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

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

Circular No. A-133, re-titled ``Audits of States, Local Governments,

and Non-Profit Organizations,'' establishes uniform audit requirements

for non-Federal entities that administer Federal awards and implements

the Single Audit Act Amendments of 1996, which were signed into law on

July 5, 1996 (Public Law 104-156). OMB Circular No. A-128, ``Audits of

States and Local Governments,'' issued in 1985, is rescinded, as a

result of the consolidation of audit requirements under Circular A-133.

One of the more significant revisions is that the threshold for

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

$300,000. This will significantly reduce audit costs for many small

entities. Other significant changes are: a report submission due date

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

that includes a data collection form and streamlined filing

requirements (Sec. ____.320); a new risk-based approach for major

program determination (Sec. ____.520); and, additional guidance for

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

(Sec. ____.510), and audit findings follow-up (Sec. ____.315).

This Notice also offers interested parties an opportunity to

comment on the provisional ``Circular A-133 Compliance Supplement,''

provided as Appendix B to Circular A-133. However, due to its length,

the provisional ``Circular A-133 Compliance Supplement'' is not

included in this Notice. See ADDRESSES for information about how to

obtain a copy.

DATES: The revised Circular is effective July 30, 1997. Federal

agencies shall adopt the standards set forth in this revised Circular

in codified regulations not later than August 29, 1997.

The standards set forth in Sec. ____.400, which apply directly to

Federal agencies, shall apply to audits of fiscal years beginning after

June 30, 1996, except as otherwise specified in Sec. ____.400(a).

The standards set forth in this Circular which Federal agencies

shall apply to non-Federal entities shall apply to audits of fiscal

years beginning after June 30, 1996, with the exception that

Sec. ____.305(b) applies to audits of fiscal years beginning after June

30, 1998. The requirements of Circular A-128, although the Circular is

rescinded, and the 1990 version of Circular A-133 continue to apply for

audits of fiscal years beginning on or before June 30, 1996.

All comments on the provisional ``Circular A-133 Compliance

Supplement'' should be in writing, and must be received by November 30,

1997. Late comments will be considered to the extent practicable.

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

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

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

WH/EOP/omb, under the captions ``OMB Documents,'' and then ``Grants

Management;'' or by writing or calling the Office of Administration,

Publications Office, room 2200, New Executive Office Building,

Washington, DC 20503, telephone (202) 395-7332. A single copy of the

provisional ``Circular A-133 Compliance Supplement'' may be obtained

from EOP Publications, Office of Administration, 2200 NEOB, Washington,

DC 20503 (telephone 202-395-7332). The provisional ``Circular A-133

Compliance Supplement'' is also available from the OMB home page.

Comments on the provisional ``Circular A-133 Compliance

Supplement'' should be mailed to the 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 the applicable page

numbers. When comments of five pages or less are sent in by facsimile

(fax), they should be faxed to (202) 395-4915. Electronic mail comments

may be submitted via the 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 would send a copy of

comments on either a 3.5 or 5.25 inch diskette in either WordPerfect

5.1 or 6.0, 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.

FOR FURTHER INFORMATION CONTACT: Recipients should contact their

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

may be appropriate in the circumstances. Subrecipients should contact

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

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

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

395-3993.

SUPPLEMENTARY INFORMATION:

A. Background

The Office of Management and Budget (OMB) received approximately 80

letters providing approximately 600 individual comments in response to

its Federal Register proposal of November 5, 1996 (61 FR 57232-57249).

Letters came from Federal agencies (including Offices of Inspectors

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

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

(including colleges and universities), professional organizations, and

others. All comments were considered in developing this final revision.

The November 5, 1996, Federal Register notice, requested public

comment on the proposed revision and retitling of Circular A-133,

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

and proposed rescission of Circular A-128, ``Audits of States and Local

Governments.'' Section B presents a summary of the major public

comments grouped by subject and a response to each comment. Other

technical amendments were made to conform to professional auditing

standards and to increase clarity and readability.

The November 5, 1996, Federal Register notice also requested

comment on two proposed information collection requirements contained

in the proposed revision to Circular A-133. A summary of the comments

received relating to the proposed information collection requirements

and response to each comment is published in a companion Notice in this

Part in today's Federal Register.

Interested parties may wish to refer to this Notice for a detailed

discussion of the following information collection

[[Page 35279]]

matters: estimates of reporting burden; necessity of the data

collection form; data collection form duplicates other reported

information; data elements in the data collection form; suggested

additional data elements for inclusion in the form; who should sign the

data collection form for the auditee; level of form's specificity

provided in the Circular and supplemental forms; data collection form

sent only to the Federal clearinghouse; applicability of Freedom of

Information Act and other Federal laws; report copies; report

submission and distribution; Federal clearinghouse responsibilities;

requirement for the auditor to prepare and sign the data collection

form; increased costs for auditors to prepare and sign form; retention

of audit workpapers; schedule of expenditures of Federal awards;

summary schedule of prior audit findings; summary of the auditor's

results; auditor's schedule of findings and questioned costs; report

due date; and effective date for the data collection form requirement.

Readers of this Notice should especially note the discussion of the

requirement for the auditor to prepare and sign the data collection

form due to its impact on the text of the Circular. Other matters

addressed in the accompanying Notice also resulted in revisions to the

text of the Circular but are not repeated in this Notice.

B. Public Comments and Responses

Overall Reaction to the Proposed Revision to Circular A-133

Comment

Most commenters overwhelmingly supported the proposed revisions and

believe that the revisions will greatly increase the efficiency and

effectiveness of the single audit process. Several State auditors

commented that the proposed revision to Circular A-133 was similar to

what they expected, particularly in light of the changes included in

the Single Audit Act Amendments of 1996 (1996 Amendments), which were

signed into law on July 5, 1996 (Public Law 104-156). Many commenters

were pleased with some of the most significant changes, such as: (a)

the increased threshold that triggers an audit requirement from $25,000

to $300,000; (b) the risk-based approach to determining major programs;

(c) the uniformity of audit requirements for States, local governments,

and non-profit organizations; and, (d) the removal of the current

requirement to report virtually all audit findings and questioned

costs. A few commenters requested that the audit threshold remain at

$25,000. Although most commenters supported these significant

revisions, many commenters expressed concern about other proposals

included in the proposed revision, on which OMB specifically requested

public comment, such as the audit coverage for the allowability of

charges to cost pools, and whether the auditor should prepare and sign

the data collection form.

Response: The most significant provisions included in the proposed

revision to Circular A-133 that commenters strongly supported are

included in the final revision to Circular A-133. Several proposals,

such as the audit threshold of $300,000, are based in the 1996

Amendments and, therefore, are adopted in the final Circular. Each of

the proposals on which OMB requested public comment are addressed in

the following sections or accompanying Notice. Some of the comments

resulted in changes to the final revision.

Consolidation of Circular A-128 Into Circular A-133

Comment

All but one commenter strongly supported the proposal to

consolidate Circular A-128 into Circular A-133, and rescind Circular A-

128. Reasons cited include less confusion for auditees and auditors,

uniformity of audit requirements for non-Federal entities that

administer Federal awards, and consistency with concepts included in

the 1996 Amendments. One Federal agency that oversees Indian tribal

governments expressed concern about rescinding Circular A-128 because

many Indian tribal governments have not yet submitted audit reports

required by Circular A-128 for audits of fiscal years beginning on or

before June 30, 1996.

Response: Pursuant to the 1996 Amendments, which establish uniform

audit requirements for non-Federal entities that administer Federal

awards, the final revision to Circular A-133 extends its coverage to

include State and local governments. In response to the Federal

agency's concern about Indian tribal governments, it should be noted

that States, including Indian tribal governments for purposes of the

Circular, and local governments are subject to the requirements of

Circular A-128, issued April 12, 1985, for audits of fiscal years

beginning on or before June 30, 1996. Sanctions are provided in

Circular A-128 and are available for use by Federal agencies, as

considered necessary, in instances of continued inability or

unwillingness to comply with the requirements of Circular A-128. The

rescission of Circular A-128 applies to audits of State and local

governments for fiscal years beginning after June 30, 1996.

Comment

In light of the proposed rescission of Circular A-128, several

commenters requested that the title of Circular A-133 be expanded to

also include Indian tribal governments.

Response: No change was made as a result of these comments. For

single audit purposes, Indian tribal governments are included under the

definition of ``State'' in Circular A-133 based on the statutory

definition of ``State'' in the Single Audit Act of 1984 and the 1996

Amendments.

Effective Date

Comment

Several Federal agencies questioned which audit requirements are

effective prior to codification of the revised Circular in a Federal

agency's regulations. Paragraph ten of the proposed revision states

that the standards set forth in the revised Circular shall be adopted

by Federal agencies in codified regulations not later than six months

after publication ``in the Federal Register, so that they apply to

audits of fiscal years beginning after June 30, 1996 * * * 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.'' Several Federal agencies also requested clarification about

how the requirements of Circular A-133 should be codified in Federal

agency regulations.

Response: The sentence regarding the interim period was removed

from the revised Circular. The 1996 Amendments (31 U.S.C. 7505(a))

require that ``each Federal agency shall promulgate such amendments to

its regulations as may be necessary to conform such regulations to the

requirements of this chapter and of such guidance [provided by the

Director of OMB to implement the 1996 Amendments].'' Federal agencies

shall adopt the provisions of the revised Circular not later than 60

days after publication of the revised Circular in the Federal Register.

OMB is coordinating an effort to facilitate Federal agency compliance

with this adoption requirement.

[[Page 35280]]

Limited Scope Audits for Subrecipients With Federal Awards Expended of

Less Than $300,000 Annually

Comment

Many commenters requested that further guidance be provided in the

Circular to assist in determining what types of procedures would

qualify as ``limited scope audits to monitor subrecipients.''

Response: The 1996 Amendments (31 U.S.C. 7505(b)(1)(A)(ii))

prohibit a non-Federal entity from charging to a Federal award the cost

of a Circular A-133 audit when the amount of Federal awards expended is

less than $300,000 per year, except that OMB may allow the cost of

limited scope audits to monitor subrecipients. A sentence was added to

the final revision of Circular A-133 (Sec. ____.230(b)(2)) which

defines limited scope audits to include only agreed-upon procedures

engagements conducted in accordance with either the American Institute

of Certified Public Accountants' (AICPA) generally accepted auditing

standards (GAAS) or attestation standards, that are paid for and

arranged by a pass-through entity and only address one or more of the

following types of compliance requirements: activities allowed or

unallowed; allowable costs/cost principles; eligibility; matching,

level of effort, earmarking; and, reporting.

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

annually, the cost of any audits or attestation engagements, other than

limited scope audits described in the previous paragraph, are not

allowable costs and, therefore, cannot be charged to any Federal award.

This provision would prohibit the cost of a financial statement audit

conducted in accordance with GAAS or generally accepted government

auditing standards (GAGAS) issued by the Comptroller General of the

United States from being charged (by either a pass-through entity or

subrecipient) to Federal awards for a subrecipient that expends less

than $300,000 in Federal awards annually.

Subrecipient Monitoring

Comment

One State agency recommended that pass-through entities no longer

be required to monitor subrecipients expending less than $300,000 in

Federal awards. Some pass-through entities expressed concern that they

might be expected to perform audit procedures for each of their

subrecipients not covered by Circular A-133. Some subrecipients stated

concern that the requirement to monitor subrecipients expending under

$300,000 in Federal awards could result in a return to grant-by-grant

auditing of such entities.

Response: The 1996 Amendments (31 U.S.C. 7502(f)(2)(B)) require

pass-through entities to monitor a subrecipient's use of Federal awards

through site visits, limited scope audits, or other means. In light of

the increased threshold that triggers an audit requirement under the

Circular to $300,000 or more in Federal awards expended per year, pass-

through entities will need to make appropriate changes in their

agreements with subrecipients to reflect that Circular A-133 audits

will no longer be required for non-Federal entities with total Federal

awards expended of less than $300,000 annually.

Since pass-through entities are held accountable for Federal awards

administered by their subrecipients, they will also 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, such as on-site visits,

reviews of documentation supporting requests for reimbursement, and

limited scope audits (e.g., agreed-upon procedures performed over

eligibility determinations made by subrecipients), can be more targeted

and less costly than a full Circular A-133 audit. OMB expects pass-

through entities to consider various risk factors in developing

subrecipient monitoring procedures, such as the relative size and

complexity of the Federal awards administered by subrecipients, prior

experience with each subrecipient, and the cost-effectiveness of

various monitoring procedures.

For example, if a pass-through entity provides a large percentage

of the only Federal award it expends to 10 subrecipients that each

expend less than $300,000 in Federal awards annually, then the pass-

through entity should carefully consider the most cost-effective method

of monitoring these Federal awards. Perhaps the majority of this

Federal award is provided to two subrecipients. The pass-through entity

might consider conducting site visits at these two subrecipients and

simply reviewing the documentation supporting requests for

reimbursement from the other eight subrecipients. Conversely, if a

small percentage of a Federal award is provided to subrecipients that

each expend less than $300,000 in Federal awards, the risk to the pass-

through entity is most likely low and, therefore, the monitoring

procedures could be minimal.

OMB believes that this approach to designing subrecipient

monitoring procedures should result in cost-effective monitoring and

minimize the return to grant-by-grant auditing. This is a matter of

particular importance to OMB and small recipients of Federal awards.

Over the next few years, OMB and Federal agencies will review

implementation of subrecipient monitoring procedures by pass-through

entities to determine whether additional guidance or subsequent

revisions to the Circular is warranted in this area.

Audit Coverage for the Allowability of Charges to Cost Pools

Comment:

Several Federal auditors and Federal agencies supported the

proposed treatment 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 (CAP). Most State auditors, State

agencies, CPAs, and college and university commenters strongly opposed

the proposal stating that the proposed revision appears to: (1) elevate

coverage of indirect costs and CAPs to major program status, which

would exceed the requirements of the 1996 Amendments; (2) require

coverage regardless of materiality; (3) violate the risk-based approach

to determining major programs; and, (4) single out indirect costs for

extensive coverage beyond other elements of cost charged to Federal

awards. Some commenters noted logistical difficulties that may result

from the timing differences between when costs are charged to pools

used to support an indirect cost rate or CAP; when the plans are

submitted and negotiated; and when indirect costs are actually charged

to Federal awards. Several college and university commenters opposed

any additional requirements in this area because they believe that

Federal cost negotiators perform some sort of audit of costs charged to

cost pools under Circular A-21, ``Cost Principles for Educational

Institutions.'' Most commenters requested that additional guidance,

either in the Circular or the compliance supplement, be provided to

assist auditors in this area.

Response: The proposed revision included certain phrases that were

intended 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 CAP (as fully described in Appendix C of

Circular A-87, ``Cost

[[Page 35281]]

Principles for State, Local and Indian Tribal Governments,'' issued May

4, 1995 (60 FR 26484)). The suggested language was included in the

proposed revision to address the timing of when costs charged to cost

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

should be audited. This area presents unique timing considerations due

to the manner in which indirect cost rates and CAPs are developed.

Indirect cost rates are usually based on costs incurred in a base

period and applied prospectively. Costs allocated through a CAP are

typically based on the actual costs incurred in the current year and

also previous years.

OMB did not intend for costs charged to cost pools used to support

an indirect cost rate or allocated through a CAP to be audited every

year as a major program regardless of materiality. As a result of the

comments received, the suggested language relating to the treatment of

indirect costs and costs allocated through a CAP was removed from

Sec. ____.500, Sec. ____.505, and Sec. ____.510 of the final revision

of Circular A-133.

Although specific mention of indirect costs and costs allocated

through a CAP was removed from the Circular, this removal does not

diminish the auditor's responsibility for such costs. Accordingly, when

indirect costs or allocated costs have a direct and material effect on

any major program, the auditor is responsible for determining the

propriety of costs charged to cost pools that are used to calculate an

indirect cost rate or allocated through a CAP in the year in which the

charges affect a major program. Because it may not be practical to

perform such tests retroactively (e.g., when there is a change in

auditors), OMB encourages the auditor to perform tests of costs charged

to cost pools during the period when the actual costs were incurred or

during the period when the proposal or plan is finalized, rather than

waiting until the period when the rate was applied or in which the

costs were allocated. Further guidance relating to audit coverage of

indirect costs is provided in the provisional ``Circular A-133

Compliance Supplement.''

To illustrate the unique timing considerations relating to indirect

costs and the impact on the audit process, assume that the actual costs

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

proposal to be submitted in 1998, and the final negotiated indirect

cost rate that will be applied in 1999. Also, assume that indirect

costs charged to a major program in 1999 are material. In this

situation, the auditor is strongly encouraged to test actual costs

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

is the base year, or as part of the 1998 audit, since 1998 is the year

when the proposal will be finalized, submitted, and negotiated. If the

auditor tests the actual costs charged to the cost pools as part of

either the 1997 or 1998 audit (or can appropriately rely on the work

performed by other auditors in these years), then the auditor's

responsibility in 1999 will relate primarily to determining whether the

appropriate rate was applied in 1999. However, if no prior audit work

was done relating to the actual costs charged to cost pools used to

support the rate used to charge a major program in 1999, then the

auditor conducting the 1999 audit would be expected to test such costs,

in addition to determining whether the appropriate rate was applied in

1999.

This area is of particular concern to OMB and Federal cost

negotiators. Contrary to the views expressed by several commenters,

Federal cost negotiators do not typically audit costs charged to cost

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

In the next few years, OMB and Federal agencies will monitor the

coverage of indirect costs under Circular A-133 audits to determine

whether additional guidance or subsequent revisions to the Circular are

warranted. OMB may also consider if the coverage of indirect costs

should be addressed separately from Circular A-133 audits in the

future, possibly as separate engagements using the AICPA's attestation

standards.

Audit Cognizance

Comment

One Federal auditor requested that OMB delay the effective date for

the new method of determining the cognizant agency for audit for State

and local governments because guidance relating to changing from one

cognizant agency to another has not yet been provided. Another Federal

auditor requested that the Circular name that agency as the cognizant

agency for audit for every State based on the large amount of Federal

funding provided by that Federal agency to States. Another Federal

auditor opposed having one Federal agency responsible for audit

cognizance for all States. Several State auditors and State agencies

requested that they be permitted to retain their current cognizant

agency for audit, and that they have input into future changes, if any,

in audit cognizance.

Response: The primary reason for revising the approach to

determining audit cognizance is to provide a straightforward method

that can be used by the majority of auditees without the involvement of

OMB. The previous policy whereby OMB was responsible for assigning

audit cognizance did not work well, particularly for non-profit

organizations. The proposed revision includes an approach whereby the

auditee could readily determine its cognizant or oversight agency for

audit based on which Federal agency provided the predominance of

funding. However, several commenters noted that the proposal may have

unintended consequences on some State and local governments that, under

Circular A-128, were previously assigned cognizant agencies for audit

by OMB in 1986 and have developed strong working relationships with

their cognizant agencies.

In response to the comments received, the Circular was modified to

reflect that current cognizant agency assignments shall continue in

effect for States (including Indian tribal governments) and local

governments that expend more than $25 million a year in Federal awards

until fiscal years beginning after June 30, 2000. Thereafter, the

method prescribed in Sec. 400(a) shall be used by State and local

governments for determining audit cognizance. This delay should provide

sufficient time to smoothly transition from one Federal agency to

another, or to request that OMB designate a specific cognizant agency

for audit assignment, as circumstances warrant. However, for State and

local governments that expend more than $25 million a year in Federal

awards but do not have a currently assigned cognizant agency for audit,

Sec. ____.400(a) shall be used to determine audit cognizance upon the

effective date of the Circular.

OMB expects to designate specific audit cognizance assignments for

only a limited number of entities. However, if a change in audit

cognizance is desired, then auditees are expected to first work through

their Federal awarding agencies to obtain a reassignment. If the

request cannot be adequately resolved among the Federal agencies, then

the Federal agencies may contact OMB to resolve the matter. In response

to several commenters, this process will permit auditees to be involved

in future changes in audit cognizance.

The proposal indicates that, in instances in which OMB makes a

specific cognizant agency for audit assignment, the assignment would be

published in the Federal Register. OMB reconsidered the necessity of

[[Page 35282]]

performing this procedure and removed this provision from the final

Circular. However, when specific assignments are made by OMB, OMB will

inform the parties involved (e.g., the auditee and the Federal agencies

involved) of the assignment.

Comment

Several Federal agencies and numerous college and university

commenters expressed strong concern that the cognizant agency

determination included in Circular A-133 is not consistent with

Circular A-21, ``Cost Principles for Educational Institutions,'' and

could result in an entity having one cognizant agency for audit

purposes and another for indirect cost negotiation.

Response: No change was made as a result of these comments. Under

Circular A-21, cost negotiation cognizance for the majority of colleges

and universities is currently assigned to either the Department of

Health and Human Services (HHS) or the Office of Naval Research (ONR)

in the Department of Defense. OMB believes that it is unnecessary to

require these two Federal agencies to also assume responsibility for

audit cognizance for each of the colleges and universities for which

they serve as cost negotiation cognizance. This additional

responsibility for audit cognizance may impede HHS' or ONR's ability to

fulfill their cost negotiation duties. Cost negotiation cognizance

requires a high degree of specialized skills. However, any Federal

agency is capable of performing audit cognizance duties. The

responsibilities for audit cognizance (Sec. ____.400(a)) and indirect

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

need not be cognizant for both. While OMB expects that the Federal

agency responsible for audit cognizance and cost negotiation cognizance

will be the same in many instances, when they are different, the

Federal agencies involved will be expected to coordinate their efforts

to avoid duplication and disruption to the auditee.

Comment

Clarification was requested by many commenters on how to determine

the predominant amount of direct funding for purposes of determining

the cognizant agency for audit. One Federal auditor questioned whether

loans and loan guarantees should be considered in the calculation.

Several college and university commenters expressed concern that the

term ``direct funding'' could be misinterpreted to mean the amount of

``awards,'' rather than ``expenditures.''

Response: No change was made as a result of these comments. The

Circular states that the predominant amount of direct funding shall be

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

year. Sec. ____.205 of the final revision addresses the basis for

determining the amount of Federal awards expended and specifically

discusses the treatment of loans and loan guarantees. Sec. ____.205

shall also be followed for purposes of determining the cognizant agency

for audit.

Required Level of Internal Control Testing

Comment

Four State auditors and one CPA commenter opposed the proposed

requirement for the auditor to plan the testing of internal control

over major programs to support a low assessed level of control risk.

One commenter stated that the Circular assumes that control risk is

always either low or high and that it ``does not recognize that control

risk may be anywhere on a continuum from low to high (with ``high''

indicating ineffective control). When an auditor gains an understanding

of an entity's internal control and determines that the controls are

not ineffective, but are also not sufficient to support a low assessed

level of control risk, then no amount of planning or testing will

support a low assessed level of control risk.'' Two commenters

recommended that OMB allow the assessment of control risk at a moderate

level, unless internal control is determined to be ineffective.

Response: No change was made as a result of these comments. Many

Federal agencies are concerned that not enough testing of internal

control over major programs is performed as part of single audits. The

President's Council on Integrity and Efficiency's (PCIE) ``Study on

Improving the Single Audit Process,'' issued in September 1993,

highlighted the disparity between Federal agencies' expectations

relating to the extent of internal control testing and the actual

testing of internal control performed by auditors. The study identified

the lack of clear requirements as a cause for this deficiency. The

study recommended that the Circular ``Require the auditor to plan the

internal control testing to perform sufficient tests to support an

assessed level of control risk of low for each program tested as

major.'' OMB believes that the Circular clearly describes the Federal

Government's expectations relating to the coverage of internal control

under single audits, in terminology that is consistent with

professional auditing standards.

It has been a longstanding Federal policy that the recipient of

Federal funds is required to establish a system of internal control to

provide reasonable assurance that it is managing Federal funds in

compliance with applicable laws and regulations. Also, the 1996

Amendments (31 U.S.C. 7502(e)(3)) require the auditor to test controls

unless they are deemed to be ineffective. Therefore, it is reasonable

to require the auditor to plan the audit consistent with the level of

internal control which the recipient of Federal funds is required to

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

controls which are inadequate and, instead, disclose a reportable

condition (including whether any such condition is a material weakness)

and perform additional tests of compliance as necessary in the

auditor's judgment.

Compliance Supplement

Comment

Several State auditors and CPA commenters stated that, while

significant progress was made to improve the single audit process, it

is critically important for OMB to move swiftly to issue a revised

compliance supplement, which is needed to conduct single audits. They

emphasized the importance of finalizing and publishing this document as

quickly as possible to facilitate audits of fiscal years beginning

after June 30, 1996 (i.e., the first audits to be conducted using the

revised Circular).

Response: OMB agrees that the compliance supplement is vital to

successful implementation. In response to these comments, OMB is

including a provisional compliance supplement as Appendix B to the

final revision to Circular A-133. It is being issued at this time in

provisional form so that it can be used as part of the first audits

conducted in accordance with the revised Circular A-133. However, the

provisional status also provides interested parties with the

opportunity to comment on the document and permits OMB to include

additional Federal programs in the document in the coming months.

The provisional ``Circular A-133 Compliance Supplement'' is

effective for audits of fiscal years beginning after June 30, 1996, and

supersedes the previously issued compliance supplements entitled

``Compliance Supplement for Single Audits of State and Local

Governments,'' issued in 1990, and ``Compliance Supplement for Audits

of Institutions of Higher Learning and Other Non-Profit Institutions,''

issued in 1991. The

[[Page 35283]]

definition of the term ``compliance supplement'' in Sec. ____.105 of

the final revision was revised to reflect the compliance supplement

included as Appendix B to this revised Circular.

Comment

Several State auditors and one CPA requested removal of the

requirement for the auditor to determine the current compliance

requirements when changes were made to the compliance requirements and

the changes are not yet reflected in the compliance supplement.

Response: No change was made as a result of these comments.

However, minor modifications were made to Sec. ____.500(d) to conform

the language used in the Circular to the compliance supplement.

The requirement in Sec. ____.500(d)(3) for auditors to consider

whether changes were made in the compliance requirements included in

the compliance supplement reflects current practice, which is based on

two documents: (1) the PCIE's Position Statement No. 6, titled

``Questions and Answers on Circular A-133,'' and (2) the AICPA's Audit

and Accounting Guide, entitled, ``Audits of State and Local

Governmental Units,'' dated May 1, 1995.

The PCIE document includes a statement that ``If there have been

changes [to the compliance requirements included in the compliance

supplement], then the auditor should follow the provisions of the

compliance supplements as modified by the changes'' (page 14). The

AICPA's Accounting and Auditing Guide (paragraph 23.37) alerts auditors

to the fact that compliance requirements may change over time and that

this should be considered in planning tests of compliance. The

provisional ``Circular A-133 Compliance Supplement'' provides guidance

to auditors regarding the Federal Government's expectations for

auditors to perform reasonable procedures (e.g., inquiry of auditee

management, review of applicable contract and grant agreements) to

determine currency of the compliance requirements included in the

compliance supplement.

Transitional Guidance to Implementing the Risk-Based Approach to

Determining Major Programs

Comment

OMB received several inquiries about whether a Type A program may

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

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

Circular A-128, issued April 12, 1985, and otherwise met the

requirements in Sec. ____.520(c) to be considered as low-risk. Similar

inquiries were received regarding whether single audits performed in

accordance with the prior Circular A-133 or Circular A-128 would

satisfy the requirements of Sec. ____.530 for an auditee to qualify as

a low-risk auditee.

Response: The reference in Sec. ____.520(c)(1) to the two most

recent audit periods includes audit periods in which the audit was

performed under either Circular A-128 or the 1990 version of Circular

A-133. Therefore, a Type A program which meets the criteria for low-

risk under Sec. ____.520(c)(1), based on the results of an audit

performed under Circular A-128 or the 1990 version of Circular A-133,

may be considered low-risk. Similarly, the requirement in Sec. ____.530

that an auditee meet specified criteria for the preceding two years to

be considered a low-risk auditee applies to audits performed under

Circular A-128 or the 1990 version of Circular A-133.

Also, to provide a transition into the risk-based approach, the

provision for deviation from use of risk criteria provided in

Sec. ____.520(i) applies to the first year this revision is applicable

and permits auditors to defer implementation of the risk-based approach

for one year.

Risk-Based Approach to Determining Major Programs

Comment

Several State auditors and one State agency requested clarification

of the requirements for performing risk assessments of Type B programs

under Sec. ____.520(d) and Sec. ____.520(e)(2). Many commenters

questioned if the Circular requires the auditor to perform annual risk

assessments of each Type B program (above an amount specified in the

Circular) and expressed concern that such a requirement would

significantly increase audit costs.

Response: Minor modifications were made to the Circular. Reference

to the percentage of coverage rule was removed from Sec. ____.520(d)(2)

of the final revision because, as two commenters noted, program risk is

not a consideration in selecting programs to meet the percentage of

coverage rule described in Sec. ____.520(f). Also, editorial changes

were made to Sec. ____.520(d)(2) to emphasize when risk assessments

should be performed.

The final revision (Sec. ____.520(d)) requires the auditor to

identify Type B programs that are high-risk and Sec. ____.520(e)(2)

provides two options for identifying high-risk Type B programs.

Under Option 1, the auditor would be expected to perform risk

assessments of all Type B programs that exceed the amount specified in

Sec. ____.520(d)(2), and audit at least one half of these high-risk

Type B programs as major, unless this number exceeds the number of low-

risk Type A programs identified under Sec. ____.520(c) (i.e., the

``cap''). In this case, the auditor would be required to audit as major

the same number of high-risk Type B programs as the cap. For example, a

State has ten low-risk Type A programs, and 50 Type B programs above

the amount specified in Sec. ____.520(d)(2). Under Option 1, the

auditor would be required to perform risk assessments of the 50 Type B

programs. Assume that the auditor determines that there are 25 high-

risk Type B programs. One half of the 25 high-risk Type B programs is

12.5, or 13, programs. Under Option 1, the auditor would audit 13 of

the high-risk Type B programs as major; however, the cap in this

example is ten (i.e., the number of low-risk Type A programs);

therefore, the auditor is only required to audit as major 10 high-risk

Type B programs.

Under Option 2, the auditor is only required to audit as major one

high-risk Type B program for each Type A program identified as low-risk

under Sec. ____.520(c). Under this option, the auditor would not be

required to perform risk assessments for any Type B programs when there

are no low-risk Type A programs (i.e., the cap is zero). Continuing

with the previous example, under Option 2, the auditor would perform

risk assessments of Type B programs until ten high-risk Type B programs

are identified. The auditor would be required to audit ten high-risk

Type B programs as major in this example. Depending on the order in

which risk assessments on Type B programs are performed, the auditor

might only need to perform risk assessments of ten Type B programs

determined to be high-risk, or the auditor may need to perform risk

assessments until ten high-risk programs are identified.

The auditor may choose either Option 1 or 2. There is no

requirement to justify the reasons for selecting either option. The

results under Options 1 and 2 may vary significantly, depending on the

number of low-risk Type A programs and high-risk Type B programs. 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.

[[Page 35284]]

Comment

OMB received several inquiries about whether large loan and loan

guarantee programs (that affect the determination of other Type A

programs under Sec. ____.520(b)(3)) audited as major programs may be

used for purposes of meeting the percentage of coverage rule

(Sec. ____.520(f)).

Response: The amount of Federal awards expended under such loan and

loan guarantee programs that are audited as major may be used for

purposes of meeting the percentage of coverage rule. In a related

matter, programs audited as major under Sec. ____.215(c), in which a

Federal agency or pass-through entity requests and pays for a program

to be audited as major, may also be used for purposes of meeting the

percentage of coverage rule (Sec. ____.520(f)).

Comment

Several commenters questioned the difference in the number of days

of advance notice a Federal agency shall provide an auditee when a

particular program: (1) cannot be considered a low-risk Type A program

(at least 120 days prior to the auditee's fiscal year end under

Sec. ____.520(c)(2)), and (2) must be audited as major (at least 180

days prior to the auditee's fiscal year end under Sec. ____.215(c)).

Response: For consistency, a change was made to Sec. ____.520(c)(2)

of the final revision to require a Federal agency to inform an auditee

at least 180 days prior to the auditee's fiscal year end when a Federal

program cannot be considered a low-risk Type A program.

Biennial Audits

Comment

All State auditors that commented on the proposal relating to

biennial audits strongly opposed the provision included in

Sec. ____.530(a) of the proposed revision that prohibits non-Federal

entities that have biennial audits from qualifying as low-risk

auditees. Commenters stated that this prohibition was not included in

the 1996 Amendments and that the frequency of the audit has no bearing

on the administration of Federal awards. One commenter suggested that,

at a minimum, the cognizant or oversight agency for audit be authorized

to permit, on a case-by-case basis, non-Federal entities that conduct

biennial audits to qualify as low-risk auditees.

Response: A change was made to Sec. ____.530(a) to permit non-

Federal entities to qualify, on a case-by-case basis, as low-risk

auditees with the approval of the cognizant or oversight agency for

audit. A change was also made to Sec. ____.400(a) of the final revision

to add this responsibility to the list of cognizant agency for audit

responsibilities.

Comment

One commenter inquired about the effective date of the Circular for

biennial periods.

Response: 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 previously applicable Circulars are in

effect until this final revision is effective. Therefore, an auditee

that conducts biennial audits and has a biennial period beginning on or

before June 30, 1996, should apply the provisions of Circular A-128

(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 Circular apply to any biennial periods beginning after June 30,

1996.

Credit Union Loans

Comment

OMB received inquiries about whether loans provided by the National

Credit Union Administration (NCUA) should be considered Federal awards

subject to the requirements of Circular A-133.

Response: A new paragraph (Sec. ____.205(j)) was added to the

Circular to address certain loans provided by the NCUA. Specifically,

loans made from the National Credit Union Share Insurance Fund and the

Central Liquidity Facility are funded by contributions from insured

institutions and are not considered Federal awards expended under

Circular A-133. However, the NCUA provides loans under other programs,

such as the Community Development Revolving Loan Programs for Credit

Unions, which are considered Federal awards for purposes of applying

Circular A-133.

Auditor Communication Regarding Report Distribution

Comment

Several commenters stated that, if the auditor prepares the data

collection form, then the communication required by Sec. ____.500(f) of

the proposed revision, whereby the auditor is required to notify the

auditee of which Federal agencies and pass-through entities are

required to receive a copy of the reporting package, will no longer be

necessary.

Response: The proposed revision of Circular A-133 included a

requirement for the auditor to 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. This

requirement was removed. This separate communication is unnecessary

because the final Circular (Sec. ____.320(b)(3)) requires the auditor

to prepare and sign the portion of the data collection form that

identifies which Federal agencies are required to receive a copy of the

reporting package.

Basis of Accounting

Comment

One State auditor requested that Sec. ____.310(a) and

Sec. ____.500(b) of the Circular be revised to include a statement,

similar to a provision (paragraph 2.4(a)) included in GAGAS, that

``Financial statement audits also include audits of financial

statements prepared in conformity with any of several other bases of

accounting discussed in the auditing standards issued by the AICPA.''

One Federal auditor requested that the Circular require the auditee to

use the same basis of accounting in preparing the schedule of

expenditures of Federal awards that is used to prepare the auditee's

financial statements, and noted that this omission has resulted in

significant unreconciled differences on the schedule of expenditures of

Federal awards.

Response: No changes were made as a result of these comments.

Circular A-133 does not prescribe the basis of accounting that must be

used by auditees to prepare their financial statements and schedule of

expenditures of Federal awards. However, auditees are required to

disclose the basis of accounting and significant accounting policies

used in preparing the financial statements and schedule of expenditures

of Federal awards. The auditor is required to report (Sec. ____.500(b))

whether the financial statements are prepared in accordance with

generally accepted accounting principles (GAAP), and 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. The auditee must be able to reconcile amounts

presented in the financial statements to related amounts included in

the schedule of expenditures of Federal awards.

[[Page 35285]]

Financial Statements

Comment

Several CPAs commented that Sec. ____.310(a) of the Circular should

be modified to recognize that financial statements should reflect the

results of operations or changes in net assets. Financial statements

prepared in accordance with GAAP for certain types of non-Federal

entities reflect changes in net assets rather than results of

operations. The commenters suggested that some auditees and auditors

may interpret this section as imposing a requirement that is not

consistent with GAAP.

Response: The Circular (Sec. ____.310(a)) was revised to state that

financial statements should reflect either the results of operations or

changes in net assets.

Comment

Several CPAs commented that the requirement included in

Sec. ____.310(a) of the Circular that the financial statements shall be

for the same organizational unit that is chosen to meet the

requirements of the Circular, considered in conjunction with

Sec. ____.500(a), could be problematic for certain auditees and may

have unintended consequences. The commenters interpreted the Circular

as requiring a direct match between the reporting entity included in

the financial statements and the reporting entity covered by the

Circular A-133 audit. The commenters questioned whether an auditee,

that chooses to meet the Circular's requirements through a series of

audits that cover separate departments, agencies, and other

organizational units which expended Federal awards, would be required

to issue non-GAAP financial statements that omitted the portions of the

reporting entity which were separately audited. One commenter requested

guidance in a situation where a local government has its school

districts separately audited. If the local government's financial

statements exclude the school districts (which is what the commenters

believe the Circular requires), then the auditor may need to issue a

qualified or adverse opinion on the local government's financial

statements, which could raise unnecessary red flags and prohibit the

auditee from qualifying as a low-risk auditee (Sec. ____.530). One

State manager noted that considerably more public entities are included

in that State's financial statement audit than in its state-wide single

audit, and that, if the Circular requires such entities to be included

in the state-wide single audit, this would result in additional audit

costs and complicate the audit process.

Response: Sec. ____.310(a) was revised to clarify OMB's

expectations in this area. The revised Circular provides non-Federal

entities an option to meet the audit requirements of the Circular

through a series of audits that cover the non-Federal entity's

departments, agencies, and other organizational units which expended or

otherwise administered Federal awards during such fiscal year. If a

non-Federal entity elects this option, then separate financial

statements and a schedule of expenditures of Federal awards shall be

prepared for each such department, agency, or other organizational

unit. In these circumstances, a non-Federal entity's organization-wide

financial statements may also include departments, agencies, or other

organizational units that have separate audits and prepare separate

financial statements.

In the example provided by the commenter, it would be acceptable

for the local government's financial statements to include the school

districts, even though the school districts were not included in the

local government's Circular A-133 audit because a separate Circular A-

133 audit is conducted of the school districts. However, if separate

financial statements were not prepared for the school districts, it

would be unacceptable for a separate Circular A-133 audit to be

conducted of the school districts (i.e., the local government's

organization-wide financial statements could not be used as a

substitute for separate financial statements for the school districts).

Schedule of Expenditures of Federal Awards

Comment

One State auditor and one State manager commented that the Circular

should not prescribe requirements for the schedule of expenditures of

Federal awards beyond the current guidance.

Response: The ``current guidance'' for presenting the schedule of

expenditures of Federal awards information was developed and

promulgated by the AICPA, and was not specifically prescribed in

Circulars A-128 and A-133 (1990 original issuance). OMB believes that

the minimum requirements for the schedule should be specified in the

Circular (Sec. ____.310(b)). Most respondents to the April 1996

revision of Circular A-133 supported the level of detail reflected in

that revision. A few modifications of the requirements were made in

this final revision of Circular A-133, in response to specific comments

received, as described in the following sections.

Comment

Several CPAs and one State auditor commented that the Circular

requires the auditor to be responsible for determining major programs

and the threshold used to distinguish between Type A and Type B

programs. However, these items are required to be presented in the

schedule of expenditures of Federal awards prepared by the auditee and

this requirement may blur the distinction between information that is

the responsibility of the auditor versus the auditee.

Response: The proposed requirements for the schedule of

expenditures of Federal awards to identify major programs and identify

the threshold to distinguish between Type A and Type B programs

(Sec. ____.310 (b)(3) and (b)(4) of the proposed revision) were

removed. However, the requirement to report this information was added

to Sec. ____.505(d) so that this information is now required to be

included in the auditor's report(s). While not required, some auditees

may find it useful to present this information in the schedule of

expenditures of Federal awards.

Comment

Several CPAs recommended that the value of non-cash assistance,

insurance in effect, and loans and loans guarantees outstanding be

required to be included in the schedule of expenditures of Federal

awards. They stated that the option to present this information in a

note to the schedule should be eliminated and that the consistency

achieved will improve the usefulness of the schedule and facilitate

OMB's data collection efforts. One college and university commenter

stated that the requirement to provide this information (either in a

note or in the schedule) was excessive, and that the same information

could be obtained from existing Federal data banks.

Response: A change was made to Sec. ____.310(b)(6) as a result of

these comments. The Circular permits the option of presenting this

information either in the schedule of expenditures of Federal awards or

in a note to the schedule; however, an additional sentence was included

indicating that it is preferable to present this information in the

schedule. It is important to note that, regardless of whether this

information is presented in a note or in the schedule, this information

must be included in the data collection form. While the requirement to

provide such information is not new, the Federal

[[Page 35286]]

Government does not currently collect and account for this information

in a systematic manner or data bank (i.e., some Federal agencies track

this information and others do not). A minor addition was made to

Sec. ____.310(b)(6) to clarify that the amount of insurance in effect

during the year should be disclosed.

Report Due Date

Comment

Two Federal auditors commented that the requirement included in the

1996 Amendments to submit the reporting package to the Federal

clearinghouse ``within the earlier of: 30 days after receipt of the

auditor's report(s), or * * *'' is not clearly specified in the

proposed revision.

Response: Sec. ____.235(c) and Sec. ____.320(a) were modified to

incorporate the report due date requirements specified in the 1996

Amendments.

Summary Schedule of Prior Audit Findings

Comment

Several State auditors requested guidance on the auditor's

responsibility for deficiencies noted in prior audit findings for which

a management decision was not issued and which the auditee believes is

no longer valid. Specifically, the commenters asked whether the lack of

a timely management decision is evidence that the Federal awarding

agency or pass-through entity is not concerned about the finding and

whether future audits may exclude coverage of the deficiency that

resulted in an audit finding. One State auditor also commented that

auditees should not be given the authority to determine when an audit

finding is no longer valid or does not warrant further action.

Response: Sec. ____.315(b) permits an auditee to determine whether

a prior audit finding is no longer valid or does not warrant further

action. A valid reason for such a determination is that all of the

following have occurred: (1) two years have passed since the audit

report in which the finding occurred was submitted to the Federal

clearinghouse, (2) the Federal agency or pass-through entity is not

currently following up with the auditee on the audit finding, and (3) a

management decision was not issued. OMB believes that it is appropriate

for the auditee to make this determination. In addition, the auditor is

required by Sec. ____.500(e) of the Circular to assess the fairness of

management's representations in the schedule.

The lack of a management decision for a prior audit finding may

provide a basis for the auditee to indicate in the summary schedule of

prior audit findings that the finding is no longer valid or does not

warrant further action (provided the two other conditions previously

listed are met). However, the lack of a management decision does not

change the scope of audit work or the auditor's reporting requirements.

As an example, if the same deficiency that resulted in a prior audit

finding (for which a management decision was not issued) is discovered

by the auditor in the current period, the auditor would be required to

determine whether the matter met the criteria provided in

Sec. ____.510(a) for reporting an audit finding in the auditor's

schedule of findings and questioned costs.

For the first year a non-Federal entity is audited under this

revised Circular, the prior year report may not have included the

equivalent of a summary schedule of prior audit findings. In these

cases, the auditee may exercise judgment and only include, to the

extent practical, audit findings from before the prior year. Also, the

auditee is not expected to include prior findings that would not have

been reported under the criteria provided in Sec. ____.510(a).

Auditor's Schedule of Findings and Questioned Costs

Comment

Several State auditors and CPA commenters noted that GAGAS does not

use the term ``findings and questioned costs,'' and the concept of

questioned costs is not discussed in GAGAS. Commenters requested that

OMB clarify the requirement included in Sec. ____.505(d)(2) of the

proposed revision.

Response: A change was made to Sec. ____.505(d)(2) to replace the

term ``findings and questioned costs'' with ``findings'' so that the

final revision requires the auditor's schedule of findings and

questioned costs to include a section that reports any findings

relating to the financial statements which are required to be reported

in accordance with GAGAS.

Comment

One State auditor requested that Sec. ____.505(a) of the proposed

revision be revised to permit unqualified opinions on financial

statements prepared in accordance with an other comprehensive basis of

accounting.

Response: No change was made as a result of this comment. The 1996

Amendments (31 U.S.C. 7502(e)(1)) require the auditor to ``* * *

determine whether the financial statements are presented fairly in all

material respects in conformity with generally accepted accounting

principles.'' However, it should be noted that neither the 1996

Amendments nor Circular A-133 prescribe the basis of accounting that

must be used by auditees to prepare their financial statements and

schedule of expenditures of Federal awards (i.e., non-GAAP statements

are acceptable).

Comment

Two CPAs indicated that the reference to Sec. ____.505(d)(2) and

(3) that was included in Sec. ____.505(d)(3)(ii) of the proposed

revision is confusing because it refers to certain schedules that are

supposed to be included as part of the schedule of findings and

questioned costs.

Response: A change was made to Sec. ____.505(d)(3)(ii) to reflect

that the schedule of findings and questioned costs is comprised of

several sections, rather than multiple schedules.

Audit Findings

Comment

Several Federal auditors, State auditors, and CPAs commented on the

requirement included in Sec. ____.510(a) (1) and (2) of the proposed

revision that, for reporting purposes, audit findings must be evaluated

in relation to a ``type of compliance requirement'' for a major program

or an audit objective identified in the compliance supplement. Some

commenters opposed requiring the evaluation of an audit finding in

relation to an audit objective because they believe this to be a more

constrictive requirement than the currently-used measurement standard,

and others requested clarification of the requirement. Two commenters

suggested that OMB revise this requirement to allow the auditor to make

the determination of reportable conditions and material noncompliance

based on the significance of the compliance requirement and the effect

on the program as a whole.

Response: No change was made as a result of these comments. The

scope of the auditor's work described in Sec. ____.500 (c) and (d) is

required at the major program level. However, for audit reporting

purposes, the results of the auditor's work must be evaluated against a

lower measure. Specifically, the revised Circular requires the auditor

to consider an audit finding in relation to a type of compliance

requirement for a major program or an audit objective identified in the

compliance supplement. The types of compliance

[[Page 35287]]

requirements and related audit objectives are included in the

provisional ``Circular A-133 Compliance Supplement.'' The auditor is

expected to determine the types of compliance requirements that could

have a direct and material effect on each major program, and to design

and conduct tests necessary to render an opinion on compliance with

respect to each major program. Clearly, auditor judgment must be used

in determining the nature, timing, and extent of audit work to be

performed, and in evaluating the audit results. The purpose of the

requirement included in Sec. ____.510(a) (1) and (2) is to advise the

auditor of the criteria against which to measure or evaluate the impact

of findings for reporting purposes.

It is important to note that, under the existing requirements of

Circular A-128, the auditor is required to report all instances of

noncompliance and, under the 1990 version of Circular A-133, the

auditor is required to report all but nonmaterial instances of

noncompliance. The requirements for reporting audit findings included

in the revised Circular are less burdensome than the existing

requirements with respect to instances of noncompliance.

Comment

Several commenters requested clarification of the requirement in

Sec. ____.510(a)(3) of the proposed revision to report as an audit

finding known questioned costs which are greater than $10,000 for a

type of compliance requirement, particularly with respect to

determining the impact of multiple instances of noncompliance relating

to a type of compliance requirement.

Response: No change was made as a result of these comments.

However, the following example is provided to illustrate the

requirements of this provision. Suppose an auditor: (1) determines that

eligibility (which is one of the types of compliance requirements

listed in the compliance supplement) could have a direct and material

effect on a major program; (2) designs and conducts tests over

eligibility relative to this major program; and, (3) discovers two

separate instances of noncompliance, in the amount of $9000 each,

relating to eligibility. The findings involve two different audit

objectives relating to eligibility (which are listed in the compliance

supplement): one finding relates to an individual participant's

eligibility, and the other finding relates to the eligibility of a

subrecipient. Since Sec. ____.510(a)(3) requires the auditor to report

known questioned costs which are greater than $10,000 for a type of

compliance requirement (which is eligibility in this case), the auditor

would be expected to report these questioned costs of $18,000 as an

audit finding. The auditor would also be expected to consider the

impact of these instances of noncompliance when reporting on compliance

on each major program.

Comment

Some Federal agencies strongly object to not requiring known

questioned costs of $10,000 or less to be reported. Conversely, one

State auditor commented that the requirement to report known questioned

costs greater than $10,000 could result in auditors' reporting matters

that are minimal in relation to the size of a particular Federal

program (e.g., a very large State program in which questioned costs of

$11,000 is considered immaterial).

Response: No change was made as a result of these comments. OMB

believes that the $10,000 threshold for reporting questioned costs

provides an appropriate balance between reporting all questioned costs

(which was previously required for State and local governments) and

only reporting substantial questioned costs.

Comment

One Federal auditor requested that OMB require auditors to report

an estimate of likely questioned costs when a known or likely

questioned cost exceeds $10,000. The commenter stated that capturing

the amount of likely questioned costs should better enable Federal

agencies to assess the nature and magnitude of questioned costs on

particular Federal awards and assist in prioritizing the resolution of

audit findings. The commenter also suggested that OMB encourage

auditors to use statistical means to determine likely questioned costs.

Response: No change was made as a result of this comment.

Sec. ____.510(a)(3) requires the auditor to report known questioned

costs which are greater than $10,000, and known questioned costs when

likely questioned costs are greater than $10,000, for a type of

compliance requirement. GAAS require the auditor to project the amount

of known questioned costs identified in a sample to the items in the

major program and to consider the best estimate of total questioned

costs (both known and likely) in determining an opinion on compliance.

The auditor is required to document this consideration in the audit

working papers.

The revised Circular does not require the auditor to report an

exact amount or statistical projection of likely questioned costs, but

rather to include an audit finding when the auditor's extrapolation of

these likely questioned costs is greater than $10,000. In reporting

likely questioned costs, it is important that the auditor follows the

requirements of Sec. ____.510(b) and provides appropriate information

for judging the prevalence and consequences of the finding. The use of

statistical means of determining likely questioned costs may be

beneficial for auditors but it is not required. During the next few

years, OMB expects Federal agencies to monitor auditor compliance in

this area to assist OMB in determining whether an expansion of these

reporting requirements is necessary in subsequent revisions.

Comment

Two CPA commenters requested guidance regarding the treatment of

audit findings that cannot be quantified. The commenters cited as an

example a situation where an auditor discovers that a pass-through

entity consistently failed to provide its subrecipients with Federal

award information, including applicable compliance requirements. The

commenters stated that Sec. ____.510(a)(3) could be read to indicate

that such nonmonetary findings would not need to be reported.

Response: No change was made as a result of these comments. In the

example provided by the commenters, this noncompliance would be

required to be reported as an audit finding. The auditor must consider

a finding in relation to the type of compliance requirement

(subrecipient monitoring, in this case) or an audit objective

identified in the compliance supplement. The pertinent audit objective

included in the provisional ``Circular A-133 Compliance Supplement''

relating to this example is for the auditor to ``determine whether the

pass-through entity identifies Federal award information and compliance

requirements to the subrecipient.'' Because the pass-through entity

failed to provide Federal award information to its subrecipients, this

noncompliance is material in relation to the audit objective and,

therefore, must be reported as an audit finding. In addition, the

auditor must consider whether reportable conditions (and possibly

material weaknesses in internal control) exist and require reporting

with respect to subrecipient monitoring.

Audit Follow-up

Comment

Several commenters requested guidance on whether the auditor is

required to follow up on all prior

[[Page 35288]]

findings, particularly immaterial amounts that were previously required

to be reported. Two commenters opposed the requirement for audit

follow-up on prior audit findings, even when a finding is unrelated to

a major program in the current year.

Response: In the first year audited under the revised Circular, the

auditor should use judgment in deciding which previously reported

findings require follow-up in the current year. Auditors are not

expected to follow up on prior year findings that are immaterial. The

auditor should consider the criteria for reporting audit findings,

provided in Sec. ____.510(a), in determining which prior audit findings

require follow-up.

No change was made to Sec. ____.500(e), which requires the auditor

to perform follow-up procedures regardless of whether a prior audit

finding relates to a major program in the current year. This

requirement is consistent with the requirement for management to report

on the status of prior findings in the summary schedule of prior audit

findings.

Auditor Selection

Comment

Two State auditors requested a change to recognize that some

auditees (e.g., State and local governments) do not have the

constitutional or legal authority to arrange for audit services.

Response: A clarification was made to Sec. ____.305(a) to indicate

that, in procuring (rather than arranging for) audit services, auditees

shall follow the provisions described in Sec. ____.305(a). If an

auditee is not authorized to procure audit services (e.g., State law

may require that a State auditor perform all required audits for that

State), then the provisions of Sec. ____.305(a) do not apply.

Comment

One State agency and one CPA commenter did not support the

restriction on auditors that perform Circular A-133 audits and also

prepare indirect cost proposal or CAPs. These commenters stated that

the AICPA's professional standards adequately address auditor

independence.

Response: No change was made as a result of these comments.

Sec. ____.305(b) precludes the same auditor from preparing the indirect

cost proposal or CAP when indirect costs exceeded $1 million in the

prior year. This restriction was developed based on comments relating

to April 1996 revision of Circular A-133, in which all Federal agencies

that responded cited at least an appearance of a lack of independence

when the same auditor both performed the audit and prepared the

indirect cost proposal or

CAP. The $1 million threshold was chosen to limit this restriction

to a relatively small number of entities, while still protecting the

Federal interest.

The implementation date for this provision is delayed two years

until audits of fiscal years beginning after June 30, 1998, to minimize

any effect this provision could have on existing contracts for audit

services. In the future, OMB and Federal agencies will monitor this

area to determine whether additional guidance or further revision to

the Circular is necessary.

Federal Awarding Agency Responsibilities

Comment

A commenter noted that the Circular does not list as a

responsibility of Federal awarding agencies the requirement included in

the 1996 Amendments (31 U.S.C. 7502(f)(1)(A)) to inform recipients of

the Federal requirements imposed on them by Federal laws, regulations,

and the provisions of contracts or grant agreements.

Response: A change was made to add this responsibility to the list

included in Sec. ____.400(c) of the revised Circular.

Request for a Program to be Audited as a Major Program

Comment

Two State auditors opposed the provision included in

Sec. ____.215(c) in which a Federal agency or pass-through entity may

request for a program to be audited as a major program. Reasons cited

include: (1) that Federal agencies might use this provision

excessively, and (2) that specifying programs to be audited as major is

contrary to the risk-based approach to determining major programs.

Response: No changes were made to the Circular as a result of these

comments. This process does not significantly change the authority

Federal agencies and pass-through entities now have to perform

additional audits as long as they pay for them. These audits may be

incorporated within the framework of the single audit and thereby

eliminate duplicative audit planning and reporting. Since the Federal

agency or pass-through entity must still pay the full incremental audit

cost, OMB does not expect a significant increase in major programs from

this provision.

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

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

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

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

risk Type B programs audited as major. Also, programs audited as major

under this process count towards meeting the percentage of coverage

rule provided in Sec. ____.520(f).

Management Decisions

Comment

Several State auditors expressed concern about the provision

permitting Federal agencies and pass-through entities, prior to issuing

a management decision, to request additional information or

documentation from an auditee, including a request that the

documentation be audited, as a way of mitigating disallowed costs. Two

CPAs requested that the term ``audit'' be replaced by ``auditor

assurance'' for clarity.

Response: A minor change was made to Sec. ____.405(a) to clarify

that the request is for auditor assurance relating to the specified

documentation. OMB also expects Federal agencies and pass-through

entities to use this provision judiciously.

Comment

One State auditor commented that it would be beneficial if auditors

could obtain copies of management decisions and suggested that the

Federal Government establish a centralized contact from which auditors

could request copies.

Response: In the next few years, OMB will consider this and other

suggestions to improve the dissemination of management decision

information.

Audit Working Papers

Comment

Several auditors requested that the Circular reflect the wording

included in the 1996 Amendments (31 U.S.C. 7503(f)) that indicates the

purpose for which access to working papers is intended.

Response: A change was made to Sec. ____.515(b) to reflect wording

similar to the 1996 Amendments relating to this matter.

Additional OMB Guidance

Comment

Several commenters requested additional information about various

provisions in the proposed revision and asked whether OMB will publish

a ``questions and answers'' document as implementation issues arise.

Response: Interested parties may wish to refer to the April 30,

1996 (61 FR

[[Page 35289]]

19134) and November 5, 1996 (61 FR 57232) Federal Register for

discussion of various provisions included in the Circular. Useful

information is provided in these Notices that is not necessarily

repeated in this Notice. In the future, if there are significant

questions concerning the revised Circular A-133, OMB will consider

issuing a ``questions and answers'' document relating to the revised

Circular.

Franklin D. Raines,

Director.

1. OMB rescinds Circular A-128 July 30, 1997.

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

[Circular No. A-133 Revised]

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, P.L. 98-502, and the Single Audit Act Amendments of 1996,

P.L. 104-156. It sets forth standards for obtaining consistency and

uniformity among Federal agencies for the audit of States, local

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 subsequent

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 the Office of Management and Budget (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, except as otherwise

specified in Sec. ____.400(a).

The standards set forth in this Circular that Federal agencies

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

agencies in codified regulations not later than 60 days after

publication of this 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. The

requirements of Circular A-128, although the Circular is rescinded, and

the 1990 version of Circular A-133 remain in effect for audits of

fiscal years beginning on or before June 30, 1996.

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.

Appendix A to Part____--Data Collection Form (Form SF-SAC)

Appendix B to Part____--Circular A-133 Compliance Supplement

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.

[[Page 35290]]

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 supplement or

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

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

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

awards included in the cluster and advise the subrecipients of

compliance requirements applicable to the cluster, consistent with

Sec. ____.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 supplement refers to the Circular A-133 Compliance

Supplement, included as Appendix B to Circular A-133, or such documents

as OMB or its designee may issue to replace it.

This document is available from the Government Printing Office,

Superintendent of Documents, Washington, DC 20402-9325.

Corrective action means action taken by the auditee that:

(1) Corrects identified deficiencies;

(2) Produces recommended improvements; or

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

warrant auditee action.

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

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

Federal award means Federal financial assistance and Federal cost-

reimbursement contracts that non-Federal entities receive directly from

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

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

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

be covered by the 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 supplement; and

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

from unauthorized use or disposition.

Loan means a Federal loan or loan guarantee received or

administered by a non-Federal entity.

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

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

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

intrastate district, council of governments, and any other

instrumentality of local government.

Major program means a Federal program determined by the auditor to

be a major program in accordance with Sec. ____.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:

[[Page 35291]]

(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 violation or possible violation of a

provision of a law, regulation, contract, grant, cooperative agreement,

or other agreement or document governing the use of Federal funds,

including funds used to match Federal funds;

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

adequate documentation; or

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

the actions a prudent person would take in the circumstances.

Recipient means a non-Federal entity that expends Federal awards

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

program.

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

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

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

directed toward fuller scientific knowledge or understanding of the

subject studied. The term research also includes activities involving

the training of individuals in research techniques where such

activities utilize the same facilities as other research and

development activities and where such activities are not included in

the instruction function. Development is the systematic use of

knowledge and understanding gained from research directed toward the

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

design and development of prototypes and processes.

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

financial statements and the Federal awards as described in

Sec. ____.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 supplement. Examples include:

activities allowed or unallowed; allowable costs/cost principles; cash

management; eligibility; matching, level of effort, earmarking; and,

reporting.

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

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

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

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

Additional guidance on distinguishing between a subrecipient and a

vendor is provided in Sec. ____.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 a FFRDC may elect to

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

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

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

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

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

require the non-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

[[Page 35292]]

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

distribution or consumption of food commodities; the disbursement of

amounts entitling the non-Federal entity to an interest subsidy; and,

the period when insurance is in force.

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

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

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

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

section:

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

plus

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

Government imposes continuing compliance requirements; plus

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

received.

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

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

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

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

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

included as Federal awards expended because the lender accounts for the

prior balances.

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

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

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

the provisions of contracts or grant agreements pertaining to such

loans impose no continuing compliance requirements other than to repay

the loans.

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

endowment funds which are federally restricted are considered awards

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

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

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

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

determining Federal awards expended and subject to audit under this

part.

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

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

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

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

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

providing patient care services to Medicare eligible individuals are

not considered Federal awards expended under this part.

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

patient care services to Medicaid eligible individuals are not

considered Federal awards expended under this part unless a State

requires the funds to be treated as Federal awards expended because

reimbursement is on a cost-reimbursement basis.

(j) Certain loans provided by the National Credit Union

Administration. For purposes of this part, loans made from the National

Credit Union Share Insurance Fund and the Central Liquidity Facility

that are funded by contributions from insured institutions are not

considered Federal awards expended.

Sec. ____.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,

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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 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. For purposes of this part,

limited scope audits only include agreed-upon procedures engagements

conducted in accordance with either the AICPA's generally accepted

auditing standards or attestation standards, that are paid for and

arranged by a pass-through entity and address only one or more of the

following types of compliance requirements: activities allowed or

unallowed; allowable costs/cost principles; eligibility; matching,

level of effort, earmarking; and, reporting.

Sec. ____.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

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presented fairly in all material respects in conformity with the stated

accounting policies;

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

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

results of the tests;

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

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

regulations, and the provisions of contracts or grant agreements which

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

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

program that includes a summary of the auditor's results relative to

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

findings and questioned costs consistent with the requirements of

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

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

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

(c)(3) of this section submitted within the earlier of 30 days after

receipt of the auditor's report(s), or nine months after the end of the

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

Federal agency that provided the funding or a different period is

specified in a program-specific audit guide. (However, for fiscal years

beginning on or before June 30, 1998, the audit shall be completed and

the required reporting shall be submitted within the earlier of 30 days

after receipt of the auditor's report(s), or 13 months after the end of

the audit period, unless a different period is specified in a program-

specific audit guide.) Unless restricted by law or regulation, the

auditee shall make report copies available for public inspection.

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

shall submit to the Federal clearinghouse designated by OMB 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

financial statement(s) of the Federal program, a summary schedule of

prior audit findings, and a corrective action plan as described in

paragraph (b)(2) of this section, and the auditor's report(s) described

in paragraph (b)(4) of this section. The data collection form prepared

in accordance with Sec. ____.320(b), as applicable to a program-

specific audit, and one copy of this reporting package shall be

submitted to the Federal clearinghouse designated by OMB to be retained

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

costs disclosed audit findings or the summary schedule of prior audit

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

submit one copy of the reporting package to the Federal clearinghouse

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

through entity in the case of a subrecipient. Instead of submitting the

reporting package to the pass-through entity, when a subrecipient is

not required to submit a reporting package to the pass-through entity,

the subrecipient shall provide written notification to the pass-through

entity, consistent with the requirements of Sec. ____.320(e)(2). A

subrecipient may submit a copy of the reporting package to the pass-

through entity to comply with this notification requirement.

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

are subject to Sec. ____.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 procuring audit services, auditees

shall follow the procurement standards prescribed by the Grants

Management Common Rule (hereinafter referred to as the ``A-102 Common

Rule'') published March 11, 1988 and amended April 19, 1995 [insert

appropriate CFR citation], Circular A-110, ``Uniform Administrative

Requirements for Grants and Agreements with Institutions of Higher

Education, Hospitals and Other Non-Profit Organizations,'' or the FAR

(48 CFR part 42), as applicable (OMB Circulars are available from the

Office of Administration, Publications Office, room 2200, New Executive

Office Building, Washington, DC 20503). Whenever possible, auditees

shall make positive efforts to utilize small businesses, minority-owned

firms, and women's business enterprises, in procuring audit services as

stated in the A-102 Common Rule, OMB Circular A-110, or the FAR (48 CFR

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

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

be considered in evaluating each proposal for audit services include

the responsiveness to the request for proposal, relevant experience,

availability of staff with professional qualifications and technical

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

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

auditor who prepares the indirect cost proposal or cost allocation plan

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

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

exceeded $1 million. This

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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

or changes in net assets, and, where appropriate, cash flows for the

fiscal year audited. The financial statements shall be for the same

organizational unit and fiscal year that is chosen to meet the

requirements of this part. However, organization-wide financial

statements may also include departments, agencies, and other

organizational units that have separate audits in accordance with

Sec. ____.500(a) and prepare separate financial statements.

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

also prepare a schedule of expenditures of Federal awards for the

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

required, the auditee may choose to provide information requested by

Federal awarding agencies and pass-through entities to make the

schedule easier to use. For example, when a Federal program has

multiple award years, the auditee may list the amount of Federal awards

expended for each award year separately. At a minimum, the schedule

shall:

(1) List individual Federal programs by Federal agency. For Federal

programs included in a cluster of programs, list individual Federal

programs within a cluster of programs. For R&D, total Federal awards

expended shall be shown either by individual award or by Federal agency

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

National Institutes of Health is a major subdivision in the Department

of Health and Human Services.

(2) For Federal awards received as a subrecipient, the name of the

pass-through entity and identifying number assigned by the pass-through

entity shall be included.

(3) Provide total Federal awards expended for each individual

Federal program and the CFDA number or other identifying number when

the CFDA information is not available.

(4) Include notes that describe the significant accounting policies

used in preparing the schedule.

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

in the schedule the total amount provided to subrecipients from each

Federal program.

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

value of the Federal awards expended in the form of non-cash

assistance, the amount of insurance in effect during the year, and

loans or loan guarantees outstanding at year end. While not required,

it is preferable to present this information in the schedule.

Sec. ____.315 Audit findings follow-up.

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

corrective action on all audit findings. As part of this

responsibility, the auditee shall prepare a summary schedule of prior

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

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

findings and the corrective action plan shall include the reference

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

Since the summary schedule may include audit findings from multiple

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

occurred.

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

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

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

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 data collection

form described in paragraph (b) of this section and reporting package

described in paragraph (c) of this section shall be submitted within

the earlier of 30 days after receipt of the auditor's report(s), or

nine months after the end of the audit period, unless a longer period

is agreed to in advance by the cognizant or oversight agency for audit.

(However, for fiscal years beginning on or before June 30, 1998, the

audit shall be completed and the data collection form and reporting

package shall be submitted within the earlier of 30 days after receipt

of the auditor's report(s), or 13 months after the end of the audit

period.) Unless restricted by law or regulation, the auditee shall make

copies available for public inspection.

(b) Data Collection. (1) The auditee shall submit a data collection

form which states whether the audit was completed in accordance with

this part and provides information about the auditee, its Federal

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

OMB, available from the Federal clearinghouse designated by OMB, and

include data elements similar to those presented in this paragraph. A

senior level representative of the auditee (e.g., State controller,

director of

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finance, chief executive officer, or chief financial officer) shall

sign a statement to be included as part of the form certifying that:

the auditee complied with the requirements of this part, the form was

prepared in accordance with this part (and the instructions

accompanying the form), and the information included in the form, in

its entirety, are accurate and complete.

(2) The data collection form shall include the following data

elements:

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

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

opinion, adverse opinion, or disclaimer of opinion).

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

internal control were disclosed by the audit of the financial

statements and whether any such conditions were material weaknesses.

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

noncompliance which is material to the financial statements of the

auditee.

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

internal control over major programs were disclosed by the audit and

whether any such conditions were material weaknesses.

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

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

opinion, or disclaimer of opinion).

(vi) A list of the Federal awarding agencies which will receive a

copy of the reporting package pursuant to Sec. ____.320(d)(2).

(vii) A yes or no statement as to whether the auditee qualified as

a low-risk auditee under Sec. ____.530.

(viii) The dollar threshold used to distinguish between Type A and

Type B programs as defined in Sec. ____.520(b).

(ix) The Catalog of Federal Domestic Assistance (CFDA) number for

each Federal program, as applicable.

(x) The name of each Federal program and identification of each

major program. Individual programs within a cluster of programs should

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

schedule of expenditures of Federal awards.

(xi) The amount of expenditures in the schedule of expenditures of

Federal awards associated with each Federal program.

(xii) For each Federal program, a yes or no statement as to whether

there are audit findings in each of the following types of compliance

requirements and the total amount of any questioned costs:

(A) Activities allowed or unallowed.

(B) Allowable costs/cost principles.

(C) Cash management.

(D) Davis-Bacon Act.

(E) Eligibility.

(F) Equipment and real property management.

(G) Matching, level of effort, earmarking.

(H) Period of availability of Federal funds.

(I) Procurement and suspension and debarment.

(J) Program income.

(K) Real property acquisition and relocation assistance.

(L) Reporting.

(M) Subrecipient monitoring.

(N) Special tests and provisions.

(xiii) Auditee Name, Employer Identification Number(s), Name and

Title of Certifying Official, Telephone Number, Signature, and Date.

(xiv) Auditor Name, Name and Title of Contact Person, Auditor

Address, Auditor Telephone Number, Signature, and Date.

(xv) Whether the auditee has either a cognizant or oversight agency

for audit.

(xvi) The name of the cognizant or oversight agency for audit

determined in accordance with Sec. ____.400(a) and Sec. ____.400(b),

respectively.

(3) Using the information included in the reporting package

described in paragraph (c) of this section, the auditor shall complete

the applicable sections of the form. The auditor shall sign a statement

to be included as part of the data collection form that indicates, at a

minimum, the source of the information included in the form, the

auditor's responsibility for the information, that the form is not a

substitute for the reporting package described in paragraph (c) of this

section, and that the content of the form is limited to the data

elements prescribed by OMB.

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

(1) Financial statements and schedule of expenditures of Federal

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

respectively;

(2) Summary schedule of prior audit findings discussed in

Sec. ____.315(b);

(3) Auditor's report(s) discussed in Sec. ____.505; and

(4) Corrective action plan discussed in Sec. ____.315(c).

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

Federal clearinghouse designated by OMB the data collection form

described in paragraph (b) of this section and one copy of the

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

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

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

questioned costs disclosed audit findings relating to Federal awards

that the Federal awarding agency provided directly or the summary

schedule of prior audit findings reported the status of any audit

findings relating to Federal awards that the Federal awarding agency

provided directly.

(e) Additional submission by subrecipients. (1) In addition to the

requirements discussed in paragraph (d) of this section, auditees that

are also subrecipients shall submit to each pass-through entity one

copy of the reporting package described in paragraph (c) of this

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

questioned costs disclosed audit findings relating to Federal awards

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

audit findings reported the status of any audit findings relating to

Federal awards that the pass-through entity provided.

(2) Instead of submitting the reporting package to a pass-through

entity, when a subrecipient is not required to submit a reporting

package to a pass-through entity pursuant to paragraph (e)(1) of this

section, the subrecipient shall provide written notification to the

pass-through entity that: an audit of the subrecipient was conducted in

accordance with this part (including the period covered by the audit

and the name, amount, and CFDA number of the Federal award(s) provided

by the pass-through entity); the schedule of findings and questioned

costs disclosed no audit findings relating to the Federal award(s) that

the pass-through entity provided; and, the summary schedule of prior

audit findings did not report on the status of any audit findings

relating to the Federal award(s) that the pass-through entity provided.

A subrecipient may submit a copy of the reporting package described in

paragraph (c) of this section to a pass-through entity to comply with

this notification requirement.

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

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

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

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

issued by the auditor.

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

the data collection form described in paragraph (b) of this section and

one copy of the reporting package described in paragraph (c) of this

section on file for three years from the date of submission to the

Federal clearinghouse designated by OMB. Pass-through entities shall

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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. To provide for continuity of

cognizance, the determination of the predominant amount of direct

funding shall be based upon direct Federal awards expended in the

recipient's fiscal years ending in 1995, 2000, 2005, and every fifth

year thereafter. For example, audit cognizance for periods ending in

1997 through 2000 will be determined based on Federal awards expended

in 1995. (However, for States and local governments that expend more

than $25 million a year in Federal awards and have previously assigned

cognizant agencies for audit, the requirements of this paragraph are

not effective until fiscal years beginning after June 30, 2000.)

Notwithstanding the manner in which audit cognizance is determined, a

Federal awarding agency with cognizance for an auditee may reassign

cognizance to another Federal awarding agency which provides

substantial direct funding and agrees to be the cognizant agency for

audit. Within 30 days after any reassignment, both the old and the new

cognizant agency for audit shall notify the auditee, and, if known, the

auditor of the reassignment. The cognizant agency for audit shall:

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

auditors.

(2) Consider auditee requests for extensions to the report

submission due date required by Sec. ____.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.

(9) For biennial audits permitted under Sec. ____.220, consider

auditee requests to qualify as a low-risk auditee under

Sec. ____.530(a).

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

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

general oversight of the Federal agency determined in accordance with

Sec. ____.105. The oversight agency for audit:

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

requested.

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

performed by a cognizant agency for audit.

(c) Federal awarding agency responsibilities. The Federal awarding

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

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

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

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

Federal agency shall provide information necessary to clearly describe

the Federal award.

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

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

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

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

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

as requested.

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

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

appropriate and timely corrective action.

(6) Assign a person responsible for providing annual updates of the

compliance supplement to OMB.

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

shall perform the following for the Federal awards it makes:

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

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

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

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

information available to describe the Federal award.

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

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

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

entity.

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

that Federal awards are used for authorized purposes in compliance with

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

and that performance goals are achieved.

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

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

requirements of this part for that fiscal year.

[[Page 35298]]

(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 for auditor assurance related to the

documentation, as a way of mitigating disallowed costs. The management

decision should describe any appeal process available to the auditee.

(b) Federal agency. As provided in Sec. ____. 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)(5), a Federal

awarding agency is responsible for issuing a management decision for

findings that relate to Federal awards it makes to recipients.

Alternate arrangements may be made on a case-by-case basis by agreement

among the Federal agencies concerned.

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

pass-through entity shall be responsible for making the management

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

subrecipients.

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

management decision shall do so within six months of receipt of the

audit report. Corrective action should be initiated within six months

after receipt of the audit report and proceed as rapidly as possible.

(e) Reference numbers. Management decisions shall include the

reference numbers the auditor assigned to each audit finding in

accordance with

Sec. ____. 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 other organizational unit, which shall be

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

schedule of expenditures of Federal awards shall be for the same fiscal

year.

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

financial statements of the auditee are presented fairly in all

material respects in conformity with generally accepted accounting

principles. The auditor shall also determine whether the schedule of

expenditures of Federal awards is presented fairly in all material

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

whole.

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

the auditor shall perform procedures to obtain an understanding of

internal control over Federal programs sufficient to plan the audit to

support a low assessed level of control risk for major programs.

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

auditor shall:

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

support a low assessed level of control risk for the assertions

relevant to the compliance requirements for each major program; and

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

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

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

requirements for a major program are likely to be ineffective in

preventing or detecting noncompliance, the planning and performing of

testing described in paragraph (c)(2) of this section are not required

for those compliance requirements. However, the auditor shall report a

reportable condition (including whether any such condition is a

material weakness) in accordance with Sec. ____. 510, assess the

related control risk at the maximum, and consider whether additional

compliance tests are required because of ineffective internal control.

(d) Compliance. (1) In addition to the requirements of GAGAS, the

auditor shall determine whether the auditee has complied with laws,

regulations, and the provisions of contracts or grant agreements that

may have a direct and material effect on each of its major programs.

(2) The principal compliance requirements applicable to most

Federal programs and the compliance requirements of the largest Federal

programs are included in the compliance supplement.

(3) For the compliance requirements related to Federal programs

contained in the compliance supplement, an audit of these compliance

requirements will meet the requirements of this part. Where there have

been changes to the compliance requirements and the changes are not

reflected in the compliance supplement, the auditor shall determine the

current compliance requirements and modify the audit procedures

accordingly. For those Federal programs not covered in the compliance

supplement, the auditor should use the types of compliance requirements

contained in the compliance supplement as guidance for identifying the

types of compliance requirements to test, and determine the

requirements governing the Federal program by reviewing the provisions

of contracts and grant agreements and the laws and regulations referred

to in such contracts and grant agreements.

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

such other auditing procedures necessary to provide the auditor

sufficient evidence to support an opinion on compliance.

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

findings, perform procedures to assess the reasonableness of the

summary schedule of prior audit findings prepared by the auditee in

accordance with Sec. ____. 315(b), and report, as a current year audit

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

audit findings materially misrepresents the status of any prior audit

finding. The auditor shall perform audit follow-up procedures

regardless of whether a prior audit finding relates to a major program

in the current year.

(f) Data Collection Form. As required in Sec. ____. 320(b)(3), the

auditor shall complete and sign specified sections of the data

collection form.

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

[[Page 35299]]

section. The auditor's report(s) shall state that the audit was

conducted in accordance with this part and include the following:

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

financial statements are presented fairly in all material respects in

conformity with generally accepted accounting principles and an opinion

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

of Federal awards is presented fairly in all material respects in

relation to the financial statements taken as a whole.

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

statements and major programs. This report shall describe the scope of

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

applicable, refer to the separate schedule of findings and questioned

costs described in paragraph (d) of this section.

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

provisions of contracts or grant agreements, noncompliance with which

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

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

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

contracts or grant agreements which could have a direct and material

effect on each major program, and, where applicable, refer to the

separate schedule of findings and questioned costs described in

paragraph (d) of this section.

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

the following three components:

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

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

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

opinion, adverse opinion, or disclaimer of opinion);

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

internal control were disclosed by the audit of the financial

statements and whether any such conditions were material weaknesses;

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

noncompliance which is material to the financial statements of the

auditee;

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

internal control over major programs were disclosed by the audit and

whether any such conditions were material weaknesses;

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

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

opinion, or disclaimer of opinion);

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

findings which the auditor is required to report under Sec. ____.

510(a);

(vii) An identification of major programs;

(viii) The dollar threshold used to distinguish between Type A and

Type B programs, as described in Sec. ____. 520(b); and

(ix) A statement as to whether the auditee qualified as a low-risk

auditee under Sec. ____. 530.

(2) Findings relating to the financial statements which are

required to be reported in accordance with GAGAS.

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

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

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

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

should be presented as a single audit finding. Where practical, audit

findings should be organized by Federal agency or pass-through entity.

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

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

this section, respectively, should be reported in both sections of the

schedule. However, the reporting in one section of the schedule may be

in summary form with a reference to a detailed reporting in the other

section of the schedule.

Sec. ____. 510 Audit findings.

(a) Audit findings reported. The auditor shall report the following

as audit findings in a schedule of findings and questioned costs:

(1) Reportable conditions in internal control over major programs.

The auditor's determination of whether a deficiency in internal control

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

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

or an audit objective identified in the compliance supplement. The

auditor shall identify reportable conditions which are individually or

cumulatively material weaknesses.

(2) Material noncompliance with the provisions of laws,

regulations, contracts, or grant agreements related to a major program.

The auditor's determination of whether a noncompliance with the

provisions of laws, regulations, contracts, or grant agreements is

material for the purpose of reporting an audit finding is in relation

to a type of compliance requirement for a major program or an audit

objective identified in the compliance supplement.

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

type of compliance requirement for a major program. Known questioned

costs are those specifically identified by the auditor. In evaluating

the effect of questioned costs on the opinion on compliance, the

auditor considers the best estimate of total costs questioned (likely

questioned costs), not just the questioned costs specifically

identified (known questioned costs). The auditor shall also report

known questioned costs when likely questioned costs are greater than

$10,000 for a type of compliance requirement for a major program. In

reporting questioned costs, the auditor shall include information to

provide proper perspective for judging the prevalence and consequences

of the questioned costs.

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

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

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

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

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

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

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

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

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

then the auditor shall report this as an audit finding.

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

compliance for major programs is other than an unqualified opinion,

unless such circumstances are otherwise reported as audit findings in

the schedule of findings and questioned costs for Federal awards.

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

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

questioned costs for Federal awards. This paragraph does not require

the auditor to make an additional reporting when the auditor confirms

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

direct reporting requirements of GAGAS.

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

disclosed that the summary schedule of prior audit findings prepared by

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

misrepresents the status of any prior audit finding.

[[Page 35300]]

(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 the auditor is aware that the Federal awarding agency,

pass-through entity, or auditee is contesting an audit finding, the

auditor shall contact the parties contesting the audit finding for

guidance prior to destruction of the working papers and reports.

(b) Access to working papers. Audit working papers shall be made

available upon request to the cognizant or oversight agency for audit

or its designee, a Federal agency providing direct or indirect funding,

or GAO at the completion of the audit, as part of a quality review, to

resolve audit findings, or to

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