Grants and Cooperative Agreements to State and Local Governments, Universities, Hospitals, and Other Non-Profit Organizations

DEPARTMENT OF AGRICULTURE

Office of the Chief Financial Officer

7 CFR Chapter XXX and Parts 3015, 3051, and 3052

RIN 0505-AA10

Grants and Cooperative Agreements to State and Local Governments,

Universities, Hospitals, and Other Non-Profit Organizations

AGENCY: Office of the Chief Financial Officer, USDA.

ACTION: Interim final rule.

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

SUMMARY: This interim final rule amendment is issued to implement the

Single Audit Act Amendments of 1996 (Public Law 104-156, 110 Stat.

1396) and the June 24, 1997, revision of OMB Circular A-133, ``Audits

of States, Local Governments, and Non-Profit Organizations'' and to

replace the existing audit requirements that are superseded by Public

Law 104-156 and the revised A-133.

DATES: This interim final rule is effective September 29, 1997.

Comments must be received on or before October 28, 1997 in order to be

assured of consideration.

ADDRESSES: Persons wishing to submit comments on this interim final

rule should send them to Patricia Wensel, Director, Planning and

Accountability Division, Department of Agriculture, 1400 Independence

Avenue, S.W., Room 3027 South Building, Washington, D.C. 20250. A copy

of each communication submitted will be available for public inspection

during regular business hours (8:30 a.m.-5:00 p.m.) at the above

address.

FOR FURTHER INFORMATION CONTACT: Patricia Wensel, Director, Office of

the Chief Financial Officer, Planning and Accountability Division, 202-

720-1175.

SUPPLEMENTARY INFORMATION:

Background

USDA is (1) removing existing audit requirements from 7 CFR Part

3015, ``Uniform Federal Assistance Regulations,'' and 7 CFR Part 3051,

``Audits of Institutions of Higher Education and Other Nonprofit

Institutions,'' and (2) codifying revised Office of Management and

Budget (OMB) Circular A-133, ``Audits of States, Local Governments, and

Non-Profit Organizations'' (62 FR 35278, June 30, 1997) in a new 7 CFR

Part 3052, ``Audits of States, Local Governments, and Non-Profit

Organizations.'' Elsewhere in this Federal Register, USDA has published

an interim final rule to amend the common rule sections on audit in 7

CFR Parts 3016, ``Uniform Administrative Requirements for Grants and

Agreements to State and Local Governments,'' and 3019, ``Uniform

Administrative Requirements for Grants and Agreements with Institutions

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

and a notice to withdraw the October 17, 1995 (60 FR 53717), proposed

rule whose audit provisions have been superseded by the Single Audit

Act Amendments of 1996 (Public Law 104-156, 110 Stat. 1396) and the

June 24, 1997, revision of OMB Circular A-133.

On November 10, 1981, the Department of Agriculture published 7 CFR

Part 3015, as a final rule to provide Departmentwide policies and

standards for the administration of grants and cooperative agreements.

Part 3015

[[Page 45948]]

included Subpart I which set out audit requirements for State and local

governments in Secs. 3015.70 through 3015.77 and audit requirements for

institutions of higher education, hospitals and other non-profit

organizations in Sec. 3015.79. Section 3015.78 was reserved for future

use.

On July 16, 1985, USDA published an interim rule amending Subpart I

of Part 3015 to implement OMB Circular A-128, ``Audits of State and

Local Governments.'' Circular A-128 was issued pursuant to the Single

Audit Act of 1984. Subpart I of Part 3015 was revised to encompass

Secs. 3015.70 through 3015.76 for State and local governments and

Sec. 3015.77 for institutions of higher education, hospitals and other

non-profit organizations.

USDA published the final rule implementing Circular A-128 in Part

3015 on January 14, 1986.

On August 3, 1993, USDA published a final rule to remove the audit

requirements for institutions of higher education and other nonprofit

organizations from Sec. 3015.77 of Subpart I, Part 3015. At the same

time, USDA published a final rule in a new 7 CFR Part 3051 to establish

audit requirements for non-governmental organizations in accordance

with OMB Circular A-133, ``Audits of Institutions of Higher Education

and Other Nonprofit Institutions,'' and to cover in the scope of the

rule Federal cost-type contracts used to buy services and goods for the

use of the Federal government.

The Single Audit Act Amendments of 1996 and the June 24, 1997,

revision of OMB Circular A-133 require agencies to adopt in codified

regulations the standards in the revised Circular A-133 by August 29,

1997, so that the standards will apply to audits of fiscal years

beginning after June 30, 1996. The revised Circular A-133 co-locates

audit requirements for States, local governments, and nonprofit

organizations. Consequently, OMB rescinded OMB Circular A-128, ``Audits

of State and Local Governments.''

In order to codify revised Circular A-133 which places audit

requirements for governments and nonprofits in one Circular, USDA is

removing the audit requirements from 7 CFR Parts 3015 and 3051. To

eliminate confusion, USDA is codifying the audit requirements of

revised Circular A-133 in a new Part 3052 of title 7. The audit

provisions in Part 3052 are verbatim to the revised Circular A-133

which OMB published in final on June 30, 1997 (62 FR 35278).

Justification for Interim Final Rule

Under the Administrative Procedure Act, to issue an interim final

rule without a prior notice of proposed rulemaking, it is necessary to

make a finding that issuing a proposed rule would be impractical,

unnecessary, and contrary to the public interest. The Single Audit Act

Amendments of 1996 and revised Circular A-133 are effective for audits

of fiscal years beginning after June 30, 1996 and the statutory date

for publication of the codified Circular A-133 is August 29, 1997.

Given these time frames, USDA believes publication of a proposed rule

would be impractical, unnecessary, and contrary to the public interest.

Publication of a proposed final rule is also unnecessary, as USDA has

no authority to deviate from the Government-wide policy under Circular

A-133 in response to any public comments.

OMB published a Notice of Proposed Rulemaking (NPRM) on November 5,

1996, (61 FR 57232-57249) requesting comments on the proposal to revise

OMB Circular A-133 and to rescind OMB Circular A-128, ``Audits of

States and Local Governments.'' The comments received on the NPRM were

considered and addressed in developing the final rule which was

published in regulatory format on June 30, 1997 (62 FR 35278--35319).

USDA's codification in 7 CFR Part 3052 of the revised Circular A-133 is

verbatim to OMB's June 30 final revision to A-133. Therefore, USDA

believes it would be unnecessary and contrary to the public interest to

ask for comments again.

The existing audit requirements in 7 CFR Part 3015 implement

Circular A-128 and in 7 CFR Part 3051 implement Circular A-133 before

the June 30 revision. Circular A-128 has been rescinded and A-133 has

been revised. USDA's action to remove obsolete audit requirements from

Parts 3015 and 3051 is a necessary action triggered by the A-133

revision and the Public Law 104-156. Therefore, it is in the public

interest to remove the audit requirements from existing regulations at

the same time as the new revised A-133 standards are codified in the

new Part 3052. Accordingly, it is impractical to publish the related

Part 3015 and Part 3051 amendments as proposed rules and it is

necessary and in the public interest to publish them as an interim

final rule with the codification of Circular A-133.

Impact Analysis

Executive Order 12866

Executive Order 12866 requires that a regulatory impact analysis be

prepared for ``major'' rules which are defined in the Order as any rule

that has an annual effect on the national economy of $100 million or

more or certain other specified effects.

USDA does not believe that this revision to its rules will have an

annual impact of $100 million or more or the other effects listed in

the Order. However, the interim final rule would result in some savings

to organizations administering grants or subgrants, primarily due to

the increase in the threshold (from $25,000 to $300,000) that triggers

an audit requirement. For this reason, USDA has determined that this

interim final rule would not create a major rule within the meaning of

the Order.

Regulatory Flexibility Act of 1980

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires

that, for each rule with a ``significant economic impact on a

substantial number of small entities,'' an analysis must be prepared

describing the rule's impact on small entities and identifying any

significant alternatives to the rule that would minimize the economic

impact on small entities (5 U.S.C. 605(b)).

USDA certifies that this interim final rule will not have a

significant economic impact on a substantial number or small entities.

The interim final rule does not affect the amount of funds provided in

the covered programs, but rather increases the threshold for non-

Federal entities subject to audit, thereby reducing the burden on some

small entities.

Unfunded Mandates Act of 1995

The Unfunded Mandates Act of 1995 (Pub. L. 104-4) requires agencies

to prepare several analytic statements before proposing any rule that

may result in annual expenditures of $100 million by State, local, and

Indian tribal governments or the private sector. Since this interim

final rule will not result in expenditures of this magnitude, USDA

certifies that such statements are not necessary.

Paperwork Reduction Act

This interim final rule will impose additional reporting or record

keeping requirements under the Paperwork Reduction Act of 1980 (44

U.S.C. Chapter 35) after OMB finalizes the new SF-SAC, ``Data

Collection Form for Reporting on Audits of States, Local Governments,

and Non-Profit Organizations.'' On June 30, 1997, OMB requested public

comments on the proposed SF-SAC (62 FR 35302).

[[Page 45949]]

List of Subjects

7 CFR Part 3015

Accounting, Grant programs (Agriculture), Intergovernmental

regulations.

7 CFR Part 3051

Accounting, Auditing, Colleges and universities, Grant programs,

Nonprofit organizations.

7 CFR Part 3052

Grant programs (Agriculture), Auditing.

Issued at Washington, D.C., on August 21, 1997.

Approved:

Irvin T. David,

Acting Chief Financial Officer.

Dan Glickman,

Secretary of Agriculture.

For the reasons stated in the preamble, 7 CFR chapter XXX is

amended as follows:

CHAPTER XXX--OFFICE OF THE CHIEF FINANCIAL OFFICER, DEPARTMENT OF

AGRICULTURE

1. The heading of Chapter XXX is revised to read as set forth

above.

PART 3015--UNIFORM FEDERAL ASSISTANCE REGULATIONS

1. The authority citation for part 3015 continues to read as

follows:

Authority: 5 U.S.C. 301.

Subpart A--General

2. Section 3015.1 is amended by revising paragraph (a)(2) as

follows:

Sec. 3015.1 Purpose and scope of this part.

(a) * * *

(2) Additionally, this part establishes intergovernmental review

provisions required by Executive Order 12372 for any programs listed in

the Federal Register as covered, and policy on competition in awarding

discretionary grants and cooperative agreements.

* * * * *

Subpart I--[Removed and Reserved]

3. Subpart I of Part 3015 (Secs. 3015.70-3015.77 and appendix to

subpart) is removed and reserved.

PART 3051--[REMOVED]

4. Part 3051 is removed.

5. Part 3052 is added as follows:

PART 3052--AUDITS OF STATES, LOCAL GOVERNMENTS, AND NON-PROFIT

ORGANIZATIONS

Sec.

Subpart A--General

3052.100 Purpose.

3052.105 Definitions.

Subpart B--Audits

3052.200 Audit requirements.

3052.205 Basis for determining Federal awards expended.

3052.210 Subrecipient and vendor determinations.

3052.215 Relation to other audit requirements.

3052.220 Frequency of audits.

3052.225 Sanctions.

3052.230 Audit costs.

3052.235 Program-specific audits.

Subpart C--Auditees

3052.300 Auditee responsibilities.

3052.305 Auditor selection.

3052.310 Financial statements.

3052.315 Audit findings follow-up.

3052.320 Report submission.

Subpart D--Federal Agencies and Pass-Through Entities

3052.400 Responsibilities.

3052.405 Management decision.

Subpart E--Auditors

3052.500 Scope of audit.

3052.505 Audit reporting.

3052.510 Audit findings.

3052.515 Audit working papers.

3052.520 Major program determination.

3052.525 Criteria for Federal program risk.

3052.530 Criteria for a low-risk auditee.

Authority: 5 U.S.C. 301

Subpart A--General

Sec. 3052.100 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. 3052.105 Definitions.

Audit finding means deficiencies which the auditor is required by

Sec. 3052.510(a) to report in the schedule of findings and questioned

costs.

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.

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. 3052.400(d)(1) and Sec. 3052.400(d)(2), respectively. A cluster of

programs shall be considered as one program for determining major

programs, as described in Sec. 3052.520, and, with the exception of R&D

as described in Sec. 3052.200(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. 3052.400(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),

[[Page 45950]]

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. 3052.205(h) and Sec. 3052.205(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. 3052.520 or a program

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

entity in accordance with Sec. 3052.215(c).

Management decision means the evaluation by the Federal awarding

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

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

corrective action is necessary.

Non-Federal entity means a State, local government, or non-profit

organization.

Non-profit organization means:

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

organization that:

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

charitable, or similar purposes in the public interest;

(ii) Is not organized primarily for profit; and

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

operations; and

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

institutions of higher education and hospitals.

OMB means the Executive Office of the President, Office of

Management and Budget.

Oversight agency for audit means the Federal awarding agency that

provides the predominant amount of direct funding to a recipient not

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

the Federal agency with the predominant indirect funding shall assume

the oversight responsibilities. The duties of the oversight agency for

audit are described in Sec. 3052.400(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. 3052.200(c) and Sec. 3052.235.

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. 3052.500.

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

[[Page 45951]]

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. 3052.210.

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. 3052.210.

Subpart B--Audits

Sec. 3052.200 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. 3052.205.

(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. 3052.500 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. 3052.235. 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. 3052.215(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. 3052.205 Basis for determining Federal awards expended.

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

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

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

require the non-Federal entity to comply with laws, regulations, and

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

expense transactions associated with grants, cost-reimbursement

contracts, cooperative agreements, and direct appropriations; the

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

proceeds under loan and loan guarantee programs; the receipt of

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

program income; the distribution or consumption of food commodities;

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

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

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

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

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

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

section:

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

plus

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

Government imposes continuing compliance requirements; plus

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

received.

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

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

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

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

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

included as Federal awards expended because the lender accounts for the

prior balances.

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

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

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

the provisions of contracts or grant agreements pertaining to such

loans impose no continuing compliance requirements other than to repay

the loans.

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

endowment funds which are federally restricted are considered awards

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

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

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

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

determining Federal awards expended and subject to audit under this

part.

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

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

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.

[[Page 45952]]

(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. 3052.210 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. 3052.215 Relation to other audit requirements.

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

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

required under individual Federal awards. To the extent this audit

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

The provisions of this part neither limit the authority of Federal

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

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

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

to constrain Federal agencies from carrying out additional audits. Any

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

build upon work performed by other auditors.

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

that conducts or contracts for additional audits shall, consistent with

other applicable laws and regulations, arrange for funding the full

cost of such additional audits.

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

Federal agency may request an auditee to have a particular Federal

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

conducting or arranging for the additional audits. To allow for

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

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

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

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

major program using the risk-based audit approach described in

Sec. 3052.520 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. 3052.220 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. 3052.225 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;

[[Page 45953]]

(b) Withholding or disallowing overhead costs;

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

(d) Terminating the Federal award.

Sec. 3052.230 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. 3052.200(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. 3052.400(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. 3052.235 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. 3052.315(b), and a corrective action plan

consistent with the requirements of Sec. 3052.315(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. 3052.500(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. 3052.500(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. 3052.500(e).

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

or separate reports and may be organized differently from the manner

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

audit was conducted in accordance with this part and include the

following:

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

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

all material respects in 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. 3052.505(d)(1) and

findings and questioned costs consistent with the requirements of

Sec. 3052.505(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, 1988, 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. 3052.320(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. 3052.320(b), as applicable to a program-

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

[[Page 45954]]

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. 3052.320(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. 3052.100 through Sec. 3052.215(b), Sec. 3052.220

through Sec. 3052.230, Sec. 3052.300 through Sec. 3052.305,

Sec. 3052.315, Sec. 3052.320(f) through Sec. 3052.320(j), Sec. 3052.400

through Sec. 3052.405, Sec. 3052.510 through Sec. 3052.515, 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. 3052.300 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. 3052.310.

(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. 3052.320(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. 3052.315(b) and

Sec. 3052.315(c), respectively.

Sec. 3052.305 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'') 7 CFR Part 3016, 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 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. 3052.310 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. 3052.500(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.

[[Page 45955]]

(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. 3052.315 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. 3052.510(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. 3052.320 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 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. 3052.320(d)(2) of OMB

Circular A-133.

(vii) A yes or no statement as to whether the auditee qualified as

a low-risk auditee under Sec. 3052.530 of OMB Circular A-133.

(viii) The dollar threshold used to distinguish between Type A and

Type B programs as defined in Sec. 3052.520(b) of OMB Circular A-133.

(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.

[[Page 45956]]

(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. 3052.400(a) and Sec. 3052.400(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. 3052.310(a) and Sec. 3052.310(b),

respectively;

(2) Summary schedule of prior audit findings discussed in

Sec. 3052.315(b);

(3) Auditor's report(s) discussed in Sec. 3052.505; and

(4) Corrective action plan discussed in Sec. 3052.315(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

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. 3052.235(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. 3052.400 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

[[Page 45957]]

date required by Sec. 3052.320(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. 3052.220, consider

auditee requests to qualify as a low-risk auditee under

Sec. 3052.530(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. 3052.105. 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.

(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. 3052.405 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. 3052.400(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. 3052.400(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. 3052.400(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. 3052.510(c).

Subpart E--Auditors

Sec. 3052.500 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

[[Page 45958]]

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. 3052.510, 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. 3052.315(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. 3052.320(b)(3), the

auditor shall complete and sign specified sections of the data

collection form.

Sec. 3052.505 Audit reporting.

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

separate reports and may be organized differently from the manner

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

audit was conducted in accordance with this part and include the

following:

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

financial statements are presented fairly in all material respects in

conformity with generally accepted accounting principles and an opinion

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

of Federal awards is presented fairly in all material respects in

relation to the financial statements taken as a whole.

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

statements 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. 3052.510(a);

(vii) An identification of major programs;

(viii) The dollar threshold used to distinguish between Type A and

Type B

[[Page 45959]]

programs, as described in Sec. 3052.520(b); and

(ix) A statement as to whether the auditee qualified as a low-risk

auditee under Sec. 3052.530.

(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. 3052.510(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. 3052.510 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. 3052.315(b) materially

misrepresents the status of any prior audit finding.

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

sufficient detail for the auditee to prepare a corrective action plan

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

entities to arrive at a management decision. The following specific

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

(1) Federal program and specific Federal award identification

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

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

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

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

information available to describe the Federal award.

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

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

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

deficiency identified in the audit finding.

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

(5) Information to provide proper perspective for judging the

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

audit findings represent an isolated instance or a systemic problem.

Where appropriate, instances identified shall be related to the

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

dollar value.

(6) The possible asserted effect to provide sufficient information

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

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

facilitate prompt and proper corrective action.

(7) Recommendations to prevent future occurrences of the deficiency

identified in the audit finding.

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

disagreement with the audit findings, to the extent practical.

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

findings and questioned costs shall include a reference number to allow

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

Sec. 3052.515 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.

[[Page 45960]]

(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 carry out oversight responsibilities

consistent with the purposes of this part. Access to working papers

includes the right of Federal agencies to obtain copies of working

papers, as is reasonable and necessary.

Sec. 3052.520 Major program determination.

(a) General. The auditor shall use a risk-based approach to

determine which Federal programs are major programs. This risk-based

approach shall include consideration of: Current and prior audit

experience, oversight by Federal agencies and pass-through entities,

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

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

(b) Step 1. (1) The auditor shall identify the larger Federal

programs, which shall be labeled Type A programs. Type A programs are

defined as Federal programs with Federal awards expended during the

audit period exceeding the larger of:

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

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

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

million.

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

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

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

to $10 billion.

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

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

Federal awards expended exceed $10 billion.

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

this section shall be labeled Type B programs.

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

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

a Federal program providing loans significantly affects the number or

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

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

Type A programs.

(4) For biennial audits permitted under Sec. 3052.220, the

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

Federal awards expended during the two-year period.

(c) Step 2. (1) The auditor shall identify Type A programs which

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

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

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

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

had no audit findings under Sec. 3052.510(a). However, the auditor may

use judgment and consider that audit findings from questioned costs

under Sec. 3052.510(a)(3) and Sec. 3052.510(a)(4), fraud under

Sec. 3052.510(a)(6), and audit follow-up for the summary schedule of

prior audit findings under Sec. 3052.510(a)(7) do not preclude the Type

A program from being low-risk. The auditor shall consider: the criteria

in Sec. 3052.525(c), Sec. 3052.525(d)(1), Sec. 3052.525(d)(2), and

Sec. 3052.525(d)(3); the results of audit follow-up; whether any

changes in personnel or systems affecting a Type A program have

significantly increased risk; and apply professional judgment in

determining whether a Type A program is low-risk.

(2) Notwithstanding paragraph (c)(1) of this section, OMB may

approve a Federal awarding agency's request that a Type A program at

certain recipients may not be considered low-risk. For example, it may

be necessary for a large Type A program to be audited as major each

year at particular recipients to allow the Federal agency to comply

with the Government Management Reform Act of 1994 (31 U.S.C. 3515). The

Federal agency shall notify the recipient and, if known, the auditor at

least 180 days prior to the end of the fiscal year to be audited of

OMB's approval.

(d) Step 3. (1) The auditor shall identify Type B programs which

are high-risk using professional judgment and the criteria in

Sec. 3052.525. However, should the auditor select Option 2 under Step 4

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

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

Type A programs. Except for known reportable conditions in internal

control or compliance problems as discussed in Sec. 3052.525(b)(1),

Sec. 3052.525(b)(2), and Sec. 3052.525(c)(1), a single criteria in

Sec. 3052.525 would seldom cause a Type B program to be considered

high-risk.

(2) The auditor is not expected to perform risk assessments on

relatively small Federal programs. Therefore, the auditor is only

required to perform risk assessments on Type B programs that exceed the

larger of:

(i) $100,000 or three-tenths of one percent (.003) of total Federal

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

in total Federal awards expended.

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

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

total Federal awards expended.

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

following as major programs:

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

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

section).

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

following two options:

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

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

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

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

identified as low-risk under Step 2.

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

identified as low-risk under Step 2.

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

major under either Option 1 or 2 in paragraph (e)(2)(i) (A) or (B), the

auditor is encouraged to use an approach which provides an opportunity

for different high-risk Type B programs to be audited as major over a

period of time.

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

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

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

major than the number of Type A programs.

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

programs Federal programs with Federal awards expended that, in the

aggregate, encompass at least 50 percent of total Federal awards

expended. If the auditee meets the criteria in Sec. 3052.530 for a low-

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

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

at least 25 percent of total Federal awards expended.

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

working papers the risk analysis process used in determining major

programs.

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

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

judgment in applying the risk-based approach to determine major

programs shall be presumed correct. Challenges by Federal agencies and

pass-through

[[Page 45961]]

entities shall only be for clearly improper use of the guidance in this

part. However, Federal agencies and pass-through entities may provide

auditors guidance about the risk of a particular Federal program and

the auditor shall consider this guidance in determining major programs

in audits not yet completed.

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

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

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

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

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

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

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

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

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

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

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

Sec. 3052.525 Criteria for Federal program risk.

(a) General. The auditor's determination should be based on an

overall evaluation of the risk of noncompliance occurring which could

be material to the Federal program. The auditor shall use auditor

judgment and consider criteria, such as described in paragraphs (b),

(c), and (d) of this section, to identify risk in Federal programs.

Also, as part of the risk analysis, the auditor may wish to discuss a

particular Federal program with auditee management and the Federal

agency or pass-through entity.

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

control over Federal programs would indicate higher risk. Consideration

should be given to the control environment over Federal programs and

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

laws and regulations and the provisions of contracts and grant

agreements and the competence and experience of personnel who

administer the Federal programs.

(i) A Federal program administered under multiple internal control

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

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

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

throughout the entity.

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

to subrecipients, a weak system for monitoring subrecipients would

indicate higher risk.

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

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

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

modified computer systems may also indicate risk.

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

when the situations identified in the audit findings could have a

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

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

of higher risk than Federal programs recently audited as major programs

without audit findings.

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

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

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

reviews performed by an oversight entity which disclosed no significant

problems would indicate lower risk. However, monitoring which disclosed

significant problems would indicate higher risk.

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

Federal programs which are higher risk. OMB plans to provide this

identification in the compliance supplement.

(d) Inherent risk of the Federal program. (1) The nature of a

Federal program may indicate risk. Consideration should be given to the

complexity of the program and the extent to which the Federal program

contracts for goods and services. For example, Federal programs that

disburse funds through third party contracts or have eligibility

criteria may be of higher risk. Federal programs primarily involving

staff payroll costs may have a high-risk for time and effort reporting,

but otherwise be at low-risk.

(2) The phase of a Federal program in its life cycle at the Federal

agency may indicate risk. For example, a new Federal program with new

or interim regulations may have higher risk than an established program

with time-tested regulations. Also, significant changes in Federal

programs, laws, regulations, or the provisions of contracts or grant

agreements may increase risk.

(3) The phase of a Federal program in its life cycle at the auditee

may indicate risk. For example, during the first and last years that an

auditee participates in a Federal program, the risk may be higher due

to start-up or closeout of program activities and staff.

(4) Type B programs with larger Federal awards expended would be of

higher risk than programs with substantially smaller Federal awards

expended.

Sec. 3052.530 Criteria for a low-risk auditee.

An auditee which meets all of the following conditions for each of

the preceding two years (or, in the case of biennial audits, preceding

two audit periods) shall qualify as a low-risk auditee and be eligible

for reduced audit coverage in accordance with Sec. 3052.520:

(a) Single audits were performed on an annual basis in accordance

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

biennial audits does not qualify as a low-risk auditee, unless agreed

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

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

schedule of expenditures of Federal awards were unqualified. However,

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

qualification does not affect the management of Federal awards and

provide a waiver.

(c) There were no deficiencies in internal control which were

identified as material weaknesses under the requirements of GAGAS.

However, the cognizant or oversight agency for audit may judge that any

identified material weaknesses do not affect the management of Federal

awards and provide a waiver.

(d) None of the Federal programs had audit findings from any of the

following in either of the preceding two years (or, in the case of

biennial audits, preceding two audit periods) in which they were

classified as Type A programs:

(1) Internal control deficiencies which were identified as material

weaknesses;

(2) Noncompliance with the provisions of laws, regulations,

contracts, or grant agreements which have a material effect on the Type

A program; or

(3) Known or likely questioned costs that exceed five percent of

the total Federal awards expended for a Type A program during the year.

[FR Doc. 97-22830 Filed 8-28-97; 8:45 am]

BILLING CODE 3410-KS-P