Audits of States, Local Governments, and Non-Profit Organizations

SUMMARY: This Notice offers interested parties an opportunity to

comment on further proposed revisions to Office of Management and

Budget (OMB) Circular No. A-133, ``Audits of Institutions of Higher

Education and Other Non-Profit Institutions,'' and the proposed

consolidation of OMB Circular No. A-128, ``Audits of State and Local

Governments,'' into Circular No. A-133 (with Circular A-128 being

rescinded). This Notice also requests comment on two proposed

information collections contained in the proposed revision to Circular

A-133. These actions are being proposed to implement the Single Audit

Act Amendments of 1996 (1996 Amendments), which were signed into law on

July 5, 1996 (Public Law 104-156).

In the proposed revisions to Circular A-133, as published in the

Federal Register on March 17, 1995 (60 FR 14594), OMB stated an intent

to seek modifications to the Single Audit Act of 1984 (1984 Act) and,

upon passage, extend the provisions of Circular A-133 to include audits

of States and local governments and then rescind Circular A-128.

(Indian tribal governments are included under the definition of States

and are covered under the 1984 Act, Circular A-128, the 1996

Amendments, and this proposed revision.) The April 1996 revision of

Circular A-133 was coordinated with the 1996 Amendments such that only

minimum changes are now necessary to include States and local

governments under Circular A-133. When States and local governments are

covered under Circular A-133, OMB will rescind Circular A-128.

Interested parties may wish to refer to the March 17, 1995, and

April 30, 1996, Federal Register (61 FR 19134) for a more detailed

discussion of the changes made during the recent revisions to Circular

A-133.

DATES: All comments on this proposal should be in writing, and must be

received by January 6, 1997. Late comments will be considered to the

extent practicable.

ADDRESSES: Comments should be mailed to Office of Management and

Budget, Office of Federal Financial Management, Financial Standards and

Reporting Branch, Room 6025, New Executive Office Building, Washington,

DC 20503. Where possible, comments should reference applicable

paragraph or section numbers in the proposed revision. When comments

are sent in by facsimile (fax), they should be faxed to (202) 395-4915.

Electronic mail comments may be submitted via Internet to

[email protected] Please include the full body of electronic mail

comments in the text of the message and not as an attachment. Please

include the name, title, organization, postal address, and E-mail

address in the text of the message.

To facilitate conversion of the comments into a computer format for

analysis, it would be helpful if respondents send a copy of comments on

either a 3.5 or 5.25 inch diskette in either WordPerfect 5.1,

WordPerfect for Windows, or ASCII format. When a diskette cannot be

provided, it would be helpful if the comments were printed in pica or

an equivalent 10 characters per inch type on white paper so the

document can be easily scanned into a computer format.

A copy of the current Circulars A-128 and A-133 may be obtained

from the OMB fax information line, 202-395-9068, document numbers 1128

and 1133, respectively, or by writing or calling the Office of

Administration, Publications Office, Room 2200, New Executive Office

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

Circular A-133 and this proposed revision are available on the OMB home

page on the internet which is currently located at http://

www.whitehouse.gov/WH/EOP/OMB/html/ombhome.html.

FOR FURTHER INFORMATION CONTACT: Sheila O. Conley, Office of Federal

Financial Management (OFFM), Financial Standards and Reporting Branch,

OMB telephone (202) 395-3993 and fax (202) 395-4915. A redlined/

strikeout version showing the detailed changes between the recently

revised OMB Circular A-133 and the further proposed revision is

available by written request to OFFM.

SUPPLEMENTARY INFORMATION: Pursuant to the Single Audit Act Amendments

of 1996 (Pub. L. 104-156), the proposed revision requires non-Federal

entities (States, local governments, and non-profit organizations)

expending $300,000 or more in a year in Federal awards to have an

audit, sets forth requirements for both the performance and reporting

of this audit, and provides for follow-up on audit findings. Each non-

Federal entity is responsible for having its audit conducted and

ensuring that subrecipients expending $300,000 or more in a year meet

the audit requirements of Office of Management and Budget (OMB)

Circular A-133 which will be renamed ``Audits of States, Local

Governments, and Non-Profit Organizations.''

Significant Changes from Circular A-128 to Circular A-133

The Single Audit Act Amendments of 1996, signed by the President on

July 5, 1996, called for uniform requirements for audits of all types

of organizations. As a consequence, OMB proposes to co-locate

requirements for States, local governments, and non-profit

organizations in Circular A-133, which currently addresses only non-

profit organizations. At the same time, OMB would rescind Circular A-

128, ``Audits of State and Local Governments,'' which currently

specifies audit requirements for States and local governments.

The April 1996 revision of Circular A-133 includes the following

major changes which are not reflected in Circular A-128 issued April

12, 1985:

(1) increased the threshold that triggers an audit requirement

under the Circular from $25,000 to $300,000 (Sec. __.200(a));

(2) prescribed a risk-based approach to determine major programs

(Sec. __.520);

(3) required a minimum major program coverage of 50 percent (25

percent for low-risk auditees) of Federal awards expended

(Sec. __.520(f));

(4) clarified the required level of internal control testing

(Sec. __.500(c));

(5) provided minimum reporting requirements for the schedule of

expenditures of Federal awards (Sec. __.310(b));

(6) required auditees to prepare a summary schedule of prior audit

findings (Sec. __.315) and a data collection form (Sec. __.320(b));

(7) required auditors to report audit findings and questioned costs

in a single schedule, including a summary of the auditor's results

(Sec. __.505(a)(4));

(8) prescribed criteria for reporting audit findings and questioned

costs (Sec. __.510);

(9) modified the method of determining the cognizant agency for

audit (Sec. __.400(a));

(10) after a two-year transition period, precluded the same auditor

from preparing the indirect cost proposal or cost allocation plan when

indirect costs exceeded $1 million in the prior year (Sec. __.305(b));

(11) after a two-year transition period, shortened the due date for

submitting reports from 13 months to nine months (Sec. __.320(a));

(12) streamlined the report submission process and expanded the

[[Page 57233]]

role of the Federal clearinghouse (Sec. __.320);

(13) changed the basis for determining the amount of Federal awards

administered by the non-Federal entity from receipts to expenditures

(Sec. __.200);

(14) provided guidance for conducting program-specific audits

(Sec. __.235); and,

(15) reorganized the Circular into a ``common rule'' format to

facilitate codification by Federal agencies and improve the

presentation of information included in the Circular.

Significant Proposed Revisions to Circular A-133

The most significant difference between this proposed revision and

the recently revised Circular A-133 is the inclusion of States and

local governments. This proposed revision also includes changes

relating to the effective date (31 U.S.C. 7507), the provisions

permitting biennial audits in limited circumstances (31 U.S.C.

7502(b)(2) and (3)), and the allowability of audit costs (31 U.S.C.

7505(b)(1)(A)(ii)) to conform the April 1996 revision of Circular A-133

to the 1996 Amendments. Aside from these changes, the 1996 Amendments

do not require other substantive changes to Circular A-133.

The following discussion is provided to describe the changes needed

to conform this proposed revision with the 1996 Amendments, solicit

input from interested parties, and summarize some of the other changes

included in this proposed revision. The readers' attention is directed

to section D. Proposed Requirement for the Auditor to Prepare and Sign

the Data Collection Form Required by Circular A-133, because it is

particularly important to OMB that commenters provide views on the

matters discussed in this section.

A. Effective Dates

The 1996 Amendments apply to any non-Federal entity with respect to

any of its fiscal years which begin after June 30, 1996 (31 U.S.C.

7507). Changes are proposed in paragraph 10 of the Circular,

``Effective Dates,'' to reflect the effective dates mandated in the

1996 Amendments.

Inquirers asked which circular applies for biennial audits when the

biennial period includes time before and after the effective date of

the proposed revision. The 1996 Amendments do not specifically address

the effective dates for biennial audits. OMB interprets the 1996

Amendments to be effective for any biennial periods which begin after

June 30, 1996. As with annual audits, the prior circulars are in effect

until this proposed revision is effective. Therefore, a non-Federal

entity which elects a biennial audit and has a biennial period

beginning on or before June 30, 1996, should apply the provisions of

Circular A-128 issued April 12, 1985 (for a State or local government)

or Circular A-133 issued March 8, 1990 (for a non-profit organization),

as applicable. The requirements of this proposed revision apply to any

biennial periods beginning after June 30, 1996.

Circular A-133 shortened the report due date from 13 months to nine

months after the end of the audit period (Sec. __.320(a)). However, the

1996 Amendments (31 U.S.C. 7502(h)) provide for a transition period of

at least two years during which the report due date would remain at 13

months. The proposed revision at Sec. __.320(a) incorporates this

transition period such that the due date of nine months after the end

of the audit period is not effective until audits of fiscal years

beginning after June 30, 1998. Cognizant or oversight agencies may

still provide extensions.

Paragraphs 6 and 10 of the April 1996 revision of Circular A-133

instructed Federal agencies to adopt the standards set forth in the

Circular in codified regulations not later than November 30, 1996. As a

result of the 1996 Amendments, the April 1996 revision of Circular A-

133, which applies only to non-profit organizations, will not become

operable unless this proposed revision is not finalized by June 30,

1997 (i.e., OMB expects that Circular A-133 issued March 8, 1990, will

apply to non-profit organizations and Circular A-128 issued April 12,

1985, will apply to States and local governments prior to the effective

dates of the 1996 Amendments, and this proposed revision will apply to

these types of organizations when the 1996 Amendments become

effective). Therefore, Federal agencies may forgo the requirement under

the April 1996 revision of Circular A-133 to adopt the standards set

forth in the Circular in codified regulations not later than November

30, 1996. However, the 1996 Amendments (31 U.S.C. 7505(a)) require each

Federal agency to promulgate such revisions to its regulations as may

be necessary to conform such regulations to the requirements of the

1996 Amendments and OMB implementing guidance. Accordingly, the

proposed revision includes a provision in paragraphs 6 and 10 of the

Circular whereby Federal agencies shall adopt the standards set forth

in the Circular in codified regulations not later than six months after

publication of the final revision in the Federal Register.

B. Biennial Audits in Limited Circumstances

Changes are proposed at Sec. __.220 to permit biennial audits in

limited circumstances in accordance with the 1996 Amendments. The

provisions in the 1996 Amendments which allow non-Federal entities to

elect a biennial audit are very specific (31 U.S.C. 7502(b)(2)and (3)).

For a State or local government to qualify for a biennial audit

election, there must be a requirement (as opposed to authorization) in

a State's constitution or State or local law which was in effect on

January 1, 1987. Also, this requirement must still be in effect. Only

non-profit organizations that had biennial audits for all biennial

periods ending between July 1, 1992, and January 1, 1995, may elect a

biennial audit. OMB expects that very few States, local governments, or

non-profit organizations meet this criteria. Nonetheless, all auditees

are encouraged to have annual audits which provide increased

accountability.

The April 1996 revision of Circular A-133 includes a provision

whereby a Federal agency or pass-through agency may allow a non-profit

organization that elects a program-specific audit under Sec. __.200(c)

to perform the audit every two years. This provision was removed from

the proposed revision to conform with the biennial audit requirements

specified in the 1996 Amendments.

Changes are also proposed at Sec. __.520 and Sec. __.530(a) to the

major program determination process and the criteria for low-risk

auditee for situations which are unique to single audits which are

performed on a biennial basis.

C. Audit Costs Prohibited for Subrecipients With Federal Awards

Expended of Less Than $300,000 Annually

The 1996 Amendments discourage pass-through entities from requiring

single audits of subrecipients with total Federal awards expended of

less than $300,000 annually. This is done by prohibiting charges to

Federal awards for audit costs under these circumstances (31 U.S.C.

7505(b)(1)(A)(ii)). However, pass-through entities are not prohibited

from charging subrecipient monitoring costs, provided those procedures

are of lesser scope than a single audit.

For example, if a pass-through entity requires a subrecipient which

expends less than $300,000 annually in total Federal awards to have a

single audit conducted in accordance with the 1996 Amendments, this

audit must be paid for with other than Federal funds.

[[Page 57234]]

However, the 1996 Amendments do not prohibit charging Federal awards

for limited scope audits and other subrecipient monitoring procedures.

Pass-through entities would need to make appropriate changes in

their agreements with subrecipients to reflect that audits will no

longer be required for non-Federal entities with total Federal awards

expended of less than $300,000 annually. Pass-through entities will

need to review their overall subrecipient monitoring process, and

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

to ensure subrecipient compliance. Monitoring procedures, which include

limited scope audits, can be more targeted and less costly than a full

Circular A-133 audit. Subrecipient monitoring procedures include: on-

site visits, reviews of documentation supporting requests for

reimbursement, limited scope audits of specific compliance areas (e.g.,

eligibility determinations made by subrecipients), and financial

statement audits in accordance with generally accepted government

auditing standards. A pass-through entity should consider the cost-

effectiveness of monitoring procedures compared to the relative size

and complexity of the Federal awards administered by subrecipients in

determining the appropriateness of monitoring procedures.

D. Proposed Requirement for the Auditor To Prepare and Sign the Data

Collection Form Required by Circular A-133

To streamline the distribution of audit reports and improve the

governmentwide collection and analysis of single audit results,

Circular A-133 provides for a machine-readable form (Sec. __.320(b)) to

be prepared at the completion of each audit and submitted to the

Federal clearinghouse designated by OMB and pass-through entities. The

data collection form will provide key information about the non-Federal

entity, the Federal awards it administers, and the audit results. It

will serve as the basis for developing a governmentwide database on

covered Federal awards administered by non-Federal entities. The April

1996 revision of Circular A-133 provides for a data collection form to

be submitted to the Federal clearinghouse and each pass-through entity

in lieu of sending the full single audit reporting package when there

are no audit findings.

The April 1996 revision of Circular A-133 requires the auditee's

management to prepare the data collection form. Many auditees are

concerned about the additional burden this reporting requirement would

place on them. A more efficient and effective method could be to have

the auditor prepare the form and sign it as preparer. OMB believes this

would not significantly increase audit costs, since most of the

information requested on the form will be obtained directly from the

schedule of expenditures of Federal awards and the auditor's reports.

Since the auditor is most knowledgeable about the audit results, OMB

expects that it will be efficient for the auditor to simply prepare the

form at the completion of the audit. Also, OMB believes that the

incremental legal exposure faced by the auditor as a result of signing

the form can be minimized by restricting its use to the Federal

clearinghouse and pass-through entities for the sole purpose of data

collection and so stating on the form. Under this method, the auditee

would continue to be required to provide assurance to the Federal

Government and pass-through entities that the auditee engaged an

auditor to conduct an audit in accordance with the Circular, that the

audit was completed, and that the information included on the form is

accurate.

OMB believes that the auditor's association with the data

collection form will add value to its usefulness, reduce the need for

Federal awarding agencies and pass-through entities to perform

unnecessary verification procedures, improve the accuracy of the

governmentwide database, streamline the single audit report submission

process, and reduce burden on auditees.

Therefore, OMB is considering adding a provision that requires the

auditor to prepare the data collection form and sign it. If this change

is made, OMB will work with the auditing profession and other

interested parties to develop any necessary revisions to the form.

Respondents are encouraged to comment on this change, including:

Whether the auditor should prepare and sign the data collection form;

what would be the estimated cost of the auditor's performing this

service; whether it would be beneficial to auditees, Federal agencies,

and pass-through entities; and, whether there are concerns over

litigation exposure.

The name of the certification form required under Sec. __.320(b) of

the April 1996 revision of Circular A-133 is changed to ``Data

Collection Form'' in the proposed revision to more appropriately

characterize the nature of the information request. This name change

also affects Sec. __.235(c)(2), Sec. __.235(c)(3), Sec. __.320(c),

Sec. __.320(e)(i), and Sec. __.320(h).

E. Audit Coverage Over the Allowability of Charges to Cost Pools

Changes are proposed at Sec. __.500(c), Sec. __.500(d),

Sec. __.505(b), Sec. __.505(c), and Sec. __.510(a) to clarify the

auditor's responsibility for testing and reporting on the allowability

of costs charged to cost pools: (1) used to support an indirect cost

rate, or (2) allocated through a State/local-wide central service cost

allocation plan (as fully described in Appendix C of Circular A-87,

``Cost Principles for State, Local and Indian Tribal Governments,''

issued May 4, 1995 (60 FR 26484), and hereinafter referred to as a

``cost allocation plan''). The proposed language is added to address

the timing of costs charged to cost pools used to support an indirect

cost rate or allocated through a cost allocation plan. Indirect cost

rates are based on costs incurred in a base period and applied

prospectively. Costs allocated through a cost allocation plan are based

on the actual costs incurred in two previous years.

Because it would not be practical to perform such tests

retroactively, the auditor is expected to perform tests of costs

charged to cost pools during the period that the actual costs were

incurred, rather than during the period in which the rate was applied

or in which the costs were allocated. For example, if the actual costs

charged to cost pools for 1997 form the basis for the indirect cost

proposal and the final negotiated indirect cost rate that will be

applied in 1998 and 1999, then the auditor should test actual costs

charged to cost pools during 1997 as part of the 1997 audit, since 1997

is the base year. The auditor would not be expected to test such costs

as part of the 1998 and 1999 audits.

F. Pilot Project Authority

The 1996 Amendments (31 U.S.C. 7502(j)) authorize OMB, in

consultation with the Chair and Ranking Minority Member of the

Committee on Governmental Affairs of the Senate and the Chair and

Ranking Minority Member of the Committee on Government Reform and

Oversight of the House of Representatives, to approve pilot projects to

test alternative methods of achieving the purposes of the 1996

Amendments. Such pilot projects, which would be voluntary undertakings

by non-Federal entities, would provide a means of assessing new ways of

testing and reporting on Federal awards.

Suggestions from auditees for pilot projects should be submitted

first to Federal funding agencies. If a Federal agency concludes that a

suggested pilot project has merit, the Federal agency

[[Page 57235]]

may present the suggestion to OMB for consideration. OMB will consult

with the appropriate members of the House and Senate prior to

authorizing any pilot projects under the 1996 Amendments.

G. Other Changes To Comply With the 1996 Amendments

The revision proposes the following other changes to comply with

the 1996 Amendments and include States and local governments under

Circular A-133.

(1) Retitles the Circular to include States and local governments.

States and local governments were also added to paragraph 1 of the

Circular.

(2) Deletes the references to Circular A-128 from paragraph 4 of

the Circular and sections Sec. __.105 and Sec. __.400(d)(4) of the

attachment.

(3) Changes definitions in Sec. __.105 of ``Federal award''

``Federal financial assistance'' ``Federal program'' ``internal

control'' ``internal control pertaining to the compliance requirements

over Federal programs'' ``pass-through entity'' and ``subrecipient'' to

conform with the definitions included in the 1996 Amendments.

(4) Adds definitions in Sec. __.105 for the terms ``Indian tribe,''

``local government,'' and ``State,'' which are defined terms in the

1996 Amendments.

(5) Adds definitions in Sec. __.105 for the term ``non-Federal

entity'' and replaces the term ``non-profit organization'' with ``non-

Federal entity'' in paragraphs 4, 6, and 10 of the Circular and

sections Sec. __.100, Sec. __.105, Sec. __.200(d), Sec. __.205(a), and

Sec. __.205(h) of the attachment.

(6) Replaces the term ``non-profit organization'' with

``subrecipient'' in Sec. __.205(i).

(7) Adds ``full'' as a modifier of cost in Sec. 7.215(b).

(8) Changes title of schedule in Sec. __.235(b)(2) to ``schedule of

expenditures of Federal awards.''

(9) Changes title of ``central clearinghouse'' to ``Federal

clearinghouse'' in Sec. __.235(c)(2), Sec. __.235(c)(3),

Sec. __.300(e), Sec. __.315(b)(4)(i), Sec. __.320(b), Sec. __.320(d),

Sec. __.320(g), Sec. __.320(h), Sec. __.320(i), and Sec. __.320(j).

910) Adds reference to Grants Management Common Rule in

Sec. __.305(a).

(11) Drops ``non-profit'' as a modifier to pass-through entity and

subrecipients in Sec. __.400(d) and Sec. __.400(d)(4), respectively.

(12) Adds a provision to cover a series of audits in

Sec. __.500(a).

(13) Changes the schedule of findings and questioned costs

(Sec. __.505(d)) to include information from the audit of the financial

statements performed in accordance with generally accepted government

auditing standards. Consistency changes were made to

Sec. __.235(b)(4)(iv) for program-specific audits.

(14)Drops from Sec. __.520(b)(3) the reference to insurance

programs because insurance programs are not specifically cited in the

1996 Amendments.

H. Other Changes

The revision proposes the following detailed changes.

(1) Adds to Sec. __.235(c)(3) a requirement that one copy of the

data collection form prepared in accordance with Sec. __.320(b) be

submitted to each pass-through entity.

(2) Adds to Sec. __.320(b) a requirement that the auditee identify

the cognizant or oversight agency for audit on the data collection

form.

(3) Changes the requirement in Sec. __.400(a)(4) for the cognizant

agency for audit to report to other Federal agencies any direct

reporting of irregularities and illegal acts.

(4) Simplifies the summary of the auditor's results in Sec. __.505

by removing the requirement for a statement concerning the auditee's

ability to continue as a going concern and consolidating the reporting

of audit findings which were not reportable conditions or material non-

compliance.

(5) Adds to the definition of audit findings reported

(Sec. __.510(a)(4)) known questioned costs greater than $10,000 for

Federal programs which are not audited as major programs. Consistent

with this, adds in Sec. __.520(c) a reference to this requirement.

(6) Removes from Sec. __.510(a)(6) the definition of fraud because

this term is the same as in professional auditing standards.

(7) Adds in Sec. __.520(d) and Sec. __.520(e) an option to allow an

auditor to minimize the risk assessment required for Type B programs

under certain circumstances.

(8) Adds in Sec. __.520(e) a statement to encourage auditors to use

an approach in identifying high-risk Type B program which provides an

opportunity for different high-risk Type B programs to be audited as

major over a period of time.

I. Changes for Clarity

The revision proposes the following changes for clarity.

(1) Changes the title of the Circular to use the term ``non-profit

organizations'' in lieu of the phrase ``institutions of higher

education and other non-profit institutions'' since non-profit

organization is the defined term (Sec. __.105) which includes non-

profit institutions of higher education.

(2) Changes the definitions in Sec. __.105 of cluster of programs

and Federal programs to clarify that research and development (R&D) and

student financial aid (SFA) are types of clusters of programs. Based

upon this change, the phrase ``category of programs'' was replaced with

``cluster of programs'' in Sec. __.105, Sec. __.310(b)(6),

Sec. __.320(b). Moves discussion of State governments combining funding

from definition of Federal programs to definition of cluster of

programs in Sec. __.105. Adds to Sec. __.105 emphasis that when a State

designates a cluster of programs, the State must identify the Federal

awards and advise subrecipients of the applicable compliance

requirements.

(3) Replaces the reference to ``Federal expenditures'' with

``Federal awards expended'' in Sec. __.200(d), Sec. __.310(b)(2),

Sec. __.310(b)(6), Sec. __.310(b)(7), Sec. __.520(b)(1),

Sec. __.520(d)(2), Sec. __.520(f), Sec. __.525(d)(4),

Sec. __.530(d)(3).

(4) For consistency with the format of the effective date of the

Circular, changes the date format from fiscal years ``ending'' to

fiscal years ``beginning'' in Sec. __.305(b).

(5) Clarifies in Sec. __.315(b) that follow-up on prior audit

findings is concerned with those relative to Federal awards as opposed

to those relative to the financial statements of the entity.

(6) Clarifies in Sec. __.500(a) that the entity's financial

statements and schedule of expenditures of Federal awards must be for

the same fiscal year.

(7) Replaces in Sec. __.500(c) the term ``achieve'' with

``support.''

(8) Clarifies in Sec. __.510(a)(2) that this reporting only relates

to major programs and removes discussion relating to auditor

conclusions which is included in generally accepted government auditing

standards.

(9) Clarifies in Sec. __.510(a)(5) and Sec. __.510(a)(6) that the

reference to the schedule of findings and questioned costs is to the

part of the schedule that deals with Federal awards.

(10) Changes the term ``50 percent rule'' to ``percentage of

coverage rule'' in Sec. __.520(d)(2), Sec. __.520(e)(3),

Sec. __.520(f), Sec. __.520(i).

(11) Clarifies in Sec. __.530(d) that this provision applies for

either of the preceding two years in which the program was classified

as a Type A program.

Information Collection Activity Under OMB Review

In accordance with the Paperwork Reduction Act (44 U.S.C. Chapter

35 et seq.), this notice requests comment on

[[Page 57236]]

the following two proposed information collections contained in this

proposed revision. The information collection request involves two

types of entities: (1) Reports from auditors to auditees concerning

audit results, audit findings, and questioned costs; and, (2) reports

from auditees to the Federal Government providing information about the

auditees, the awards they administer, and the audit results. The

proposed revision specifies what auditors are required to report to

auditees, under Sec. __.235(b)(4), for program-specific audits, and

Sec. __.505, ``Audit Reporting,'' for single audits. The proposed

revision also specifies what auditees are required to report to the

Federal clearinghouse designated by OMB and pass-through entities, if

applicable, under Sec. __.235(c), for program-specific audits, and

Sec. __.320, ``Report Submission,'' for single audits.

The information collection requests included in this proposal would

result in a decrease in overall reporting burden. Although the

reporting burden per audit will increase under this proposal from 26 to

34 hours (described in the following paragraphs), fewer entities will

be subject to the reporting requirements as a result of the proposal to

increase the threshold that triggers an audit requirement under the

Circular from $25,000 to $300,000. Based on available information, OMB

estimates that approximately 25,000 non-Federal entities would be

subject to the information collection requirement included in this

proposal; whereas, approximately 35,000 non-Federal entities are

subject to the current requirements under Circulars A-128 and A-133.

The overall reporting burden currently approximates 910,000 hours

(35,000 non-Federal entities at 26 hours per audit). Under the

proposal, the overall reporting burden would be approximately 850,000

hours (25,000 non-Federal entities at 34 hours per audit), or 60,000

hours less than the current reporting burden. In addition, as more

fully discussed below, there is an opportunity to reduce further the

overall reporting burden under the proposal from 850,000 to 800,000

hours by having auditors, rather than auditees, prepare the data

collection form discussed below.

Congress intended to improve the contents of single audit reports

to make them more useful by enacting the 1996 Amendments. OMB believes

that the increase in reporting burden per audit is warranted because

several changes included in the proposed revision would improve the

usefulness and effectiveness of single audit reporting with respect to

information provided by both auditors and auditees.

OMB estimates that reporting by auditors currently takes

approximately 10 hours on the average per audit under Circulars A-128

and A-133, and will take 14 hours under the proposal. The estimated

increase of 4 hours of reporting burden per audit on auditors is due

primarily to a provision in the 1996 Amendments (31 U.S.C. 7502(g)(2))

which requires the auditor, for the first time, to prepare a summary of

audit results. In its report on the 1996 Amendments, the Committee on

Government Reform and Oversight stated that ``the complexity of the

reports makes it difficult for the average reader to understand what

has been audited and reported ... A summary of the audit results would

highlight important information and thus enable users to quickly

discern the overall results of an audit'' (H.R. Report 104-607, page

18).

OMB estimates that reporting by auditees currently takes

approximately 16 hours on the average per audit under Circulars A-128

and A-133, and will take 20 hours under the proposal. The estimated

increase of 4 hours of reporting burden per audit on auditees is due

primarily to a proposed requirement whereby management would prepare

two new documents to improve the usefulness of single audit reports.

The first of these reports is a summary schedule of prior audit

findings which will provide the current status of previously reported

audit findings until such findings are corrected. This information,

which is important to Federal funding agencies and pass-through

entities, is currently required under Circulars A-128 and A-133 but it

is not consistently provided in single audit reports. As a result,

Federal funding agencies and pass-through entities frequently request

this type of information long after a finding is reported, which

results in additional burden on Federal agencies, auditees, and

auditors. The proposed requirements provide additional guidance to

auditees on where and how to present information regarding prior audit

findings. While additional time may be required up-front for certain

auditees to prepare the summary schedule of prior audit findings, the

reporting burden for such entities should be offset by the elimination

of the inefficiencies caused by the current practice of having to

retrieve and provide information after-the-fact on old audit findings.

The second report management would be required to prepare is the

``Data Collection Form'' prescribed in Sec. ____.320(b) of the proposed

revision and discussed previously in Section D (Proposed Requirement

for the Auditor to Prepare and Sign the Data Collection Form Required

by Circular A-133). The data collection form will facilitate

streamlining the report distribution process and improve the

governmentwide collection and analysis of single audit results.

OMB believes that the overall reporting burden under the proposed

revision could be further reduced by having the auditor prepare the

data collection form. Specifically, OMB estimates that if auditors,

rather than auditees, prepare the data collection form then the

estimate of reporting burden on auditors would increase by two hours

(that is, from 14 hours to 16 hours), and the estimate of reporting

burden on auditees would decrease by four hours (that is, from 20 hours

to 16 hours) per audit under the proposal. This would result in a net

decrease of 2 hours per audit, or 50,000 hours in overall reporting

burden (25,000 non-Federal entities at 2 hours savings per audit). As a

result of having auditors, rather than auditees, prepare the data

collection form, overall reporting burden could be reduced from 850,000

to 800,000 hours.

Comments are invited on: (a) Whether the proposed information

collection is necessary for the proper performance of the functions of

the agencies, including whether the information has practical utility;

(b) the accuracy of the estimate of the burden of the collection of the

information; (c) ways to enhance the quality, utility, and clarity of

the information to be collected; and (d) ways to minimize the burden

related to the collection of information on respondents, including use

of automated collection techniques or other forms of information

technology.

G. Edward DeSeve,

Controller.

1. OMB proposes to rescind Circular A-128 upon issuance of a

revised Circular A-133 that covers States and local governments.

2. OMB proposes to revise Circular A-133 to read as follows:

To the Heads of Executive Departments and Establishments

Subject: Audits of States, Local Governments, and Non-Profit

Organizations

1. Purpose. This Circular is issued pursuant to the Single Audit

Act of 1984, Public Law 98-502, and the Single Audit Act Amendments

of 1996, Public Law 104-156. It sets forth standards for obtaining

consistency and uniformity among Federal agencies for the audit of

States, local

[[Page 57237]]

governments, and non-profit organizations expending Federal awards.

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

sections 503, 1111, and 7501 et seq. of title 31, United States

Code, and Executive Orders 8248 and 11541.

3. Rescission and Supersession. This Circular rescinds Circular

A-128, ``Audits of State and Local Governments,'' issued April 12,

1985, and supersedes the prior Circular A-133, ``Audits of

Institutions of Higher Education and Other Non-Profit

Institutions,'' issued April 22, 1996. 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-Federal entities, 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).

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-Federal entities are

set forth in the Attachment to this Circular. Federal agencies

making awards to non-Federal entities, either directly or

indirectly, shall adopt the language in the Circular in codified

regulations as provided in Section 10 (below), 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

uniform, 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. 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 beginning after June 30, 1996.

The standards set forth in this Circular that Federal agencies

are to apply to non-Federal entities shall be adopted by Federal

agencies in codified regulations not later than six months after

publication of the final revision in the Federal Register, so that

they will apply to audits of fiscal years beginning after June 30,

1996, with the exception that Sec. ____.305(b) of the Attachment

applies to audits of fiscal years beginning after June 30, 1998. In

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

and become applicable, the audit provisions of Circular A-128 issued

April 12, 1985, and Circular A-133, issued April 22, 1996, shall

continue in effect.

Franklin D. Raines,

Director.

Attachment

PART ____--AUDITS OF STATES, LOCAL GOVERNMENTS, AND NON-PROFIT

ORGANIZATIONS

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.

Subpart A--General

Sec. ____.100 Purpose.

This part sets forth standards for obtaining consistency and

uniformity among Federal agencies for the audit of non-Federal entities

expending Federal awards.

Sec. ____.105 Definitions.

Auditee means any non-Federal entity that expends Federal awards

which must be audited under this part.

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

State or local government audit organization, which meets the general

standards specified in generally accepted government auditing standards

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

profit organizations.

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 a grouping of closely related programs

that share common compliance requirements. The types of clusters of

programs are research and development (R&D), student financial aid

(SFA), and other clusters. ``Other clusters'' are as defined by the

Office of Management and Budget (OMB) in the compliance supplements or

as designated by a State for Federal awards the State provides to its

subrecipients that meet the definition of a cluster of programs. When

designating an ``other cluster,'' a State shall identify the Federal

awards included in the cluster and advise the subrecipients of

compliance requirements applicable to the cluster, consistent with

Sec. ____.400(d)(1) and Sec. ____.400(d)(2), respectively. A cluster of

programs shall be considered as one program for determining major

programs, as described in Sec. ____.520, and, with the exception of R&D

as described in Sec. ____.200(c), whether a program-specific audit may

be elected.

Cognizant agency for audit means the Federal agency designated to

carry out the responsibilities described in Sec. ____.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 Audits of State

and Local Governments or such documents as 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-

[[Page 57238]]

reimbursement contracts that non-Federal entities receive directly from

Federal awarding agencies or indirectly from pass-through entities. It

does not include procurement contracts, under grants or contracts, used

to buy goods or services from vendors. Any audits of such vendors shall

be covered by the 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 that non-Federal

entities receive or administer in the form of grants, loans, loan

guarantees, property (including donated surplus property), cooperative

agreements, interest subsidies, insurance, food commodities, direct

appropriations, and other assistance, but does not include amounts

received as reimbursement for services rendered to individuals as

described in Sec. ____.205(h) and Sec. ____.205(i).

Federal program means:

(1) All Federal awards to a non-Federal entity assigned a single

number in the CFDA.

(2) 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.

(3) Notwithstanding paragraphs (1) and (2) of this definition, a

cluster of programs. The types of clusters of programs are:

(i) Research and development (R&D);

(ii) Student financial aid (SFA); and

(iii) ``Other clusters,'' as described in the definition of cluster

of programs in this section.

GAGAS means generally accepted government auditing standards issued

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

to financial audits.

Generally accepted accounting principles has the meaning specified

in generally accepted auditing standards issued by the American

Institute of Certified Public Accountants (AICPA).

Indian tribe means any Indian tribe, band, nation, or other

organized group or community, including any Alaskan Native village or

regional or village corporation (as defined in, or established under,

the Alaskan Native Claims Settlement Act) that is recognized by the

United States as eligible for the special programs and services

provided by the United States to Indians because of their status as

Indians.

Internal control means a process, effected by an entity's

management and other personnel, designed to provide reasonable

assurance regarding the achievement of objectives in the following

categories:

(1) Effectiveness and efficiency of operations;

(2) Reliability of financial reporting; and

(3) Compliance with applicable laws and regulations.

Internal control pertaining to the compliance requirements for

Federal programs (Internal control over Federal programs) means a

process--effected by an entity's management and other personnel--

designed to provide reasonable assurance regarding the achievement of

the following objectives for Federal programs:

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

(i) Permit the preparation of reliable financial statements and

Federal reports;

(ii) Maintain accountability over assets; and

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

compliance requirements;

(2) Transactions are executed in compliance with:

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

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

program; and

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

compliance 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-Federal entity.

Local government means any unit of local government within a State,

including a county, borough, municipality, city, town, township,

parish, local public authority, special district, school district,

intrastate district, council of governments, and any other

instrumentality of local government.

Major program means a Federal program determined by the auditor to

be a major program in accordance with Sec. ____.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-Federal entity means a State, local government, or non-profit

organization.

Non-profit organization means:

(1) any corporation, trust, association, cooperative, or other

organization that:

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

charitable, or similar purposes in the public interest;

(ii) Is not organized primarily for profit; and

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

operations; and

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

institutions of higher education and hospitals.

OMB means the Executive Office of the President, Office of

Management and Budget.

Oversight agency for audit means the Federal awarding agency that

provides the predominant amount of direct funding to a recipient not

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

the Federal agency with the predominant indirect funding shall assume

the oversight responsibilities. The duties of the oversight agency for

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

Pass-through entity means a non-Federal entity that provides a

Federal award to a subrecipient to carry out a Federal program.

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

provided for in Sec. ____.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-Federal entity that expends Federal awards

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

program.

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

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

a non-Federal entity. Research is defined as a systematic study

directed toward fuller scientific knowledge or understanding of the

subject studied. The term research also includes activities involving

the training of individuals in research

[[Page 57239]]

techniques where such activities utilize the same facilities as other

research and development activities and where such activities are not

included in the instruction function. Development is the systematic use

of knowledge and understanding gained from research directed toward the

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

design and development of prototypes and processes.

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

financial statements and the Federal awards as described in

Sec. ____.500.

State means any State of the United States, the District of

Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam,

American Samoa, the Commonwealth of the Northern Mariana Islands, and

the Trust Territory of the Pacific Islands, any instrumentality

thereof, any multi-State, regional, or interstate entity which has

governmental functions, and any Indian tribe as defined in this

section.

Student Financial Aid (SFA) includes those programs of general

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

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

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

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

provide fellowships or similar Federal awards to students on a

competitive basis, or for specified studies or research.

Subrecipient means a non-Federal entity that expends Federal awards

received from a pass-through entity to carry out a Federal program, but

does not include an individual that is a beneficiary of such a program.

A subrecipient may also be a recipient of other Federal awards directly

from a Federal awarding agency. Guidance on distinguishing between a

subrecipient and a vendor is provided in Sec. ____.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-Federal entities that expend $300,000 or

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

specific audit conducted for that year in accordance with the

provisions of this part. Guidance on determining Federal awards

expended is provided in Sec. ____.205.

(b) Single audit. Non-Federal entities that expend $300,000 or more

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

accordance with Sec. ____.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 of the Federal awards expended were received from the same

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

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

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

(d) Exemption when Federal awards expended are less than $300,000.

Non-Federal entities that expend less than $300,000 a year in Federal

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

as noted in Sec. ____.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 an 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-Federal entity to comply with laws, regulations, and

the provisions of contracts or grant agreements, such as: expenditure/

expense transactions associated with grants, cost-reimbursement

contracts, cooperative agreements, and direct appropriations; the

disbursement of funds passed through to subrecipients; the use of loan

proceeds under loan and loan guarantee programs; the receipt of

property; the receipt of surplus property; the receipt or use of

program income; the distribution or consumption of food commodities;

the disbursement of amounts entitling the non-Federal entity to an

interest subsidy; and, the period when insurance is in force.

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

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

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

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

section:

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

plus

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

Government imposes continuing compliance requirements; plus

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

received.

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

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

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

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

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

included as Federal awards expended because the lender accounts for the

prior balances.

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

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

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

the provisions of contracts or grant agreements pertaining to such

loans impose no continuing compliance requirements other than to repay

the loans.

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

endowment funds which are federally restricted are considered awards

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

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

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

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

determining Federal awards expended and subject to audit under this

part.

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

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

[[Page 57240]]

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

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

(h) Medicare. Medicare payments to a non-Federal entity for

providing patient care services to Medicare eligible individuals are

not considered Federal awards expended under this part.

(i) Medicaid. Medicaid payments to a subrecipient for providing

patient care services to Medicaid eligible individuals are not

considered Federal awards expended under this part unless a State

requires the funds to be treated as Federal awards expended because

reimbursement is on a cost-reimbursement basis.

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 full

cost of such additional audits.

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

Federal agency may request an auditee to have a particular Federal

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

conducting or arranging for the additional audits. To allow for

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

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

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

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

major program using the risk-based audit approach described in

Sec. ____.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.

Except for the provisions for biennial audits provided in

paragraphs (a) and (b) of this section, audits required by this part

shall be performed annually. Any biennial audit shall cover both years

within the biennial period.

(a) A State or local government that is required by constitution or

statute, in effect on January 1, 1987, to undergo its audits less

frequently than annually, is permitted to undergo its audits pursuant

to this part biennially. This requirement must still be in effect for

the biennial period under audit.

(b) Any non-profit organization that had biennial audits for all

biennial periods ending between July 1, 1992, and January 1, 1995, is

permitted to undergo its audits pursuant to this part biennially.

Sec. ____.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

[[Page 57241]]

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.

(a) Allowable costs. Unless prohibited by law, the cost of audits

made in accordance with the provisions of this part are allowable

charges to Federal awards. The charges may be considered a direct cost

or an allocated indirect cost, as determined in accordance with the

provisions of applicable OMB cost principles circulars, the Federal

Acquisition Regulation (FAR) (48 CFR parts 30 and 31), or other

applicable cost principles or regulations.

(b) Unallowable costs. A non-Federal entity shall not charge the

following to a Federal award:

(1) The cost of any audit under the Single Audit Act Amendments of

1996 (31 U.S.C. 7501 et seq.) not conducted in accordance with this

part.

(2) The cost of auditing a non-Federal entity which has Federal

awards expended of less than $300,000 per year and is thereby exempted

under Sec. ____.200(d) from having an audit conducted under this part.

However, this does not prohibit a pass-through entity from charging

Federal awards for the cost of limited scope audits to monitor its

subrecipients in accordance with Sec. ____.400(d)(3), provided the

subrecipient does not have a single audit.

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 expenditures

of Federal awards for the program and notes that describe the

significant accounting policies used in preparing the schedule, a

summary schedule of prior audit findings consistent with the

requirements of Sec. ____.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 includes a summary of the auditor's results relative to

the Federal program in a format consistent with Sec. ____.505(d)(1) and

findings and questioned costs consistent with the requirements of

Sec. ____.505(d)(3).

(c) Report submission for program-specific audits. 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. (However, for fiscal years beginning on

or before June 30, 1998, auditees shall have 13 months after the end of

the audit period to complete the audit and submit the reporting package

unless a different period is specified in a program-specific audit

guide.) 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 Federal clearinghouse designated by OMB one copy of

the data collection form 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

data collection form 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 Federal clearinghouse designated by OMB to be retained as an

archival copy and one copy of the data collection form prepared in

accordance with Sec. ____.320(b) shall be submitted to each pass-

through entity. Also, when the schedule of findings and questioned

[[Page 57242]]

costs disclosed audit findings or the summary schedule of prior audit

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

submit one copy of the reporting package to the Federal clearinghouse

on 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.

(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 Federal

clearinghouse designated by OMB and each pass-through entity providing

Federal awards of the extension.

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

including preparation of a summary schedule of prior audit findings and

a corrective action plan in accordance with Sec. ____.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 the Grants

Management Common Rule (GMCR) published March 11, 1988 and amended

April 19, 1995 [Each agency should insert appropriate CFR citation.]

Circular A-110, ``Uniform Requirements for Grants and Agreements with

Institutions of Higher Education, Hospitals and Other Non-Profit

Organizations,'' or the FAR (48 CFR part 42), as applicable. (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 GMCR,

OMB Circular A-110, or the FAR (48 CFR part 42), as applicable. In

requesting proposals for audit services, the objectives and scope of

the audit should be made clear. Factors to be considered in evaluating

each proposal for audit services include the responsiveness to the

request for proposal, relevant experience, availability of staff with

professional qualifications and technical abilities, the results of

external quality control reviews, and price.

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

auditor who prepares the indirect cost proposal or cost allocation plan

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

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

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

the preparation of the indirect cost proposal or cost allocation plan

and any subsequent years in which the resulting indirect cost agreement

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

disruption in existing contracts for audit services, this paragraph

applies to audits of fiscal years beginning after June 30, 1998.

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

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

requirements of this part.

Sec. ____.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 Federal awards expended 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 cluster of programs.

However, when it is not practical to list each individual Federal award

for R&D, total Federal awards expended 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 the Federal awards expended in the form of non-cash

assistance, 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

[[Page 57243]]

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

relative to Federal awards. The summary schedule shall also include

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

audit findings except audit findings listed as corrected in accordance

with paragraph (b)(1) of this section, or no longer valid or not

warranting further action in accordance with paragraph (b)(4) of this

section.

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

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

taken.

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

corrected, the summary schedule shall describe the planned corrective

action as well as any partial corrective action taken.

(3) When corrective action taken is significantly different from

corrective action previously reported in a corrective action plan or in

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

summary schedule shall provide an explanation.

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

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

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

considering an audit finding as not warranting further action is that

all of the following have occurred:

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

finding occurred was submitted to the Federal clearinghouse;

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

following up with the auditee on the audit finding; and

(iii) A management decision was not issued.

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

auditee shall prepare a corrective action plan to address each audit

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

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

responsible for corrective action, the corrective action planned, and

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

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

corrective action plan shall include an explanation and specific

reasons.

Sec. ____.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. (However,

for fiscal years beginning on or before June 30, 1998, auditees shall

have 13 months after the end of the audit period to complete the audit

and submit the reporting package.) 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) Data Collection. The auditee shall complete a data collection

form which states whether the audit was completed in accordance with

this part and provides information about the auditee, its Federal

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

OMB, available from the Federal clearinghouse designated by OMB,

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 is accurate and complete and 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

Data Collection Form

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), respectively, 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 cluster of programs 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, 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:

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

[[Page 57244]]

Auditor Telephone Number: ----------------------------------

13. Whether the auditee has a cognizant or oversight agency for

audit.

14. The name of the cognizant or oversight agency for audit

determined in accordance with Sec. ------.400(a) and Sec. ------

.400(b), respectively.

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

(1) Data collection form 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

Federal clearinghouse designated by OMB one copy of the reporting

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

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

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

questioned costs disclosed audit findings relating to Federal awards

that the Federal awarding agency provided directly or the summary

schedule of prior audit findings reported the status of any audit

findings relating to Federal awards that the Federal awarding agency

provided directly.

(e) Additional submission by subrecipients. 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) Data collection form 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 pass-through 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 Federal

clearinghouse designated by OMB. Pass-through entities shall keep

subrecipients' submissions on file for three years from date of

receipt.

(h) Clearinghouse responsibilities. The Federal clearinghouse

designated by OMB shall distribute the reporting packages received in

accordance with paragraph (d)(2) of this section and

Sec. ____.235(c)(3) to applicable Federal awarding agencies, maintain a

data base of completed audits, provide appropriate information to

Federal agencies, and follow up with known auditees which have not

submitted the required data collection forms and reporting packages.

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

currently designated by OMB is Federal Audit Clearinghouse, Bureau of

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

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

electronic submissions to the Federal clearinghouse in such manner as

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

may pilot test methods of electronic submissions.

Subpart D--Federal Agencies and Pass-Through Entities

Sec. ____.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.

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

deficiencies found in the audits when the deficiencies require

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

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

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

notify the auditor, the auditee, and applicable Federal awarding

agencies and pass-through entities of the facts and make

recommendations for follow-up action. Major inadequacies or repetitive

substandard performance by auditors shall be referred to appropriate

State licensing agencies and professional bodies for disciplinary

action.

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

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

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

upon audits performed in accordance with this part.

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

the Federal programs of more than one agency.

(8) Coordinate the audit work and reporting responsibilities among

auditors to achieve the most cost-effective audit.

(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

the definition of oversight agency for audit in Sec. ____.105. The

oversight agency for audit:

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

requested.

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

performed by a cognizant agency for audit.

(c) Federal awarding agency responsibilities. The Federal awarding

[[Page 57245]]

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 pass-through entity

shall perform the following for the Federal awards it makes:

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

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

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

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

information available to describe the Federal award.

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

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

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

entity.

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

that Federal awards are used for authorized purposes in compliance with

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

and that performance goals are achieved.

(4) Ensure that subrecipients expending $300,000 or more in Federal

awards during the subrecipient's fiscal year have met the audit

requirements of this part for that fiscal year.

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

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

subrecipient takes appropriate and timely corrective action.

(6) Consider whether subrecipient audits necessitate adjustment of

the pass-through entity's own records.

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

auditors to have access to the records and financial statements as

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

Sec. ______.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.

The audit shall cover the entire operations of the auditee; or, at the

option of the auditee, such audit shall include a series of audits that

cover departments, agencies, and other organizational units which

expended or otherwise administered Federal awards during such fiscal

year, provided that each such audit shall encompass the financial

statements and schedule of expenditures of Federal awards for each such

department, agency, and organizational unit, which shall be considered

to be a non-Federal entity. The financial statements and schedule of

expenditures of Federal awards shall be for the same fiscal year.

(b) Financial statements. The auditor shall determine whether the

financial statements of the auditee are presented fairly in all

material respects in conformity with generally accepted accounting

principles. The auditor shall also determine whether the schedule of

expenditures of Federal awards is presented fairly in all material

respects in relation to the auditee's financial statements taken as a

whole.

(c) Internal control. (1) In addition to the requirements of GAGAS,

the auditor shall perform procedures to obtain an understanding of

internal control over Federal programs sufficient to plan the audit to

support a low assessed level of control risk for major programs and the

allowability of costs charged to cost pools used to support an indirect

cost rate or allocated through a State/local-wide central service cost

allocation plan (as fully described in Appendix C of Circular A-87,

``Cost Principles for State, Local and Indian Tribal Governments,''

issued May 4, 1995, and hereinafter referred to as a ``cost allocation

plan''). (Circular available from Office of Administration,

Publications Office, Room 2200, New Executive Office Building,

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

(2) Except as provided in paragraph (c)(3) of this section, the

auditor shall:

(i) Plan the testing of internal control over major programs and

the allowability of costs charged to cost pools used to support an

indirect cost rate or allocated through a cost allocation plan to

support a low assessed level of control risk for the assertions

relevant to the compliance requirements for each major program; and

(ii) Perform testing of internal control as planned in paragraph

(c)(2)(i) of this section.

(3) When internal control over some or all of the compliance

requirements for a major program and the allowability of costs charged

to cost pools used to support an indirect cost rate or allocated

through a cost allocation plan 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

[[Page 57246]]

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.

(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 and

the allowability of costs charged to cost pools used to support an

indirect cost rate or allocated through a cost allocation plan.

(2) The principal compliance requirements common to most Federal

programs and the programmatic compliance requirements of the largest

Federal programs are included in the compliance supplements.

(3) For the compliance requirements (common and programmatic)

related to Federal programs contained in the compliance supplements, an

audit of these compliance requirements will meet the requirements of

this part. Where there have been changes to the compliance requirements

and the changes are not reflected in the compliance 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.

(4) The compliance testing shall include tests of transactions,

including costs charged to cost pools used to support an indirect cost

rate or allocated through a cost allocation plan, and such other

auditing procedures necessary to provide the auditor sufficient

evidence to support an opinion on compliance.

(e) Audit follow-up. The auditor shall follow up on prior audit

findings, perform procedures to assess the reasonableness of the

summary schedule of prior audit findings prepared by the auditee in

accordance with Sec. ______.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

or the allowability of costs charged to cost pools used to support an

indirect cost rate or allocated through a cost allocation plan 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.

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

separate reports and may be organized differently from the manner

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

audit was conducted in accordance with this part and include the

following:

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

financial statements are presented fairly in all material respects in

conformity with generally accepted accounting principles and an opinion

(or disclaimer of opinion) as to whether the schedule of expenditures

of Federal awards is presented fairly in all material respects in

relation to the financial statements taken as a whole.

(b) A report on internal control related to the financial

statements, major programs, and the allowability of costs charged to

cost pools used to support an indirect cost rate or allocated through a

cost allocation plan. This report shall describe the scope of testing

of internal control and the results of the tests, and, where

applicable, refer to the separate schedule of findings and questioned

costs described in paragraph (d) of this section.

(c) A report on compliance with laws, regulations, and the

provisions of contracts or grant agreements, noncompliance with which

could have a material effect on the financial statements. This report

shall also include an opinion (or disclaimer of opinion) as to whether

the auditee complied with laws, regulations, and the provisions of

contracts or grant agreements which could have a direct and material

effect on each major program and on the allowability of costs charged

to cost pools used to support an indirect cost rate or allocated

through a cost allocation plan, and, where applicable, refer to the

separate schedule of findings and questioned costs described in

paragraph (d) of this section.

(d) A schedule of findings and questioned costs which shall include

the following three components:

(1) A summary of the auditor's results which shall include:

(i) The type of report the auditor issued on the financial

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

opinion, adverse opinion, or disclaimer of opinion);

(ii) Where applicable, a statement that reportable conditions in

internal control were disclosed by the audit of the financial

statements and whether any such conditions were material weaknesses;

(iii) A statement as to whether the audit disclosed any

noncompliance which is material to the financial statements of the

auditee;

(iv) Where applicable, a statement that reportable conditions in

internal control over major programs and the allowability of costs

charged to cost pools used to support an indirect cost rate or

allocated through a cost allocation plan were disclosed by the audit

and whether any such conditions were material weaknesses;

(v) The type of report the auditor issued on compliance for major

programs and with the provisions of applicable OMB cost principles

circulars, the FAR (48 CFR parts 30 and 31), or other applicable cost

principles or regulations pertaining to the allowability of costs

charged to cost pools used to support an indirect cost rate or

allocated through a cost allocation plan (i.e., unqualified opinion,

qualified opinion, adverse opinion, or disclaimer of opinion); and

(vi) A statement as to whether the audit disclosed any audit

findings which the auditor is required to report under

Sec. ______.510(a).

(2) Findings and questioned costs for the financial statements

which are required to be reported in accordance with GAGAS.

(3) Findings and questioned costs for Federal awards which shall

include audit findings as defined in Sec. ______.510(a).

(i) Audit findings (e.g., internal control findings, compliance

findings, questioned costs, or fraud) which relate to the same issue

should be presented as a single audit finding. Where

[[Page 57247]]

practical, audit findings should be organized by Federal agency or

pass-through entity.

(ii) Audit findings which relate to both the financial statements

and Federal awards, as reported under paragraphs (d)(2) and (d)(3) of

this section, respectively, should be reported in both schedules.

However, the reporting in one schedule may be in summary form with a

reference to a detailed reporting in the other schedule.

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

and over the allowability of costs charged to cost pools used to

support an indirect cost rate or allocated through a cost allocation

plan. The auditor's determination of whether a deficiency in internal

control is a reportable condition for the purpose of reporting an audit

finding is in relation to a type of compliance requirement for a major

program, total costs charged to cost pools used to support an indirect

cost rate or allocated through a cost allocation plan, 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 related to a major program

and the provisions of applicable OMB cost principles circulars, the

FAR, or other applicable cost principles or regulations pertaining to

the allowability of costs charged to cost pools used to support an

indirect cost rate or allocated through a cost allocation plan. 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, total costs charged to cost

pools used to support an indirect cost rate or allocated through a cost

allocation plan, 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 and costs charged to

cost pools used to support an indirect cost rate or allocated through a

cost allocation plan. Known questioned costs are those specifically

identified by the auditor. In evaluating the effect of questioned costs

on the opinion on compliance, the auditor considers the best estimate

of total costs questioned (likely questioned costs), not just the

questioned costs specifically identified (known questioned costs). The

auditor shall also report known questioned costs when likely questioned

costs are greater than $10,000 for a type of compliance requirement for

a major program and costs charged to cost pools used to support an

indirect cost rate or allocated through a cost allocation plan. In

reporting questioned costs, the auditor shall include information to

provide proper perspective for judging the prevalence and consequences

of the questioned costs.

(4) Known questioned costs which are greater than $10,000 for a

Federal program which is not audited as a major program. Except for

audit follow-up, the auditor is not required under this part to perform

audit procedures for such a Federal program; therefore, the auditor

will normally not find questioned costs for a program which is not

audited as a major program. However, if the auditor does become aware

of questioned costs for a Federal program which is not audited as a

major program (e.g., as part of audit follow-up or other audit

procedures) and the known questioned costs are greater than $10,000,

then the auditor shall report this as an audit finding.

(5) The circumstances concerning why the auditor's report on

compliance for major programs and the allowability of costs charged to

cost pools used to support an indirect cost rate or allocated through a

cost allocation plan is other than an unqualified opinion, unless such

circumstances are otherwise reported as audit findings in the schedule

of findings and questioned costs for Federal awards.

(6) Known fraud affecting a Federal award, unless such fraud is

otherwise reported as an audit finding in the schedule of findings and

questioned costs for Federal awards. This paragraph does not require

the auditor to make an additional reporting when the auditor confirms

that the fraud was reported outside of the auditor's reports under the

direct reporting requirements of GAGAS.

(7) Instances where the results of audit follow-up procedures

disclosed that the summary schedule of prior audit findings prepared by

the auditee in accordance with Sec. ______ .315(b) materially

misrepresents the status of any prior audit finding.

(b) Audit finding detail. Audit findings shall be presented in

sufficient detail for the auditee to prepare a corrective action plan

and take corrective action and for Federal agencies and pass-through

entities to arrive at a management decision. The following specific

information shall be included, as applicable, in audit findings:

(1) Federal program and specific Federal award identification

including the CFDA title and number, Federal award number and year,

name of Federal agency, and name of the applicable pass-through entity.

When information, such as the CFDA title and number or Federal award

number, is not available, the auditor shall provide the best

information available to describe the Federal award.

(2) The criteria or specific requirement upon which the audit

finding is based, including statutory, regulatory, or other citation.

(3) The condition found, including facts that support the

deficiency identified in the audit finding.

(4) Identification of questioned costs and how they were computed.

(5) Information to provide proper perspective for judging the

prevalence and consequences of the audit findings, such as whether the

audit findings represent an isolated instance or a systemic problem.

Where appropriate, instances identified shall be related to the

universe and the number of cases examined and be quantified in terms of

dollar value.

(6) The possible asserted effect to provide sufficient information

to the auditee and Federal agency, or pass-through entity in the case

of a subrecipient, to permit them to determine the cause and effect to

facilitate prompt and proper corrective action.

(7) Recommendations to prevent future occurrences of the deficiency

identified in the audit finding.

(8) Views of responsible officials of the auditee when there is

disagreement with the audit findings, to the extent practical.

(c) Reference numbers. Each audit finding in the schedule of

findings and questioned costs shall include a reference number to allow

for easy referencing of the audit findings during follow-up.

Sec. ______.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

[[Page 57248]]

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 pass-through entities,

and the inherent risk of the Federal program. The process in paragraphs

(b) through (i) of this section shall be followed.

(b) Step 1. 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 awards expended during the audit period

exceeding the larger of:

(i) $300,000 or three percent (.03) of total Federal awards

expended in the case of an auditee for which total Federal awards

expended equal or exceed $300,000 but are less than or equal to $100

million.

(ii) $3 million or three-tenths of one percent (.003) of total

Federal awards expended in the case of an auditee for which total

Federal awards expended exceed $100 million but are less than or equal

to $10 billion.

(iii) $30 million or 15 hundredths of one percent (.0015) of total

Federal awards expended in the case of an auditee for which total

Federal awards expended exceed $10 billion.

(2) Federal programs not labeled Type A under paragraph (b)(1) of

this section shall be labeled Type B programs.

(3) The inclusion of large loan and loan guarantees (loans) should

not result in the exclusion of other programs as Type A programs. When

a Federal program providing loans significantly affects the number or

size of Type A programs, the auditor shall consider this Federal

program as a Type A program and exclude its values in determining other

Type A programs.

(4) For biennial audits permitted under Sec. ______.220, the

determination of Type A and Type B programs shall be based upon the

Federal awards expended during the two-year period.

(c) Step 2. The auditor shall identify Type A programs which are

low-risk. For a Type A program to be considered low-risk, it shall have

been audited as a major program in at least one of the two most recent

audit periods (in the most recent audit period in the case of a

biennial audit), and, in the most recent audit period, it shall have

had no audit findings under Sec. ______.510(a). However, the auditor

may use judgment and consider that audit findings from questioned costs

under Sec. ______.510(a)(3) and Sec. ______.510(a)(4), fraud under

Sec. ______.510(a)(6), and audit follow-up for the summary schedule of

prior audit findings under Sec. ______.510(a)(7) do not preclude the

Type A program from being low-risk. 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. The auditor shall identify Type B programs which are

high-risk using professional judgment and the criteria in

Sec. ______.525. However, should the auditor select Option 2 under Step

4 (paragraph (e)(2)(i)(B) of this section), the auditor is not required

to identify more high-risk Type B programs than the number of low-risk

Type A programs. Except for known reportable conditions in internal

control or compliance problems as discussed in Sec. ______.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 percentage of

coverage 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

awards expended when the auditee has less than or equal to $100 million

in total Federal awards expended.

(ii) $300,000 or three-hundredths of one percent (.0003) of total

Federal awards expended when the auditee has more than $100 million in

total Federal awards expended.

(e) Step 4. At a minimum, the auditor shall audit all of the

following as major programs:

(1) All Type A programs, except the auditor may exclude any Type A

programs identified as low-risk under Step 2 (paragraph (c)(1) of this

section).

(2) (i) High-risk Type B programs as identified under either of the

following two options:

(A) Option 1. At least one half of the Type B programs identified

as high-risk under Step 3 (paragraph (d) of this section), except this

paragraph (e)(2)(i)(A) does not require the auditor to audit more high-

risk Type B programs than the number of low-risk Type A programs

identified as low-risk under Step 2.

(B) Option 2. One high-risk Type B program for each Type A program

identified as low-risk under Step 2.

(ii) When identifying which high-risk Type B programs to audit as

major under either Option 1 or 2 in paragraph (a)(2)(i) (A) or (B) of

this section, the auditor is encouraged to use an approach which

provides an opportunity for different high-risk Type B programs to be

audited as major over a period of time.

(3) Such additional programs as may be necessary to comply with the

percentage of coverage rule discussed in paragraph (f) of this section.

This paragraph (e)(3) may require the auditor to audit more programs as

major than the number of Type A programs.

(f) Percentage of coverage rule. The auditor shall audit as major

programs Federal programs with Federal awards expended that, in the

aggregate, encompass at least 50 percent of total Federal awards

expended. If the auditee meets the criteria in Sec. ______.530 for a

low-risk auditee, the auditor need only audit as major programs Federal

programs with Federal awards expended that, in the aggregate, encompass

at least 25 percent of total Federal awards expended.

(g) Documentation of risk. The auditor shall document in the

working papers the risk analysis process used in determining major

programs.

[[Page 57249]]

(h) Auditor's judgment. When the major program determination was

performed and documented in accordance with this part, the auditor's

judgment in applying the risk-based approach to determine major

programs shall be presumed correct. Challenges by Federal agencies and

pass-through entities shall only be for clearly improper use of the

guidance in this part. However, Federal agencies and pass-through

entities may provide auditors guidance about the risk of a particular

Federal program and the auditor shall consider this guidance in

determining major programs in audits not yet completed.

(i) Deviation from use of risk criteria. For first-year audits, the

auditor may elect to determine major programs as all Type A programs

plus any Type B programs as necessary to meet the percentage of

coverage rule discussed in paragraph (f) of this section. Under this

option, the auditor would not be required to perform the procedures

discussed in paragraphs (c), (d), and (e) of this section.

(1) A first-year audit is the first year the entity is audited

under this part or the first year of a change of auditors.

(2) To ensure that a frequent change of auditors would not preclude

audit of high-risk Type B programs, this election for first-year audits

may not be used by an auditee more than once in every three years.

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 pass-through entity.

(b) Current and prior audit experience. (1) Weaknesses in internal

control over Federal programs would indicate higher risk. Consideration

should be given to the control environment over Federal programs and

such factors as the expectation of management's adherence to applicable

laws and regulations and the provisions of contracts and grant

agreements and the competence and experience of personnel who

administer the Federal programs.

(i) A Federal program administered under multiple internal control

structures may have higher risk. When assessing risk in a large single

audit, the auditor shall consider whether weaknesses are isolated in a

single operating unit (e.g., one college campus) or pervasive

throughout the entity.

(ii) When significant parts of a Federal program are passed through

to subrecipients, a weak system for monitoring subrecipients would

indicate higher risk.

(iii) The extent to which computer processing is used to administer

Federal programs, as well as the complexity of that processing, should

be considered by the auditor in assessing risk. New and recently

modified computer systems may also indicate risk.

(2) Prior audit findings would indicate higher risk, particularly

when the situations identified in the audit findings could have a

significant impact on a Federal program or have not been corrected.

(3) Federal programs not recently audited as major programs may be

of higher risk than Federal programs recently audited as major programs

without audit findings.

(c) Oversight exercised by Federal agencies and pass-through

entities. (1) Oversight exercised by Federal agencies or pass-through

entities could indicate risk. For example, recent monitoring or other

reviews performed by an oversight entity which disclosed no significant

problems would indicate lower risk. However, monitoring which disclosed

significant problems would indicate higher risk.

(2) Federal agencies, with the concurrence of OMB, may identify

Federal programs which are higher risk. 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 Federal awards expended would be of

higher risk than programs with substantially smaller Federal awards

expended.

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) Single audits were performed on an annual basis in accordance

with the provisions of this part. A non-Federal entity that has

biennial audits does not qualify as a low-risk auditee.

(b) The auditor's opinions on the financial statements and the

schedule of expenditures of Federal awards were unqualified. However,

the cognizant or oversight agency for audit may judge that an opinion

qualification does not affect the management of Federal awards and

provide a waiver.

(c) There were no deficiencies in internal control which were

identified as material weaknesses under the requirements of GAGAS.

However, the cognizant or oversight agency for audit may judge that any

identified material weaknesses do not affect the management of Federal

awards and provide a waiver.

(d) None of the Federal programs had audit findings from any of the

following in either of the preceding two years in which they were

classified as Type A programs:

(1) Internal control deficiencies which were identified as material

weaknesses;

(2) Noncompliance with the provisions of laws, regulations,

contracts, or grant agreements which have a material effect on the Type

A program; or

(3) Known or likely questioned costs that exceed five percent of

the total Federal awards expended for a Type A program during the year.

[FR Doc. 96-27819 Filed 11-4-96; 8:45 am]

BILLING CODE 3110-01-P