountability over assets; and

(iii) Demonstrate compliance with laws, regulations, and other

compliance requirements;

(2) Transactions are executed in compliance with:

(i) Laws, regulations, and the provisions of contracts or grant

agreements that could have a direct and material effect on a Federal

program; and

(ii) Any other laws and regulations that are identified in the

compliance supplements; and

(3) Funds, property, and other assets are safeguarded against loss

from unauthorized use or disposition.

Loan means a Federal loan or loan guarantee received or

administered by a non-profit organization.

Major program means a Federal program determined by the auditor to

be a major program in accordance with Sec. ______.520 or a program

identified as a major program by a Federal agency or pass-through

entity in accordance with Sec. ______.215(c).

Management decision means the evaluation by the Federal awarding

agency or pass-through entity of the audit findings and corrective

action plan and the issuance of a written decision as to what

corrective action is necessary.

Non-profit organization means: (1) any corporation, trust,

association, cooperative, or other organization which:

(i) Is operated primarily for scientific, educational, service,

charitable, or similar purposes in the public interest;

(ii) Is not organized primarily for profit; and

(iii) Uses its net proceeds to maintain, improve, or expand its

operations; and

(2) The term non-profit organization includes both non-profit

institutions of higher education and hospitals, and public institutions

of higher education and hospitals that are not audited in accordance

with Circular A-128, ``Audits of State and Local Governments''

(Available from Office of Administration, Publications Office, room

2200, New Executive Office Building, Washington, DC 20503; telephone

(202) 395-7332).

OMB means the Executive Office of the President, Office of

Management and Budget.

Oversight agency for audit means the Federal awarding agency that

provides the predominant amount of direct funding to a recipient not

assigned a cognizant agency for audit. When there is no direct funding,

the Federal agency with the predominant indirect funding shall assume

the oversight responsibilities. The duties of the oversight agency for

audit are described in Sec. ______.400(b).

Pass-through entity means a non-profit organization or other entity

that provides a Federal award to a subrecipient.

Program-specific audit means an audit of one Federal program as

provided for in Sec. ______.200(c) and Sec. ______.235.

Questioned cost means a cost that is questioned by the auditor

because of an audit finding:

(1) Which resulted from a possible violation of a provision of a

law, regulation, contract, grant, cooperative agreement, or other

agreement or document governing the use of Federal funds, including

funds used to match Federal funds;

(2) Where the costs, at the time of the audit, are not supported by

adequate documentation; or

(3) Where the costs incurred appear unreasonable and do not reflect

the actions a prudent person would take in the circumstances.

Recipient means a non-profit organization that expends Federal

awards received directly from a Federal awarding agency to carry out a

Federal program.

Research and development (R&D) means all research activities, both

basic and applied, and all development activities that are performed by

a non-profit organization. Research is defined as a systematic study

directed toward fuller scientific knowledge or understanding of the

subject studied. The term research also includes activities involving

the training of individuals in research techniques

[[Page 19141]]

where such activities utilize the same facilities as other research and

development activities and where such activities are not included in

the instruction function. Development is the systematic use of

knowledge and understanding gained from research directed toward the

production of useful materials, devices, systems, or methods, including

design and development of prototypes and processes.

Single audit means an audit which includes both the entity's

financial statements and the Federal awards as described in

Sec. ______.500.

Student Financial Aid (SFA) includes those programs of general

student assistance, such as those authorized by Title IV of the Higher

Education Act of 1965, as amended, (20 U.S.C. 1070 et seq.) which is

administered by the U.S. Department of Education, and similar programs

provided by other Federal agencies. It does not include programs which

provide fellowships or similar Federal awards to students on a

competitive basis, or for specified studies or research.

Subrecipient means the entity that expends Federal awards received

from a pass-through entity to carry out a Federal program, but does not

include an individual that is a beneficiary of such a program. A

subrecipient may also be a recipient of other Federal awards directly

from a Federal awarding agency. Guidance on distinguishing between a

subrecipient and a vendor is provided in Sec. ______.210.

Types of compliance requirements refers to the types of compliance

requirements listed in the compliance supplements. Examples include

cash management, Federal financial reporting, allowable costs/cost

principles, types of services allowed or unallowed, eligibility, and

matching.

Vendor means a dealer, distributor, merchant, or other seller

providing goods or services that are required for the conduct of a

Federal program. These goods or services may be for an organization's

own use or for the use of beneficiaries of the Federal program.

Additional guidance on distinguishing between a subrecipient and a

vendor is provided in Sec. ______.210.

Subpart B--Audits

Sec. ______.200 Audit requirements.

(a) Audit required. Non-profit organizations that expend $300,000

or more in a year in Federal awards shall have a single or program-

specific audit conducted for that year in accordance with the

provisions of this part. Guidance on determining Federal awards

expended is provided in Sec. ______.205.

(b) Single audit. Non-profit organizations that expend $300,000 or

more in a year in Federal awards shall have a single audit conducted in

accordance with Sec. ______.500 except when they elect to have a

program-specific audit conducted in accordance with paragraph (c) of

this section.

(c) Program-specific audit election. When an auditee expends

Federal awards under only one Federal program (excluding R&D) and the

Federal program's laws, regulations, or grant agreements do not require

a financial statement audit of the auditee, the auditee may elect to

have a program-specific audit conducted in accordance with

Sec. ______.235. A program-specific audit may not be elected for R&D

unless all expenditures are for Federal awards received from the same

Federal agency, or the same Federal agency and the same pass-through

entity, and that Federal agency, or pass-through entity in the case of

a subrecipient, approves in advance a program-specific audit.

(d) Exemption when expenditures are less than $300,000. Non-profit

organizations that expend less than $300,000 a year in Federal awards

are exempt from Federal audit requirements for that year, except as

noted in Sec. ______.215(a), but records must be available for review

or audit by appropriate officials of the Federal agency, pass-through

entity, and General Accounting Office (GAO).

(e) Federally Funded Research and Development Centers (FFRDC).

Management of an auditee that owns or operates a FFRDC may elect to

treat the FFRDC as a separate entity for purposes of this part.

Sec. ______.205 Basis for determining Federal awards expended.

(a) Determining Federal awards expended. The determination of when

an award is expended should be based on when the activity related to

the award occurs. Generally, the activity pertains to events that

require the non-profit organization to comply with laws, regulations,

and the provisions of contracts or grant agreements, such as:

expenditure/expense transactions associated with grants, cost-

reimbursement contracts, cooperative agreements, and direct

appropriations; the disbursement of funds passed through to

subrecipients; the use of loan proceeds under loan and loan guarantee

programs; the receipt of property; the receipt of surplus property; the

receipt or use of program income; the distribution or consumption of

food commodities; the disbursement of amounts entitling the non-profit

organization to an interest subsidy; and, the period when insurance is

in force.

(b) Loan and loan guarantees (loans). Since the Federal Government

is at risk for loans until the debt is repaid, the following guidelines

shall be used to calculate the value of Federal awards expended under

loan programs, except as noted in paragraphs (c) and (d) of this

section:

(1) Value of new loans made or received during the fiscal year;

plus

(2) Balance of loans from previous years for which the Federal

Government imposes continuing compliance requirements; plus

(3) Any interest subsidy, cash, or administrative cost allowance

received.

(c) Loan and loan guarantees (loans) at institutions of higher

education. When loans are made to students of an institution of higher

education but the institution does not make the loans, then only the

value of loans made during the year shall be considered Federal awards

expended in that year. The balance of loans for previous years is not

included as Federal awards expended because the lender accounts for the

prior balances.

(d) Prior loan and loan guarantees (loans). Loans, the proceeds of

which were received and expended in prior-years, are not considered

Federal awards expended under this part when the laws, regulations, and

the provisions of contracts or grant agreements pertaining to such

loans impose no continuing compliance requirements other than to repay

the loans.

(e) Endowment funds. The cumulative balance of Federal awards for

endowment funds which are federally restricted are considered awards

expended in each year in which the funds are still restricted.

(f) Free rent. Free rent received by itself is not considered an

award expended under this part. However, free rent received as part of

an award to carry out a Federal program shall be included in

determining Federal awards expended and subject to audit under this

part.

(g) Valuing non-cash assistance. Federal non-cash assistance, such

as free rent, food stamps, food commodities, donated property, or

donated surplus property, shall be valued at fair market value at the

time of receipt or the assessed value provided by the Federal agency.

(h) Medicare. Medicare payments to a non-profit organization for

providing patient care services to Medicare eligible individuals are

not considered Federal awards expended under this part.

[[Page 19142]]

(i) Medicaid. Medicaid payments to a non-profit organization for

providing patient care services to Medicaid eligible individuals are

not considered Federal awards expended under this part unless a State

requires the funds to be treated as Federal awards expended because

reimbursement is on a cost-reimbursement basis.

Sec. ______.210 Subrecipient and vendor determinations.

(a) General. An auditee may be a recipient, a subrecipient, and a

vendor. Federal awards expended as a recipient or a subrecipient would

be subject to audit under this part. The payments received for goods or

services provided as a vendor would not be considered Federal awards.

The guidance in paragraphs (b) and (c) of this section should be

considered in determining whether payments constitute a Federal award

or a payment for goods and services.

(b) Federal award. Characteristics indicative of a Federal award

received by a subrecipient are when the organization:

(1) Determines who is eligible to receive what Federal financial

assistance;

(2) Has its performance measured against whether the objectives of

the Federal program are met;

(3) Has responsibility for programmatic decision making;

(4) Has responsibility for adherence to applicable Federal program

compliance requirements; and

(5) Uses the Federal funds to carry out a program of the

organization as compared to providing goods or services for a program

of the pass-through entity.

(c) Payment for goods and services. Characteristics indicative of a

payment for goods and services received by a vendor are when the

organization:

(1) Provides the goods and services within normal business

operations;

(2) Provides similar goods or services to many different

purchasers;

(3) Operates in a competitive environment;

(4) Provides goods or services that are ancillary to the operation

of the Federal program; and

(5) Is not subject to compliance requirements of the Federal

program.

(d) Use of judgment in making determination. There may be unusual

circumstances or exceptions to the listed characteristics. In making

the determination of whether a subrecipient or vendor relationship

exists, the substance of the relationship is more important than the

form of the agreement. It is not expected that all of the

characteristics will be present and judgment should be used in

determining whether an entity is a subrecipient or vendor.

(e) For-profit subrecipient. Since this part does not apply to for-

profit subrecipients, the pass-through entity is responsible for

establishing requirements, as necessary, to ensure compliance by for-

profit subrecipients. The contract with the for-profit subrecipient

should describe applicable compliance requirements and the for-profit

subrecipient's compliance responsibility. Methods to ensure compliance

for Federal awards made to for-profit subrecipients may include pre-

award audits, monitoring during the contract, and post-award audits.

(f) Compliance responsibility for vendors. In most cases, the

auditee's compliance responsibility for vendors is only to ensure that

the procurement, receipt, and payment for goods and services comply

with laws, regulations, and the provisions of contracts or grant

agreements. Program compliance requirements normally do not pass

through to vendors. However, the auditee is responsible for ensuring

compliance for vendor transactions which are structured such that the

vendor is responsible for program compliance or the vendor's records

must be reviewed to determine program compliance. Also, when these

vendor transactions relate to a major program, the scope of the audit

shall include determining whether these transactions are in compliance

with laws, regulations, and the provisions of contracts or grant

agreements.

Sec. ______.215 Relation to other audit requirements.

(a) Audit under this part in lieu of other audits. An audit made in

accordance with this part shall be in lieu of any financial audit

required under individual Federal awards. To the extent this audit

meets a Federal agency's needs, it shall rely upon and use such audits.

The provisions of this part neither limit the authority of Federal

agencies, including their Inspectors General, or GAO to conduct or

arrange for additional audits (e.g., financial audits, performance

audits, evaluations, inspections, or reviews) nor authorize any auditee

to constrain Federal agencies from carrying out additional audits. Any

additional audits shall be planned and performed in such a way as to

build upon work performed by other auditors.

(b) Federal agency to pay for additional audits. A Federal agency

that conducts or contracts for additional audits shall, consistent with

other applicable laws and regulations, arrange for funding the cost of

such additional audits.

(c) Request for a program to be audited as a major program. A

Federal agency may request an auditee to have a particular Federal

program audited as a major program in lieu of the Federal agency

conducting or arranging for the additional audits. To allow for

planning, such requests should be made at least 180 days prior to the

end of the fiscal year to be audited. The auditee, after consultation

with its auditor, should promptly respond to such request by informing

the Federal agency whether the program would otherwise be audited as a

major program using the risk-based audit approach described in

Sec. ______.520 and, if not, the estimated incremental cost. The

Federal agency shall then promptly confirm to the auditee whether it

wants the program audited as a major program. If the program is to be

audited as a major program based upon this Federal agency request, and

the Federal agency agrees to pay the full incremental costs, then the

auditee shall have the program audited as a major program. A pass-

through entity may use the provisions of this paragraph for a

subrecipient.

Sec. ______.220 Frequency of audits.

Audits required by this part shall be performed annually. However,

a Federal agency or pass-through entity may allow an auditee that

elects a program-specific audit under Sec. ______.200(c) to perform the

audit every two years. Two-year audits must cover both years.

Sec. ______.225 Sanctions.

No audit costs may be charged to Federal awards when audits

required by this part have not been made or have been made but not in

accordance with this part. In cases of continued inability or

unwillingness to have an audit conducted in accordance with this part,

Federal agencies and pass-through entities shall take appropriate

action using sanctions such as:

(a) Withholding a percentage of Federal awards until the audit is

completed satisfactorily;

(b) Withholding or disallowing overhead costs;

(c) Suspending Federal awards until the audit is conducted; or

(d) Terminating the Federal award.

Sec. ______.230 Audit costs.

Unless prohibited by law, the cost of audits made in accordance

with the provisions of this part are allowable charges to Federal

awards. The charges may be considered a direct cost or an allocated

indirect cost, as determined in accordance with the provisions of

[[Page 19143]]

applicable OMB cost principles circulars, Federal Acquisition

Regulation (48 CFR part 31), or other applicable cost principles or

regulations.

Sec. ______.235 Program-specific audits.

(a) Program-specific audit guide available. In many cases, a

program-specific audit guide will be available to provide specific

guidance to the auditor with respect to internal control, compliance

requirements, suggested audit procedures, and audit reporting

requirements. The auditor should contact the Office of Inspector

General of the Federal agency to determine whether such a guide is

available. When a current program-specific audit guide is available,

the auditor shall follow GAGAS and the guide when performing a program-

specific audit.

(b) Program-specific audit guide not available. (1) When a program-

specific audit guide is not available, the auditee and auditor shall

have basically the same responsibilities for the Federal program as

they would have for an audit of a major program in a single audit.

(2) The auditee shall prepare the financial statement(s) for the

Federal program that includes, at a minimum, a schedule of the Federal

program's expenditures and notes that describe the significant

accounting policies used in preparing the schedule, a summary schedule

of prior audit findings consistent with the requirements of

Sec. ______.315(b), and a corrective action plan consistent with the

requirements of Sec. ______.315(c).

(3) The auditor shall:

(i) Perform an audit of the financial statement(s) for the Federal

program in accordance with GAGAS;

(ii) Obtain an understanding of internal control and perform tests

of internal control over the Federal program consistent with the

requirements of Sec. ______.500(c) for a major program;

(iii) Perform procedures to determine whether the auditee has

complied with laws, regulations, and the provisions of contracts or

grant agreements that could have a direct and material effect on the

Federal program consistent with the requirements of Sec. ______.500(d)

for a major program; and

(iv) Follow up on prior audit findings, perform procedures to

assess the reasonableness of the summary schedule of prior audit

findings prepared by the auditee, and report, as a current year audit

finding, when the auditor concludes that the summary schedule of prior

audit findings materially misrepresents the status of any prior audit

finding in accordance with the requirements of Sec. ______.500(e).

(4) The auditor's report(s) may be in the form of either combined

or separate reports and may be organized differently from the manner

presented in this section. The auditor's report(s) shall state that the

audit was conducted in accordance with this part and include the

following:

(i) An opinion (or disclaimer of opinion) as to whether the

financial statement(s) of the Federal program is presented fairly in

all material respects in accordance with the stated accounting

policies;

(ii) A report on internal control related to the Federal program,

which shall describe the scope of testing of internal control and the

results of the tests;

(iii) A report on compliance which includes an opinion (or

disclaimer of opinion) as to whether the auditee complied with laws,

regulations, and the provisions of contracts or grant agreements which

could have a direct and material effect on the Federal program; and

(iv) A schedule of findings and questioned costs for the Federal

program that is consistent with the requirements of

Sec. ______.505(a)(4) and includes a summary of the auditor's results

applicable to the audit of the Federal program and in a format

consistent with Sec. ______.505(b).

(c) Report submission for program-specific audits. (1) The audit

shall be completed and the reporting required by paragraph (c)(2) or

(c)(3) of this section submitted within nine months after the end of

the audit period, unless a longer period is agreed to in advance by the

Federal agency that provided the funding or a different period is

specified in a program-specific audit guide. Also, this required

reporting shall be submitted within 30 days after the issuance of the

auditor's report(s) to the auditee. Unless restricted by law or

regulation, the auditee shall make report copies available for public

inspection.

(2) When a program-specific audit guide is available, the auditee

shall submit to the central clearinghouse designated by OMB one copy of

the certification prepared in accordance with Sec. ______.320(b), as

applicable to a program-specific audit, and the reporting required by

the program-specific audit guide to be retained as an archival copy.

Also, the auditee shall submit to the Federal awarding agency or pass-

through entity the reporting required by the program-specific audit

guide.

(3) When a program-specific audit guide is not available, the

reporting package for a program-specific audit shall consist of the

certification prepared in accordance with Sec. ______.320(b), as

applicable to a program-specific audit, the financial statement(s) of

the Federal program, a summary schedule of prior audit findings, and a

corrective action plan as described in paragraph (b)(2) of this

section, and the auditor's report(s) described in paragraph (b)(4) of

this section. One copy of this reporting package shall be submitted to

the central clearinghouse designated by OMB to be retained as an

archival copy. Also, when the schedule of findings and questioned costs

disclosed audit findings or the summary schedule of prior audit

findings reported the status of any audit findings, the auditee shall

submit one copy of the reporting package to the central clearinghouse

on behalf of the Federal awarding agency, or directly to the pass-

through entity in the case of a subrecipient.

(d) Other sections of this part may apply. Program-specific audits

are subject to Sec. ______.100 through Sec. ______.215(b),

Sec. ______.220 through Sec. ______.230, Sec. ______.300 through

Sec. ______.305, Sec. ______.315, Sec. ______.320(f) through

Sec. ______.320(j), Sec. ______.400 through Sec. ______.405,

Sec. ______.510 through Sec. ______.515, and other referenced

provisions of this part unless contrary to the provisions of this

section, a program-specific audit guide, or program laws and

regulations.

Subpart C--Auditees

Sec. ______.300 Auditee responsibilities.

The auditee shall:

(a) Identify, in its accounts, all Federal awards received and

expended and the Federal programs under which they were received.

Federal program and award identification shall include, as applicable,

the CFDA title and number, award number and year, name of the Federal

agency, and name of the pass-through entity.

(b) Maintain internal control over Federal programs that provides

reasonable assurance that the auditee is managing Federal awards in

compliance with laws, regulations, and the provisions of contracts or

grant agreements that could have a material effect on each of its

Federal programs.

(c) Comply with laws, regulations, and the provisions of contracts

or grant agreements related to each of its Federal programs.

(d) Prepare appropriate financial statements, including the

schedule of expenditures of Federal awards in accordance with

Sec. ______.310.

[[Page 19144]]

(e) Ensure that the audits required by this part are properly

performed and submitted when due. When extensions to the report

submission due date required by Sec. ______.320(a) are granted by the

cognizant or oversight agency for audit, promptly notify the central

clearinghouse designated by OMB and each pass-through entity providing

Federal awards of the extension.

(f) Follow up and take corrective action on audit findings,

including preparation of a summary schedule of prior audit findings and

a corrective action plan in accordance with Sec. ______.315(b) and

Sec. ______.315(c), respectively.

Sec. ______.305 Auditor selection.

(a) Auditor procurement. In arranging for audit services, auditees

shall follow the procurement standards prescribed by Circular A-110,

``Uniform Requirements for Grants and Agreements with Institutions of

Higher Education, Hospitals and Other Non-Profit Organizations,'' or

the Federal Acquisition Regulation (48 CFR part 42), as applicable.

(Circular available from Office of Administration, Publications Office,

room 2200, New Executive Office Building, Washington, DC 20503;

telephone (202) 395-7332.) Whenever possible, auditees shall make

positive efforts to utilize small businesses, minority-owned firms, and

women's business enterprises, in procuring audit services as stated in

OMB Circular A-110 or the Federal Acquisition Regulation (48 CFR part

42), as applicable. In requesting proposals for audit services, the

objectives and scope of the audit should be made clear. Factors to be

considered in evaluating each proposal for audit services include the

responsiveness to the request for proposal, relevant experience,

availability of staff with professional qualifications and technical

abilities, the results of external quality control reviews, and price.

(b) Restriction on auditor preparing indirect cost proposals. An

auditor who prepares the indirect cost proposal or cost allocation plan

may not also be selected to perform the audit required by this part

when the indirect costs recovered by the auditee during the prior year

exceeded $1 million. This restriction applies to the base year used in

the preparation of the indirect cost proposal or cost allocation plan

and any subsequent years in which the resulting indirect cost agreement

or cost allocation plan is used to recover costs. To minimize any

disruption in existing contracts for audit services, this paragraph

applies to audits of fiscal years ending on or after June 30, 1999.

(c) Use of Federal auditors. Federal auditors may perform all or

part of the work required under this part if they comply fully with the

requirements of this part.

Sec. ______.310 Financial statements.

(a) Financial statements. The auditee shall prepare financial

statements that reflect its financial position, results of operations,

and, where appropriate, cash flows for the fiscal year audited. The

financial statements shall be for the same organizational unit and

fiscal year that is chosen to meet the requirements of this part.

(b) Schedule of expenditures of Federal awards. The auditee shall

also prepare a schedule of expenditures of Federal awards for the

period covered by the auditee's financial statements. While not

required, it is appropriate for the auditee to provide information

requested to make the schedule easier to use by Federal awarding

agencies and pass-through entities. For example, when a Federal program

has multiple award years, the auditee may list the amount of each award

year separately. At a minimum, the schedule shall:

(1) List individual Federal programs by Federal agency and major

subdivision within a Federal agency. For Federal awards received as a

subrecipient, the name of the pass-through entity and identifying

number assigned by the pass-through entity shall be included.

(2) Provide total expenditures for each individual Federal program

and the CFDA number or other identifying number when the CFDA

information is not available.

(3) Identify major programs.

(4) Include notes that describe the significant accounting policies

used in preparing the schedule and identify in the notes the dollar

threshold used to distinguish between Type A and Type B programs, as

described in Sec. ______.520(b).

(5) To the extent practical, pass-through entities should identify

in the schedule the total amount provided to subrecipients from each

Type A program and from each Type B program which is audited as a major

program.

(6) List individual Federal awards within a category of Federal

awards. However, when it is not practical to list each individual

Federal award for R&D, total expenditures shall be shown by Federal

agency and major subdivision within the Federal agency. For example,

the National Institutes of Health is a major subdivision in the

Department of Health and Human Services.

(7) Include, in either the schedule or a note to the schedule, the

value of non-cash assistance expended, insurance in effect during the

year, and loans or loan guarantees outstanding at year end.

Sec. ______.315 Audit findings follow-up.

(a) General. The auditee is responsible for follow-up and

corrective action on all audit findings. As part of this

responsibility, the auditee shall prepare a summary schedule of prior

audit findings. The auditee shall also prepare a corrective action plan

for current year audit findings. The summary schedule of prior audit

findings and the corrective action plan shall include the reference

numbers the auditor assigns to audit findings under Sec. ______.510(c).

Since the summary schedule may include audit findings from multiple

years, it shall include the fiscal year in which the finding initially

occurred.

(b) Summary schedule of prior audit findings. The summary schedule

of prior audit findings shall report the status of all audit findings

included in the prior audit's schedule of findings and questioned

costs. The summary schedule shall also include audit findings reported

in the prior audit's summary schedule of prior audit findings except

audit findings listed as corrected in accordance with paragraph (b)(1),

or no longer valid or not warranting further action in accordance with

paragraph (b)(4) of this section.

(1) When audit findings were fully corrected, the summary schedule

need only list the audit findings and state that corrective action was

taken.

(2) When audit findings were not corrected or were only partially

corrected, the summary schedule shall describe the planned corrective

action as well as any partial corrective action taken.

(3) When corrective action taken is significantly different from

corrective action previously reported in a corrective action plan or in

the Federal agency's or pass-through entity's management decision, the

summary schedule shall provide an explanation.

(4) When the auditee believes the audit findings are no longer

valid or do not warrant further action, the reasons for this position

shall be described in the summary schedule. A valid reason for

considering an audit finding as not warranting further action is that

all of the following have occurred:

(i) Two years have passed since the audit report in which the

finding occurred was submitted to the central clearinghouse;

(ii) The Federal agency or pass-through entity is not currently

following up with the auditee on the audit finding; and

[[Page 19145]]

(iii) A management decision was not issued.

(c) Corrective action plan. At the completion of the audit, the

auditee shall prepare a corrective action plan to address each audit

finding included in the current year auditor's reports. The corrective

action plan shall provide the name(s) of the contact person(s)

responsible for corrective action, the corrective action planned, and

the anticipated completion date. If the auditee does not agree with the

audit findings or believes corrective action is not required, then the

corrective action plan shall include an explanation and specific

reasons.

Sec. ______.320 Report submission.

(a) General. The audit shall be completed and the reporting package

described in paragraph (c) of this section submitted within nine months

after the end of the audit period, unless a longer period is agreed to

in advance by the cognizant or oversight agency for audit. Also, the

reporting package shall be submitted within 30 days after issuance of

the auditor's report(s) to the auditee. Unless restricted by law or

regulation, the auditee shall make copies available for public

inspection.

(b) Certification. The auditee shall complete a certification form

which states whether the audit was completed in accordance with this

part and provides information about the auditee, its Federal programs,

and the results of the audit. The form shall be approved by OMB,

available from the central clearinghouse designated by OMB, include

data elements similar to those presented in this paragraph, and use a

machine-readable format. The auditee's chief executive officer or chief

financial officer shall sign a statement that the information on the

form is accurate and complete as follows:

Certificate of Audit

This is to certify that, to the best of my knowledge and belief,

the [specify name of the auditee] has: (1) engaged an auditor to

perform an audit in accordance with the provisions of OMB Circular

A-133 for the [specify number] months ended [specify date]; (2) the

auditor has completed such audit and presented a signed audit report

which states that the audit was conducted in accordance with the

provisions of the Circular; and, (3) the information on the attached

form accurately and completely reflects the results of this audit,

as presented in the auditor's report. I declare that the foregoing

is true and correct.

Attachment to Certificate

Information Accompanying Certificate of Audit

1. The type of report the auditor issued on the financial

statements of the auditee (i.e., unqualified opinion, qualified

opinion, adverse opinion, or disclaimer of opinion).

2. A yes or no statement as to whether the auditor's report on

the financial statements indicated that the auditor has substantial

doubt about the auditee's ability to continue as a going concern.

3. The type of report the auditor issued on compliance for major

programs (i.e., unqualified opinion, qualified opinion, adverse

opinion, or disclaimer of opinion).

4. A list of the Federal awarding agencies and pass-through

entities which will receive a copy of the reporting package pursuant

to Sec. ______.320(d)(2) and Sec. ______.320(e)(2) of OMB Circular

A-133. An explanation should be provided if this list is different

from the communication the auditor provides to the auditee under

Sec. ______.500(f) of OMB Circular A-133.

5. A yes or no statement as to whether the auditee qualified as

a low-risk auditee under Sec. ______.530 of OMB Circular A-133.

6. The dollar threshold used to distinguish between Type A and

Type B programs as defined in Sec. ______.520(b) of OMB Circular A-

133.

7. The Catalog of Federal Domestic Assistance (CFDA) number for

each Federal program, as applicable.

8. The name of each Federal program and identification of each

major program. Individual awards within a category of awards should

be listed in the same level of detail as they are listed in the

schedule of expenditures of Federal awards.

9. The amount of expenditures in the schedule of expenditures of

Federal awards associated with each Federal program.

10. A yes or no statement as to whether there are audit findings

and the amount of any questioned costs related to the following for

each Federal program:

a. Types of services allowed or unallowed.

b. Eligibility.

c. Matching, maintenance of level of effort, or earmarking.

d. Federal financial reporting.

e. Program income.

f. Procurement.

g. Subrecipient monitoring.

h. Allowable costs/cost principles.

i. Other.

11. Auditee Name:

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

Employer Identification Number:

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

Name and Title of Responsible Official:

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

Telephone Number:

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

Signature:

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

Date:

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

12. Auditor Name:

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

Name and Title of Contact Person:

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

Auditor Address:

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

Auditor Telephone Number:

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

(c) Reporting Package. The reporting package shall include the:

(1) Certification discussed in paragraph (b) of this section;

(2) Financial statements and schedule of expenditures of Federal

awards discussed in Sec. ______.310(a) and Sec. ______.310(b),

respectively;

(3) Summary schedule of prior audit findings discussed in

Sec. ______.315(b);

(4) Auditor's report(s) discussed in Sec. ______.505; and

(5) Corrective action plan discussed in Sec. ______.315(c).

(d) Submission to clearinghouse. All auditees shall submit to the

central clearinghouse designated by OMB one copy of the reporting

package described in paragraph (c) of this section for:

(1) The central clearinghouse to retain as an archival copy; and

(2) Each Federal awarding agency when the schedule of findings and

questioned costs disclosed audit findings relating to Federal awards

that the Federal awarding agency provided directly or the summary

schedule of prior audit findings reported the status of any audit

findings relating to Federal awards that the Federal awarding agency

provided directly.

(e) Additional submission by subrecipients. In addition to the

requirements discussed in paragraph (d) of this section, subrecipients

shall submit to each pass-through entity one copy of the:

(1) Certification discussed in paragraph (b) of this section; and

(2) Reporting package described in paragraph (c) of this section

for each pass-through entity when the schedule of findings and

questioned costs disclosed audit findings relating to Federal awards

that the pass-through entity provided or the summary schedule of prior

audit findings reported the status of any audit findings relating to

Federal awards that the passthrough entity provided.

(f) Requests for report copies. In response to requests by a

Federal agency or pass-through entity, auditees shall submit the

appropriate copies of the reporting package described in paragraph (c)

of this section and, if requested, a copy of any management letters

issued by the auditor.

(g) Report retention requirements. Auditees shall keep one copy of

the reporting package described in paragraph (c) of this section on

file for three years from the date of submission to the central

clearinghouse designated by OMB. Pass-through entities shall keep

subrecipients' submissions on file for three years from date of

receipt.

(h) Clearinghouse responsibilities. The central clearinghouse

designated by OMB shall distribute the reporting packages received in

accordance with

[[Page 19146]]

paragraph (d)(2) of this section and Sec. ______.235(c)(3) to

applicable Federal awarding agencies, maintain a data base of completed

audits, provide appropriate information to Federal agencies, and follow

up with known auditees which have not submitted the required

certifications and reporting packages.

(i) Clearinghouse address. The address of the central clearinghouse

currently designated by OMB is Federal Audit Clearinghouse, Bureau of

the Census, 1201 E. 10th Street, Jeffersonville, IN 47132.

(j) Electronic filing. Nothing in this part shall preclude

electronic submissions to the central clearinghouse in such manner as

may be approved by OMB. With OMB approval, the central clearinghouse

may pilot test methods of electronic submissions.

Subpart D--Federal Agencies and Pass-Through Entities

Sec. ______.400 Responsibilities.

(a) Cognizant agency for audit responsibilities. Recipients

expending more than $25 million a year in Federal awards shall have a

cognizant agency for audit. The designated cognizant agency for audit

shall be the Federal awarding agency that provides the predominant

amount of direct funding to a recipient unless OMB makes a specific

cognizant agency for audit assignment and provides notice in the

Federal Register. To provide for continuity of cognizance, the

determination of the predominant amount of direct funding shall be

based upon direct Federal awards expended in the recipient's fiscal

years ending in 1995, 2000, 2005, and every fifth year thereafter. For

example, audit cognizance for periods ending in 1996 through 2000 will

be determined based on Federal awards expended in 1995. A Federal

awarding agency with cognizance for an auditee may reassign cognizance

to another Federal awarding agency which provides substantial direct

funding and agrees to be the cognizant agency for audit. Within 30 days

after any reassignment, both the old and the new cognizant agency for

audit shall notify the auditee, and, if known, the auditor of the

reassignment. The cognizant agency for audit shall:

(1) Provide technical audit advice and liaison to auditees and

auditors.

(2) Consider auditee requests for extensions to the report

submission due date required by Sec. ______.320(a). The cognizant

agency for audit may grant extensions for good cause.

(3) Obtain or conduct quality control reviews of selected audits

made by non-Federal auditors, and provide the results, when

appropriate, to other interested organizations.

(4) Promptly inform other affected Federal agencies and appropriate

Federal law enforcement officials of any direct reporting by the

auditee or its auditor of irregularities or illegal acts, as required

by GAGAS or laws and regulations, when such reporting is not included

in the reporting package described in Sec. ______.320(c).

(5) Advise the auditor and, where appropriate, the auditee of any

deficiencies found in the audits when the deficiencies require

corrective action by the auditor. When advised of deficiencies, the

auditee shall work with the auditor to take corrective action. If

corrective action is not taken, the cognizant agency for audit shall

notify the auditor, the auditee, and applicable Federal awarding

agencies and pass-through entities of the facts and make

recommendations for follow-up action. Major inadequacies or repetitive

substandard performance by auditors shall be referred to appropriate

State licensing agencies and professional bodies for disciplinary

action.

(6) Coordinate, to the extent practical, audits or reviews made by

or for Federal agencies that are in addition to the audits made

pursuant to this part, so that the additional audits or reviews build

upon audits performed in accordance with this part.

(7) Coordinate a management decision for audit findings that affect

the Federal programs of more than one agency.

(8) Coordinate the audit work and reporting responsibilities among

auditors to achieve the most costeffective audit.

(b) Oversight agency for audit responsibilities. An auditee which

does not have a designated cognizant agency for audit will be under the

general oversight of the Federal agency determined in accordance with

Sec. ______.105 (Oversight agency for audit). The oversight agency for

audit:

(1) Shall provide technical advice to auditees and auditors as

requested.

(2) May assume all or some of the responsibilities normally

performed by a cognizant agency for audit.

(c) Federal awarding agency responsibilities. The Federal awarding

agency shall perform the following for the Federal awards it makes:

(1) Identify Federal awards made by informing each recipient of the

CFDA title and number, award name and number, award year, and if the

award is for R&D. When some of this information is not available, the

Federal agency shall provide information necessary to clearly describe

the Federal award.

(2) Ensure that audits are completed and reports are received in a

timely manner and in accordance with the requirements of this part.

(3) Provide technical advice and counsel to auditees and auditors

as requested.

(4) Issue a management decision on audit findings within six months

after receipt of the audit report and ensure that the recipient takes

appropriate and timely corrective action.

(5) Assign a person responsible to inform OMB annually of any

updates needed to the compliance supplements.

(d) Pass-through entity responsibilities. A non-profit pass-through

entity shall perform the following for the Federal awards it makes:

(1) Identify Federal awards made by informing each subrecipient of

CFDA title and number, award name and number, award year, if the award

is R&D, and name of Federal agency. When some of this information is

not available, the pass-through entity shall provide the best

information available to describe the Federal award.

(2) Advise subrecipients of requirements imposed on them by Federal

laws, regulations, and the provisions of contracts or grant agreements

as well as any supplemental requirements imposed by the pass-through

entity.

(3) Monitor the activities of subrecipients as necessary to ensure

that Federal awards are used for authorized purposes in compliance with

laws, regulations, and the provisions of contracts or grant agreements

and that performance goals are achieved.

(4) Ensure that non-profit subrecipients expending $300,000 or more

in Federal awards during the subrecipient's fiscal year have met the

audit requirements of this part for that fiscal year, and that

subrecipients subject to Circular A-128 have met the requirements of

Circular A-128.

(5) Issue a management decision on audit findings within six months

after receipt of the subrecipient's audit report and ensure that the

subrecipient takes appropriate and timely corrective action.

(6) Consider whether subrecipient audits necessitate adjustment of

the pass-through entity's own records.

(7) Require each subrecipient to permit the pass-through entity and

auditors to have access to the records and financial statements as

necessary for the pass-through entity to comply with this part.

[[Page 19147]]

Sec. ______.405 Management decision.

(a) General. The management decision shall clearly state whether or

not the audit finding is sustained, the reasons for the decision, and

the expected auditee action to repay disallowed costs, make financial

adjustments, or take other action. If the auditee has not completed

corrective action, a timetable for follow-up should be given. Prior to

issuing the management decision, the Federal agency or pass-through

entity may request additional information or documentation from the

auditee, including a request that the documentation be audited, as a

way of mitigating disallowed costs. The management decision should

describe any appeal process available to the auditee.

(b) Federal agency. As provided in Sec. ______.400(a)(7), the

cognizant agency for audit shall be responsible for coordinating a

management decision for audit findings that affect the programs of more

than one Federal agency. As provided in Sec. ______.400(c)(4), a

Federal awarding agency is responsible for issuing a management

decision for findings that relate to Federal awards it makes to

recipients. Alternate arrangements may be made on a case-by-case basis

by agreement among the Federal agencies concerned.

(c) Pass-through entity. As provided in Sec. ______.400(d)(5), the

pass-through entity shall be responsible for making the management

decision for audit findings that relate to Federal awards it makes to

subrecipients.

(d) Time requirements. The entity responsible for making the

management decision shall do so within six months of receipt of the

audit report. Corrective action should be initiated within six months

and proceed as rapidly as possible.

(e) Reference numbers. Management decisions shall include the

reference numbers the auditor assigned to each audit finding in

accordance with Sec. ______.510(c).

Subpart E--Auditors

Sec. ______.500 Scope of audit.

(a) General. The audit shall be conducted in accordance with GAGAS.

(b) Financial statements. The auditor shall determine whether the

financial statements of the auditee are presented fairly in all

material respects in conformity with generally accepted accounting

principles. The auditor shall also determine whether the schedule of

expenditures of Federal awards is presented fairly in all material

respects in relation to the auditee's financial statements taken as a

whole.

(c) Internal control. (1) In addition to the requirements of GAGAS,

the auditor shall perform procedures to obtain an understanding of

internal control over Federal programs sufficient to plan the audit to

achieve a low assessed level of control risk for major programs.

(2) Except as provided in paragraph (c)(3) of this section, the

auditor shall:

(i) Plan the testing of internal control over major programs to

achieve a low assessed level of control risk for the assertions

relevant to the compliance requirements for each major program; and

(ii) Perform testing of internal control over major programs as

planned in paragraph (c)(2)(i) of this section.

(3) When internal control over some or all of the compliance

requirements for a major program are likely to be ineffective in

preventing or detecting noncompliance, the planning and performing of

testing described in paragraph (c)(2) of this section are not required

for those compliance requirements. However, the auditor shall report a

reportable condition or a material weakness in accordance with

Sec. ______.510, assess the related control risk at the maximum, and

consider whether additional compliance tests are required because of

ineffective internal control over the major program.

(d) Compliance. (1) In addition to the requirements of GAGAS, the

auditor shall determine whether the auditee has complied with laws,

regulations, and the provisions of contracts or grant agreements that

may have a direct and material effect on each of its major programs.

(2) The compliance testing shall include tests of transactions and

such other auditing procedures necessary to provide the auditor

sufficient evidence to support an opinion on compliance for each major

program.

(3) The principal compliance requirements of the largest Federal

programs are included in the compliance supplements.

(4) For Federal programs contained in the compliance supplements,

an audit of the compliance requirements contained in the compliance

supplements will meet the requirements of this part. Where there have

been changes to the compliance requirements and the changes are not

reflected in the compliance supplements, the auditor shall determine

the current compliance requirements and modify the audit procedures

accordingly. For those Federal programs not covered in the compliance

supplements, the auditor should use the types of compliance

requirements (e.g., cash management, Federal financial reporting,

allowable costs/cost principles, types of services allowed or

unallowed, eligibility, and matching) contained in the compliance

supplements as guidance for identifying the types of compliance

requirements to test, and determine the requirements governing the

Federal program by reviewing the provisions of contracts and grant

agreements and the laws and regulations referred to in such contracts

and grant agreements. The auditor should consult with the applicable

Federal agency to determine the availability of agency-prepared

supplements or audit guides.

(e) Audit follow-up. The auditor shall follow-up on prior audit

findings, perform procedures to assess the reasonableness of the

summary schedule of prior audit findings prepared by the auditee in

accordance with Sec. ______.315(b), and report, as a current year audit

finding, when the auditor concludes that the summary schedule of prior

audit findings materially misrepresents the status of any prior audit

finding. The auditor shall perform audit follow-up procedures

regardless of whether a prior audit finding relates to a major program

in the current year.

(f) Communication. The auditor shall communicate, preferably in

writing, to the auditee which Federal awarding agencies and pass-

through entities are required to receive a copy of the reporting

package pursuant to Sec. ______.320(d)(2) and Sec. ______.320(e)(2),

respectively. The auditor shall retain a record of this communication

in the auditor's working papers.

Sec. ______.505 Audit reporting.

(a) Auditor's reports. The auditor's report(s) may be in the form

of either combined or separate reports and may be organized differently

from the manner presented in this section. The auditor's report(s)

shall state that the audit was conducted in accordance with this part

and include the following:

(1) An opinion (or disclaimer of opinion) as to whether the

financial statements are presented fairly in all material respects in

conformity with generally accepted accounting principles and an opinion

(or disclaimer of opinion) as to whether the schedule of expenditures

of Federal awards is presented fairly in all material respects in

relation to the financial statements taken as a whole.

(2) A report on internal control related to the financial

statements and major programs. This report shall describe the scope of

testing of internal control and the results of the tests, and, where

applicable, refer to the separate

[[Page 19148]]

schedule of findings and questioned costs described in paragraph (a)(4)

of this section.

(3) A report on compliance with laws, regulations, and the

provisions of contracts or grant agreements, noncompliance with which

could have a material effect on the financial statements. This report

shall also include an opinion (or disclaimer of opinion) as to whether

the auditee complied with laws, regulations, and the provisions of

contracts or grant agreements which could have a direct and material

effect on each major program, and, where applicable, refer to the

separate schedule of findings and questioned costs described in

paragraph (a)(4) of this section.

(4) A schedule of findings and questioned costs which includes a

summary of the auditor's results as described in paragraph (b) of this

section and all audit findings as defined in Sec. ______.510(a). Any

findings (e.g., internal control findings, compliance findings,

questioned costs, or fraud) which relate to the same issue should be

presented as a single finding. Where practical, audit findings should

be organized by Federal agency or pass-through entity.

(b) Summary of the auditor's results. The summary of the auditor's

results shall include:

(1) The type of report the auditor issued on the financial

statements of the auditee (i.e., unqualified opinion, qualified

opinion, adverse opinion, or disclaimer of opinion);

(2) Where applicable, a statement that the auditor's report on the

financial statements indicated that the auditor has substantial doubt

about the auditee's ability to continue as a going concern;

(3) The type of report the auditor issued on compliance for major

programs (i.e., unqualified opinion, qualified opinion, adverse

opinion, or disclaimer of opinion);

(4) Where applicable, a statement that reportable conditions in

internal control over major programs were disclosed by the audit and

whether any such conditions were material weaknesses, as described in

Sec. ______.510(a)(1);

(5) A statement as to whether the audit disclosed any material

noncompliance in major programs, as described in Sec. ______.510(a)(2);

(6) A statement as to whether the audit disclosed any questioned

costs, as described in Sec. ______.510(a)(3);

(7) Where applicable, a statement that the schedule of findings and

questioned costs contains instances of known fraud, as described in

Sec. ______.510(a)(5); and

(8) Where applicable, a statement that the audit follow-up

procedures disclosed that the summary schedule of prior audit findings

materially misrepresents the status of any prior audit finding, as

described in Sec. ______.510(a)(6).

Sec. ______.510 Audit findings.

(a) Audit findings reported. The auditor shall report the following

as audit findings in a schedule of findings and questioned costs:

(1) Reportable conditions in internal control over major programs.

The auditor's determination of whether to report a deficiency in

internal control as a reportable condition is in relation to a type of

compliance requirement for a major program or an audit objective

identified in the compliance supplements. The auditor shall identify

reportable conditions which are individually or cumulatively material

weaknesses.

(2) Material noncompliance with the provisions of laws,

regulations, contracts, or grant agreements which the auditor

concludes, based on evidence obtained, has occurred or is likely to

have occurred. The auditor's determination of whether a noncompliance

with the provisions of laws, regulations, contracts, or grant

agreements is material for the purpose of reporting an audit finding is

in relation to a type of compliance requirement for a major program or

an audit objective identified in the compliance supplements.

(3) Known questioned costs which are greater than $10,000 for a

type of compliance requirement for a major program. Known questioned

costs are those specifically identified by the auditor. In evaluating

the effect of questioned costs on the opinion on compliance for each

major program, the auditor considers the best estimate of total costs

questioned (likely questioned costs), not just the questioned costs

specifically identified (known questioned costs). The auditor shall

also report known questioned costs when likely questioned costs are

greater than $10,000 for a type of compliance requirement for a major

program. In reporting questioned costs, the auditor shall include

information to provide proper perspective for judging the prevalence

and consequences of the questioned costs.

(4) The circumstances concerning why the auditor's report on

compliance for major programs is other than an unqualified opinion,

unless such circumstances are otherwise reported as audit findings in

the schedule of findings and questioned costs.

(5) Known fraud affecting a Federal award, unless such fraud is

otherwise reported as an audit finding in the schedule of findings and

questioned costs. Fraud is a type of illegal act involving the

obtaining of something of value through willful misrepresentation. This

paragraph does not require the auditor to make an additional reporting

when the auditor confirms that the fraud was reported outside of the

auditor's reports under the direct reporting requirements of GAGAS.

(6) Instances where the results of audit follow-up procedures

disclosed that the summary schedule of prior audit findings prepared by

the auditee in accordance with Sec. ______.315(b) materially

misrepresents the status of any prior audit finding.

(b) Audit finding detail. Audit findings shall be presented in

sufficient detail for the auditee to prepare a corrective action plan

and take corrective action and for Federal agencies and pass-through

entities to arrive at a management decision. The following specific

information shall be included, as applicable, in audit findings:

(1) Federal program and specific Federal award identification

including the CFDA title and number, Federal award number and year,

name of Federal agency, and name of the applicable pass-through entity.

When information, such as the CFDA title and number or Federal award

number, is not available, the auditor shall provide the best

information available to describe the Federal award.

(2) The criteria or specific requirement upon which the audit

finding is based, including statutory, regulatory, or other citation.

(3) The condition found, including facts that support the

deficiency identified in the audit finding.

(4) Identification of questioned costs and how they were computed.

(5) Information to provide proper perspective for judging the

prevalence and consequences of the audit findings, such as whether the

audit findings represent an isolated instance or a systemic problem.

Where appropriate, instances identified shall be related to the

universe and the number of cases examined and be quantified in terms of

dollar value.

(6) The possible asserted effect to provide sufficient information

to the auditee and Federal agency, or pass-through entity in the case

of a subrecipient, to permit them to determine the cause and effect to

facilitate prompt and proper corrective action.

[[Page 19149]]

(7) Recommendations to prevent future occurrences of the deficiency

identified in the audit finding.

(8) Views of responsible officials of the auditee when there is

disagreement with the audit findings, to the extent practical.

(c) Reference numbers. Each audit finding in the schedule of

findings and questioned costs shall include a reference number to allow

for easy referencing of the audit findings during follow-up.

Sec. ______.515 Audit working papers.

(a) Retention of working papers. The auditor shall retain working

papers and reports for a minimum of three years after the date of

issuance of the auditor's report(s) to the auditee, unless the auditor

is notified in writing by the cognizant agency for audit, oversight

agency for audit, or pass-through entity to extend the retention

period. When the auditor is aware that the Federal awarding agency,

pass-through entity, or auditee is contesting an audit finding, the

auditor shall contact the parties contesting the audit finding for

guidance prior to destruction of the working papers and reports.

(b) Access to working papers. Audit working papers shall be made

available upon request to the cognizant or oversight agency for audit

or its designee, a Federal agency providing direct or indirect funding,

or GAO at the completion of the audit. Access to working papers

includes the right of Federal agencies to obtain copies of working

papers, as is reasonable and necessary.

Sec. ______.520 Major program determination.

(a) General. The auditor shall use a risk-based approach to

determine which Federal programs are major programs. This risk-based

approach shall include consideration of: Current and prior audit

experience, oversight by Federal agencies and passthrough entities, and

the inherent risk of the Federal program. The process in paragraphs (b)

through (i) of this section shall be followed.

(b) Step 1. (1) The auditor shall identify the larger Federal

programs, which shall be labeled Type A programs. Type A programs are

defined as Federal programs with Federal expenditures during the audit

period exceeding the larger of:

(i) $300,000 or three percent (.03) of total Federal expenditures

in the case of an auditee for which total Federal expenditures equal or

exceed $300,000 but are less than or equal to $100 million.

(ii) $3 million or three-tenths of one percent (.003) of total

Federal expenditures in the case of an auditee for which total Federal

expenditures exceed $100 million but are less than or equal to $10

billion.

(iii) $30 million or 15 hundredths of one percent (.0015) of total

Federal expenditures in the case of an auditee for which total Federal

expenditures exceed $10 billion.

(2) Federal programs not labeled Type A under paragraph (b)(1) of

this section shall be labeled Type B programs.

(3) The inclusion of large insurance programs or loan and loan

guarantees (loans) should not result in the exclusion of other programs

as Type A programs. When a Federal program providing insurance or loans

significantly affects the number or size of Type A programs, the

auditor shall consider this Federal program as a Type A program and

exclude its values in determining other Type A programs.

(c) Step 2. (1) The auditor shall identify Type A programs which

are low-risk. For a Type A program to be considered low-risk, it shall

have been audited as a major program in at least one of the two most

recent audit periods, and, in the most recent audit period, it shall

have had no audit findings under Sec. ______.510(a). However, the

auditor may use judgment and consider that audit findings from

questioned costs under Sec. ______.510(a)(3), fraud under

Sec. ______.510(a)(5), and audit follow-up for the summary schedule of

prior audit findings under Sec. ______.510(a)(6) do not preclude the

Type A program from being lowrisk. The auditor shall consider: the

criteria in Sec. ______.525(c), Sec. ______.525(d)(1),

Sec. ______.525(d)(2), and Sec. ______.525(d)(3); the results of audit

follow-up; whether any changes in personnel or systems affecting a Type

A program have significantly increased risk; and apply professional

judgment in determining whether a Type A program is low-risk.

(2) Notwithstanding paragraph (c)(1) of this section, OMB may

approve a Federal awarding agency's request that a Type A program at

certain recipients may not be considered low-risk. For example, it may

be necessary for a large Type A program to be audited as major each

year at particular recipients to allow the Federal agency to comply

with the Government Management Reform Act of 1994 (31 U.S.C. 3515). The

Federal agency shall notify the recipient and, if known, the auditor at

least 120 days prior to the end of the fiscal year to be audited of

OMB's approval.

(d) Step 3. (1) The auditor shall identify Type B programs which

are high-risk using professional judgment and the criteria in

Sec. ______.525. Except for known reportable conditions in internal

control or compliance problems as discussed in Sec. ______.525(b)(1),

Sec. ______.525(b)(2), and Sec. ______.525(c)(1), a single criteria in

Sec. ______.525 would seldom cause a Type B program to be considered

high-risk.

(2) An audit under this part is not expected to test relatively

small Federal programs. Therefore, except to meet the 50 percent rule

discussed in paragraph (f) of this section, the auditor is only

required to perform risk assessments on Type B programs that exceed the

larger of:

(i) $100,000 or three-tenths of one percent (.003) of total Federal

expenditures when the auditee has less than or equal to $100 million in

total Federal expenditures.

(ii) $300,000 or three-hundredths of one percent (.0003) of total

Federal expenditures when the auditee has more than $100 million in

total Federal expenditures.

(e) Step 4. At a minimum, the auditor shall audit all of the

following as major programs:

(1) All Type A programs, except the auditor may exclude any Type A

programs identified as low-risk under Step 2 (paragraph (c)(1) of this

section);

(2) At least one half of the Type B programs identified as high-

risk under Step 3 (paragraph (d) of this section), except this

paragraph (e)(2) does not require the auditor to audit more high-risk

Type B programs than the number of low-risk Type A programs identified

as low-risk under Step 2; and

(3) Such additional programs as may be necessary to comply with the

50 percent rule discussed in paragraph (f) of this section. This

paragraph (e)(3) may require the auditor to audit more programs as

major than the number of Type A programs.

(f) 50 percent rule. The auditor shall audit as major programs

Federal programs with expenditures that, in the aggregate, encompass at

least 50 percent of total Federal expenditures. If the auditee meets

the criteria in Sec. ______.530 for a low-risk auditee, the auditor

need only audit as major programs Federal programs with expenditures

that, in the aggregate, encompass at least 25 percent of total Federal

expenditures.

(g) Documentation of risk. The auditor shall document in the

working papers the risk analysis process used in determining major

programs.

(h) Auditor's judgment. When the major program determination was

performed and documented in accordance with this part, the auditor's

[[Page 19150]]

judgment in applying the risk-based approach to determine major

programs shall be presumed correct. Challenges by Federal agencies and

pass-through entities shall only be for clearly improper use of the

guidance in this part. However, Federal agencies and pass-through

entities may provide auditors guidance about the risk of a particular

Federal program and the auditor shall consider this guidance in

determining major programs in audits not yet completed.

(i) Deviation from use of risk criteria. For first-year audits, the

auditor may elect to determine major programs as all Type A programs

plus any Type B programs as necessary to meet the 50 percent rule

discussed in paragraph (f) of this section. Under this option, the

auditor would not be required to perform the procedures discussed in

paragraphs (c), (d), and (e) of this section.

(1) A first-year audit is the first year the entity is audited

under this part or the first year of a change of auditors.

(2) To ensure that a frequent change of auditors would not preclude

audit of high risk Type B programs, this election for first-year audits

may not be used by an auditee more than once in every three years.

Sec. ______.525 Criteria for Federal program risk.

(a) General. The auditor's determination should be based on an

overall evaluation of the risk of noncompliance occurring which could

be material to the Federal program. The auditor shall use auditor

judgment and consider criteria, such as described in paragraphs (b),

(c), and (d) of this section, to identify risk in Federal programs.

Also, as part of the risk analysis, the auditor may wish to discuss a

particular Federal program with auditee management and the Federal

agency or passthrough entity.

(b) Current and prior audit experience. (1) Weaknesses in internal

control over Federal programs would indicate higher risk. Consideration

should be given to the control environment over Federal programs and

such factors as the expectation of management's adherence to applicable

laws and regulations and the provisions of contracts and grant

agreements and the competence and experience of personnel who

administer the Federal programs.

(i) A Federal program administered under multiple internal control

structures may have higher risk. When assessing risk in a large single

audit, the auditor shall consider whether weaknesses are isolated in a

single operating unit (e.g., one college campus) or pervasive

throughout the entity.

(ii) When significant parts of a Federal program are passed through

to subrecipients, a weak system for monitoring subrecipients would

indicate higher risk.

(iii) The extent to which computer processing is used to administer

Federal programs, as well as the complexity of that processing, should

be considered by the auditor in assessing risk. New and recently

modified computer systems may also indicate risk.

(2) Prior audit findings would indicate higher risk, particularly

when the situations identified in the audit findings could have a

significant impact on a Federal program or have not been corrected.

(3) Federal programs not recently audited as major programs may be

of higher risk than Federal programs recently audited as major programs

without audit findings.

(c) Oversight exercised by Federal agencies and pass-through

entities. (1) Oversight exercised by Federal agencies or pass-through

entities could indicate risk. For example, recent monitoring or other

reviews performed by an oversight entity which disclosed no significant

problems would indicate lower risk. However, monitoring which disclosed

significant problems would indicate higher risk.

(2) Federal agencies, with the concurrence of OMB, may identify

Federal programs which are higher risk. OMB plans to provide this

identification in the compliance supplements.

(d) Inherent risk of the Federal program. (1) The nature of a

Federal program may indicate risk. Consideration should be given to the

complexity of the program and the extent to which the Federal program

contracts for goods and services. For example, Federal programs that

disburse funds through third party contracts or have eligibility

criteria may be of higher risk. Federal programs primarily involving

staff payroll costs may have a high-risk for time and effort reporting,

but otherwise be at low-risk.

(2) The phase of a Federal program in its life cycle at the Federal

agency may indicate risk. For example, a new Federal program with new

or interim regulations may have higher risk than an established program

with time-tested regulations. Also, significant changes in Federal

programs, laws, regulations, or the provisions of contracts or grant

agreements may increase risk.

(3) The phase of a Federal program in its life cycle at the auditee

may indicate risk. For example, during the first and last years that an

auditee participates in a Federal program, the risk may be higher due

to start-up or closeout of program activities and staff.

(4) Type B programs with larger expenditures would be of higher

risk than programs with substantially smaller expenditures.

Sec. ______.530 Criteria for a low-risk auditee.

An auditee which meets all of the following conditions for each of

the preceding two years shall qualify as a low-risk auditee and be

eligible for reduced audit coverage in accordance with

Sec. ______.520(f):

(a) The audits were performed in accordance with the provisions of

this part.

(b) The auditor's opinions on the financial statements and the

schedule of expenditures of Federal awards were unqualified. However,

the cognizant or oversight agency for audit may judge that an opinion

qualification does not affect the management of Federal awards and

provide a waiver.

(c) There were no deficiencies in internal control which were

identified as material weaknesses under the requirements of GAGAS.

However, the cognizant or oversight agency for audit may judge that the

material weaknesses do not affect the management of Federal awards and

provide a waiver.

(d) None of the Type A programs, as defined in Sec. ______.520(b),

had audit findings from any of the following:

(1) Internal control deficiencies which were identified as material

weaknesses;

(2) Noncompliance with the provisions of laws, regulations,

contracts, or grant agreements which have a material effect on the Type

A program; or

(3) Known or likely questioned costs that exceed five percent of

the total expenditures for a Type A program during the year.

[FR Doc. 96-10330 Filed 4-29-96; 8:45 am]

BILLING CODE 3110-01-P