OFFICE OF MANAGEMENT AND BUDGET

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

AGENCY: Office of Management and Budget

ACTION: Proposed Revision of OMB Circular No. A-133 and Proposed Rescission of OMB Circular No. A-128


SUMMARY: This Notice offers interested parties an opportunity to comment on further proposed revisions to Office of Management and Budget (OMB) Circular No. A-133, "Audits of Institutions of Higher Education and Other Non-Profit Institutions," and the proposed consolidation of OMB Circular No. A-128, "Audits of State and Local Governments," into Circular No. A-133 (with Circular A-128 being rescinded). This Notice also requests comment on two proposed information collections contained in the proposed revision to Circular A-133. These actions are being proposed to implement the Single Audit Act Amendments of 1996 (1996 Amendments), which were signed into law on July 5, 1996 (P.L. 104-156).

In the proposed revisions to Circular A-133, as published in the Federal Register on March 17, 1995 (60 FR 14594), OMB stated an intent to seek modifications to the Single Audit Act of 1984 (1984 Act) and, upon passage, extend the provisions of Circular A-133 to include audits of States and local governments and then rescind Circular A-128. (Indian tribal governments are included under the definition of States and are covered under the 1984 Act, Circular A-128, the 1996 Amendments, and this proposed revision.) The April 1996 revision of Circular A-133 was coordinated with the 1996 Amendments such that only minimum changes are now necessary to include States and local governments under Circular A-133. When States and local governments are covered under Circular A-133, OMB will rescind Circular A-128.

Interested parties may wish to refer to the March 17, 1995, and April 30, 1996, Federal Register (61 FR 19134) for a more detailed discussion of the changes made during the recent revisions to Circular A-133.

DATES: All comments on this proposal should be in writing, and must be received by [60 days after publication]. Late comments will be considered to the extent practicable.

ADDRESSES: Comments should be mailed to Office of Management and Budget, Office of Federal Financial Management, Financial Standards and Reporting Branch, Room 6025, New Executive Office Building, Washington, DC 20503. Where possible, comments should reference applicable paragraph or section numbers in the proposed revision. When comments are sent in by facsimile (fax), they should be faxed to (202) 395-4915. Electronic mail comments may be submitted via Internet to CONLEY_S@A1.EOP.GOV. Please include the full body of electronic mail comments in the text of the message and not as an attachment. Please include the name, title, organization, postal address, and E-mail address in the text of the message.

To facilitate conversion of the comments into a computer format for analysis, it would be helpful if respondents send a copy of comments on either a 3.5 or 5.25 inch diskette in either WordPerfect 5.1, WordPerfect for Windows, or ASCII format. When a diskette cannot be provided, it would be helpful if the comments were printed in pica or an equivalent 10 characters per inch type on white paper so the document can be easily scanned into a computer format.

A copy of the current Circulars A-128 and A-133 may be obtained from the OMB fax information line, 202-395-9068, document numbers 1128 and 1133, respectively, or by writing or calling the Office of Administration, Publications Office, Room 2200, New Executive Office Building, Washington, DC 20503, telephone (202) 395-7332. Also, Circular A-133 and this proposed revision are available on the OMB home page on the internet which is currently located at http://www.whitehouse.gov/OMB.

FOR FURTHER INFORMATION CONTACT: Sheila O. Conley, Office of Federal Financial Management (OFFM), Financial Standards and Reporting Branch, OMB telephone (202) 395-3993 and fax (202) 395-4915. A redlined/strikeout version showing the detailed changes between the recently revised OMB Circular A-133 and the further proposed revision is available by written request to OFFM.

SUPPLEMENTARY INFORMATION: Pursuant to the Single Audit Act Amendments of 1996 (P.L. 104-156), the proposed revision requires non-Federal entities (States, local governments, and non-profit organizations) expending $300,000 or more in a year in Federal awards to have an audit, sets forth requirements for both the performance and reporting of this audit, and provides for follow-up on audit findings. Each non-Federal entity is responsible for having its audit conducted and ensuring that subrecipients expending $300,000 or more in a year meet the audit requirements of Office of Management and Budget (OMB) Circular A-133 which will be renamed "Audits of States, Local Governments, and Non-Profit Organizations."

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

The Single Audit Act Amendments of 1996, signed by the President on July 5, 1996, called for uniform requirements for audits of all types of organizations. As a consequence, OMB proposes to co-locate requirements for States, local governments, and non-profit organizations in Circular A-133, which currently addresses only non-profit organizations. At the same time, OMB would rescind Circular A-128, "Audits of State and Local Governments," which currently specifies audit requirements for States and local governments.

The April 1996 revision of Circular A-133 includes the following major changes which are not reflected in Circular A-128 issued April 12, 1985:

(1) increased the threshold that triggers an audit requirement under the Circular from $25,000 to $300,000 (___.200(a));

(2) prescribed a risk-based approach to determine major programs (___.520);

(3) required a minimum major program coverage of 50 percent (25 percent for low-risk auditees) of Federal awards expended (___.520(f));

(4) clarified the required level of internal control testing (___.500(c));

(5) provided minimum reporting requirements for the schedule of expenditures of Federal awards (___.310(b));

(6) required auditees to prepare a summary schedule of prior audit findings (___.315) and a data collection form (___.320(b));

(7) required auditors to report audit findings and questioned costs in a single schedule, including a summary of the auditor's results (___.505(a)(4));

(8) prescribed criteria for reporting audit findings and questioned costs (___.510);

(9) modified the method of determining the cognizant agency for audit (___.400(a));

(10) after a two-year transition period, precluded the same auditor from preparing the indirect cost proposal or cost allocation plan when indirect costs exceeded $1 million in the prior year (___.305(b));

(11) after a two-year transition period, shortened the due date for submitting reports from 13 months to nine months (___.320(a));

(12) streamlined the report submission process and expanded the role of the Federal clearinghouse (___.320);

(13) changed the basis for determining the amount of Federal awards administered by the non-Federal entity from receipts to expenditures (___.200);

(14) provided guidance for conducting program-specific audits (___.235); and,

(15) reorganized the Circular into a "common rule" format to facilitate codification by Federal agencies and improve the presentation of information included in the Circular.

Significant Proposed Revisions to Circular A-133

The most significant difference between this proposed revision and the recently revised Circular A-133 is the inclusion of States and local governments. This proposed revision also includes changes relating to the effective date (31 U.S.C. 7507), the provisions permitting biennial audits in limited circumstances (31 U.S.C. 7502(b)(2) and (3)), and the allowability of audit costs (31 U.S.C. 7505(b)(1)(A)(ii)) to conform the April 1996 revision of Circular A-133 to the 1996 Amendments. Aside from these changes, the 1996 Amendments do not require other substantive changes to Circular A-133.

The following discussion is provided to describe the changes needed to conform this proposed revision with the 1996 Amendments, solicit input from interested parties, and summarize some of the other changes included in this proposed revision. The readers' attention is directed to section D. Proposed Requirement for the Auditor to Prepare and Sign the Data Collection Form Required by Circular A-133, because it is particularly important to OMB that commenters provide views on the matters discussed in this section.

A. Effective Dates

The 1996 Amendments apply to any non-Federal entity with respect to any of its fiscal years which begin after June 30, 1996 (31 U.S.C. 7507). Changes are proposed in paragraph 10 of the Circular, "Effective Dates," to reflect the effective dates mandated in the 1996 Amendments.

Inquirers asked which circular applies for biennial audits when the biennial period includes time before and after the effective date of the proposed revision. The 1996 Amendments do not specifically address the effective dates for biennial audits. OMB interprets the 1996 Amendments to be effective for any biennial periods which begin after June 30, 1996. As with annual audits, the prior circulars are in effect until this proposed revision is effective. Therefore, a non-Federal entity which elects a biennial audit and has a biennial period beginning on or before June 30, 1996, should apply the provisions of Circular A-128 issued April 12, 1985 (for a State or local government) or Circular A-133 issued March 8, 1990 (for a non-profit organization), as applicable. The requirements of this proposed revision apply to any biennial periods beginning after June 30, 1996.

Circular A-133 shortened the report due date from 13 months to nine months after the end of the audit period (___.320(a)). However, the 1996 Amendments (31 U.S.C. 7502(h)) provide for a transition period of at least two years during which the report due date would remain at 13 months. The proposed revision at ___.320(a) incorporates this transition period such that the due date of nine months after the end of the audit period is not effective until audits of fiscal years beginning after June 30, 1998. Cognizant or oversight agencies may still provide extensions.

Paragraphs 6 and 10 of the April 1996 revision of Circular A-133 instructed Federal agencies to adopt the standards set forth in the Circular in codified regulations not later than November 30, 1996. As a result of the 1996 Amendments, the April 1996 revision of Circular A-133, which applies only to non-profit organizations, will not become operable unless this proposed revision is not finalized by June 30, 1997 (i.e., OMB expects that Circular A-133 issued March 8, 1990, will apply to non-profit organizations and Circular A-128 issued April 12, 1985, will apply to States and local governments prior to the effective dates of the 1996 Amendments, and this proposed revision will apply to these types of organizations when the 1996 Amendments become effective). Therefore, Federal agencies may forgo the requirement under the April 1996 revision of Circular A-133 to adopt the standards set forth in the Circular in codified regulations not later than November 30, 1996. However, the 1996 Amendments (31 U.S.C. 7505(a)) require each Federal agency to promulgate such revisions to its regulations as may be necessary to conform such regulations to the requirements of the 1996 Amendments and OMB implementing guidance. Accordingly, the proposed revision includes a provision in paragraphs 6 and 10 of the Circular whereby Federal agencies shall adopt the standards set forth in the Circular in codified regulations not later than six months after publication of the final revision in the Federal Register.

B. Biennial Audits in Limited Circumstances

Changes are proposed at ___.220 to permit biennial audits in limited circumstances in accordance with the 1996 Amendments. The provisions in the 1996 Amendments which allow non-Federal entities to elect a biennial audit are very specific (31 U.S.C. 7502(b)(2)and (3)). For a State or local government to qualify for a biennial audit election, there must be a requirement (as opposed to authorization) in a State's constitution or State or local law which was in effect on January 1, 1987. Also, this requirement must still be in effect. Only non-profit organizations that had biennial audits for all biennial periods ending between July 1, 1992, and January 1, 1995, may elect a biennial audit. OMB expects that very few States, local governments, or non-profit organizations meet this criteria. Nonetheless, all auditees are encouraged to have annual audits which provide increased accountability.

The April 1996 revision of Circular A-133 includes a provision whereby a Federal agency or pass-through agency may allow a non-profit organization that elects a program-specific audit under ___.200(c) to perform the audit every two years. This provision was removed from the proposed revision to conform with the biennial audit requirements specified in the 1996 Amendments.

Changes are also proposed at ___.520 and ___.530(a) to the major program determination process and the criteria for low-risk auditee for situations which are unique to single audits which are performed on a biennial basis.

C. Audit Costs Prohibited for Subrecipients with Federal Awards Expended of Less Than $300,000 Annually

The 1996 Amendments discourage pass-through entities from requiring single audits of subrecipients with total Federal awards expended of less than $300,000 annually. This is done by prohibiting charges to Federal awards for audit costs under these circumstances (31 U.S.C. 7505(b)(1)(A)(ii)). However, pass-through entities are not prohibited from charging subrecipient monitoring costs, provided those procedures are of lesser scope than a single audit.

For example, if a pass-through entity requires a subrecipient which expends less than $300,000 annually in total Federal awards to have a single audit conducted in accordance with the 1996 Amendments, this audit must be paid for with other than Federal funds. However, the 1996 Amendments do not prohibit charging Federal awards for limited scope audits and other subrecipient monitoring procedures.

Pass-through entities would need to make appropriate changes in their agreements with subrecipients to reflect that audits will no longer be required for non-Federal entities with total Federal awards expended of less than $300,000 annually. Pass-through entities will need to review their overall subrecipient monitoring process, and decide what, if any, additional monitoring procedures may be necessary to ensure subrecipient compliance. Monitoring procedures, which include limited scope audits, can be more targeted and less costly than a full Circular A-133 audit. Subrecipient monitoring procedures include: on-site visits, reviews of documentation supporting requests for reimbursement, limited scope audits of specific compliance areas (e.g., eligibility determinations made by subrecipients), and financial statement audits in accordance with generally accepted government auditing standards. A pass-through entity should consider the cost-effectiveness of monitoring procedures compared to the relative size and complexity of the Federal awards administered by subrecipients in determining the appropriateness of monitoring procedures.

D. Proposed Requirement for the Auditor to Prepare and Sign the Data Collection Form Required by Circular A-133

To streamline the distribution of audit reports and improve the governmentwide collection and analysis of single audit results, Circular A-133 provides for a machine-readable form (___.320(b)) to be prepared at the completion of each audit and submitted to the Federal clearinghouse designated by OMB and pass-through entities. The data collection form will provide key information about the non-Federal entity, the Federal awards it administers, and the audit results. It will serve as the basis for developing a governmentwide database on covered Federal awards administered by non-Federal entities. The April 1996 revision of Circular A-133 provides for a data collection form to be submitted to the Federal clearinghouse and each pass-through entity in lieu of sending the full single audit reporting package when there are no audit findings.

The April 1996 revision of Circular A-133 requires the auditee's management to prepare the data collection form. Many auditees are concerned about the additional burden this reporting requirement would place on them. A more efficient and effective method could be to have the auditor prepare the form and sign it as preparer. OMB believes this would not significantly increase audit costs, since most of the information requested on the form will be obtained directly from the schedule of expenditures of Federal awards and the auditor's reports. Since the auditor is most knowledgeable about the audit results, OMB expects that it will be efficient for the auditor to simply prepare the form at the completion of the audit. Also, OMB believes that the incremental legal exposure faced by the auditor as a result of signing the form can be minimized by restricting its use to the Federal clearinghouse and pass-through entities for the sole purpose of data collection and so stating on the form. Under this method, the auditee would continue to be required to provide assurance to the Federal Government and pass-through entities that the auditee engaged an auditor to conduct an audit in accordance with the Circular, that the audit was completed, and that the information included on the form is accurate.

OMB believes that the auditor's association with the data collection form will add value to its usefulness, reduce the need for Federal awarding agencies and pass-through entities to perform unnecessary verification procedures, improve the accuracy of the governmentwide database, streamline the single audit report submission process, and reduce burden on auditees.

Therefore, OMB is considering adding a provision that requires the auditor to prepare the data collection form and sign it. If this change is made, OMB will work with the auditing profession and other interested parties to develop any necessary revisions to the form. Respondents are encouraged to comment on this change, including: whether the auditor should prepare and sign the data collection form; what would be the estimated cost of the auditor's performing this service; whether it would be beneficial to auditees, Federal agencies, and pass-through entities; and, whether there are concerns over litigation exposure.

The name of the certification form required under ___.320(b) of the April 1996 revision of Circular A-133 is changed to "Data Collection Form" in the proposed revision to more appropriately characterize the nature of the information request. This name change also affects ___.235(c)(2), ___.235(c)(3), ___.320(c), ___.320(e)(i), and ___.320(h).

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

Changes are proposed at ___.500(c), ___.500(d), ___.505(b), ___.505(c), and ___.510(a) to clarify the auditor's responsibility for testing and reporting on the allowability of costs charged to cost pools: (1) used to support an indirect cost rate, or (2) allocated through a State/local-wide central service cost allocation plan (as fully described in Appendix C of Circular A-87, "Cost Principles for State, Local and Indian Tribal Governments," issued May 4, 1995 (60 FR 26484), and hereinafter referred to as a "cost allocation plan"). The proposed language is added to address the timing of costs charged to cost pools used to support an indirect cost rate or allocated through a cost allocation plan. Indirect cost rates are based on costs incurred in a base period and applied prospectively. Costs allocated through a cost allocation plan are based on the actual costs incurred in two previous years.

Because it would not be practical to perform such tests retroactively, the auditor is expected to perform tests of costs charged to cost pools during the period that the actual costs were incurred, rather than during the period in which the rate was applied or in which the costs were allocated. For example, if the actual costs charged to cost pools for 1997 form the basis for the indirect cost proposal and the final negotiated indirect cost rate that will be applied in 1998 and 1999, then the auditor should test actual costs charged to cost pools during 1997 as part of the 1997 audit, since 1997 is the base year. The auditor would not be expected to test such costs as part of the 1998 and 1999 audits.

F. Pilot Project Authority

The 1996 Amendments (31 U.S.C. 7502(j)) authorize OMB, in consultation with the Chair and Ranking Minority Member of the Committee on Governmental Affairs of the Senate and the Chair and Ranking Minority Member of the Committee on Government Reform and Oversight of the House of Representatives, to approve pilot projects to test alternative methods of achieving the purposes of the 1996 Amendments. Such pilot projects, which would be voluntary undertakings by non-Federal entities, would provide a means of assessing new ways of testing and reporting on Federal awards.

Suggestions from auditees for pilot projects should be submitted first to Federal funding agencies. If a Federal agency concludes that a suggested pilot project has merit, the Federal agency may present the suggestion to OMB for consideration. OMB will consult with the appropriate members of the House and Senate prior to authorizing any pilot projects under the 1996 Amendments.

G. Other Changes to Comply with the 1996 Amendments

The revision proposes the following other changes to comply with the 1996 Amendments and include States and local governments under Circular A-133.

(1) Retitles the Circular to include States and local governments. States and local governments were also added to paragraph 1 of the Circular.

(2) Deletes the references to Circular A-128 from paragraph 4 of the Circular and sections ___.105(x)(2) and ___.400(d)(4) of the attachment.

(3) Changes definitions of "Federal award" (___.105(j)), "Federal financial assistance" (___.105(l)), "Federal program" (___.105(m)), "internal control" (___.105(q)), "internal control pertaining to the compliance requirements over Federal programs" (___.105(r)), "pass-through entity" (___.105(aa)), and "subrecipient" (___.105(ii)) to conform with the definitions included in the 1996 Amendments.

(4) Adds definitions for the terms "Indian tribe" (___.105(p)), "local government" (___.105(t)), and "State" (___.105(gg)), which are defined terms in the 1996 Amendments.

(5) Adds definitions for the term "non-Federal entity" (___.105(w)) and replaces the term "non-profit organization" with "non-Federal entity" in paragraphs 4, 6, and 10 of the Circular and sections ___.100, ___.105(a), ___.105(s), ___.105(aa), ___.105(dd), ___.105(ee), ___.200(d), ___.205(a), and ___.205(h) of the attachment.

(6) Replaces the term "non-profit organization" with "subrecipient" in ___.205(i).

(7) Adds "full" as a modifier of cost in ___.215(b).

(8) Changes title of schedule in ___.235(b)(2) to "schedule of expenditures of Federal awards."

(9) Changes title of "central clearinghouse" to "Federal clearinghouse" in ___.235(c)(2), ___.235(c)(3), ___.300(e), ___.315(b)(4)(i), ___.320(b), ___.320(d), ___.320(g), ___.320(h), ___.320(i), and ___.320(j).

(10) Adds reference to Grants Management Common Rule in ___.305(a).

(11) Drops "non-profit" as a modifier to pass-through entity and subrecipients in ___.400(d) and ___.400(d)(4), respectively.

(12) Adds a provision to cover a series of audits in ___.500(a).

(13) Changes the schedule of findings and questioned costs (___.505(d)) to include information from the audit of the financial statements performed in accordance with generally accepted government auditing standards. Consistency changes were made to ___.235(b)(4)(iv) for program-specific audits.

(14) Drops from ___.520(b)(3) the reference to insurance programs because insurance programs are not specifically cited in the 1996 Amendments.

H. Other Changes

The revision proposes the following detailed changes.

(1) Adds to ___.235(c)(3) a requirement that one copy of the data collection form prepared in accordance with ___.320(b) be submitted to each pass-through entity.

(2) Adds to ___.320(b) a requirement that the auditee identify the cognizant or oversight agency for audit on the data collection form.

(3) Changes the requirement in ___.400(a)(4) for the cognizant agency for audit to report to other Federal agencies any direct reporting of irregularities and illegal acts.

(4) Simplifies the summary of the auditor's results in ___.505 by removing the requirement for a statement concerning the auditee's ability to continue as a going concern and consolidating the reporting of audit findings which were not reportable conditions or material non-compliance.

(5) Adds to the definition of audit findings reported (___.510(a)(4)) known questioned costs greater than $10,000 for Federal programs which are not audited as major programs. Consistent with this, adds in ___.520(c) a reference to this requirement.

(6) Removes from ___.510(a)(6) the definition of fraud because this term is the same as in professional auditing standards.

(7) Adds in ___.520(d) and ___.520(e) an option to allow an auditor to minimize the risk assessment required for Type B programs under certain circumstances.

(8) Adds in ___.520(e) a statement to encourage auditors to use an approach in identifying high-risk Type B program which provides an opportunity for different high-risk Type B programs to be audited as major over a period of time.

I. Changes for Clarity

The revision proposes the following changes for clarity.

(1) Changes the title of the Circular to use the term "non-profit organizations" in lieu of the phrase "institutions of higher education and other non-profit institutions" since non-profit organization is the defined term (___.105(x)) which includes non-profit institutions of higher education.

(2) Changes the definitions of cluster of programs (___.105(e)) and Federal programs (___.105(m)) to clarify that research and development (R&D) and student financial aid (SFA) are types of clusters of programs. Based upon this change, the phrase "category of programs" was replaced with "cluster of programs" in ___.105(m), ___.310(b)(6), ___.320(b). Moves discussion of State governments combining funding from definition of Federal programs (___.105(m)) to definition of cluster of programs (___.105(e)). Adds to ___.105(e) emphasis that when a State designates a cluster of programs, the State must identify the Federal awards and advise subrecipients of the applicable compliance requirements.

(3) Replaces the reference to "Federal expenditures" with "Federal awards expended" in ___.200(d), ___.310(b)(2), ___.310(b)(6), ___.310(b)(7), ___.520(b)(1), ___.520(d)(2), ___.520(f), ___.525(d)(4), ___.530(d)(3).

(4) For consistency with the format of the effective date of the Circular, changes the date format from fiscal years "ending" to fiscal years "beginning" in ___.305(b).

(5) Clarifies in ___.315(b) that follow-up on prior audit findings is concerned with those relative to Federal awards as opposed to those relative to the financial statements of the entity.

(6) Clarifies in ___.500(a) that the entity's financial statements and schedule of expenditures of Federal awards must be for the same fiscal year.

(7) Replaces in ___.500(c) the term "achieve" with "support."

(8) Clarifies in ___.510(a)(2) that this reporting only relates to major programs and removes discussion relating to auditor conclusions which is included in generally accepted government auditing standards.

(9) Clarifies in ___.510(a)(5) and ___.510(a)(6) that the reference to the schedule of findings and questioned costs is to the part of the schedule that deals with Federal awards.

(10) Changes the term "50 percent rule" to "percentage of coverage rule" in ___.520(d)(2), ___.520(e)(3), ___.520(f), ___.520(i).

(11) Clarifies in ___.530(d) that this provision applies for either of the preceding two years in which the program was classified as a Type A program.

Information Collection Activity Under OMB Review

In accordance with the Paperwork Reduction Act (44 U.S.C. Chapter 35 et seq.), this notice requests comment on the following two proposed information collections contained in this proposed revision. The information collection request involves two types of entities: (1) reports from auditors to auditees concerning audit results, audit findings, and questioned costs; and, (2) reports from auditees to the Federal Government providing information about the auditees, the awards they administer, and the audit results. The proposed revision specifies what auditors are required to report to auditees, under ___.235(b)(4), for program-specific audits, and ___.505, "Audit Reporting," for single audits. The proposed revision also specifies what auditees are required to report to the Federal clearinghouse designated by OMB and pass-through entities, if applicable, under ___.235(c), for program-specific audits, and ___.320, "Report Submission," for single audits.

The information collection requests included in this proposal would result in a decrease in overall reporting burden. Although the reporting burden per audit will increase under this proposal from 26 to 34 hours (described in the following paragraphs), fewer entities will be subject to the reporting requirements as a result of the proposal to increase the threshold that triggers an audit requirement under the Circular from $25,000 to $300,000. Based on available information, OMB estimates that approximately 25,000 non-Federal entities would be subject to the information collection requirement included in this proposal; whereas, approximately 35,000 non-Federal entities are subject to the current requirements under Circulars A-128 and A-133. The overall reporting burden currently approximates 910,000 hours (35,000 non-Federal entities at 26 hours per audit). Under the proposal, the overall reporting burden would be approximately 850,000 hours (25,000 non-Federal entities at 34 hours per audit), or 60,000 hours less than the current reporting burden. In addition, as more fully discussed below, there is an opportunity to reduce further the overall reporting burden under the proposal from 850,000 to 800,000 hours by having auditors, rather than auditees, prepare the data collection form discussed below.

Congress intended to improve the contents of single audit reports to make them more useful by enacting the 1996 Amendments. OMB believes that the increase in reporting burden per audit is warranted because several changes included in the proposed revision would improve the usefulness and effectiveness of single audit reporting with respect to information provided by both auditors and auditees.

OMB estimates that reporting by auditors currently takes approximately 10 hours on the average per audit under Circulars A-128 and A-133, and will take 14 hours under the proposal. The estimated increase of 4 hours of reporting burden per audit on auditors is due primarily to a provision in the 1996 Amendments (31 U.S.C. 7502(g)(2)) which requires the auditor, for the first time, to prepare a summary of audit results. In its report on the 1996 Amendments, the Committee on Government Reform and Oversight stated that "the complexity of the reports makes it difficult for the average reader to understand what has been audited and reported ... A summary of the audit results would highlight important information and thus enable users to quickly discern the overall results of an audit" (H.R. Report 104-607, page 18).

OMB estimates that reporting by auditees currently takes approximately 16 hours on the average per audit under Circulars A-128 and A-133, and will take 20 hours under the proposal. The estimated increase of 4 hours of reporting burden per audit on auditees is due primarily to a proposed requirement whereby management would prepare two new documents to improve the usefulness of single audit reports.

The first of these reports is a summary schedule of prior audit findings which will provide the current status of previously reported audit findings until such findings are corrected. This information, which is important to Federal funding agencies and pass-through entities, is currently required under Circulars A-128 and A-133 but it is not consistently provided in single audit reports. As a result, Federal funding agencies and pass-through entities frequently request this type of information long after a finding is reported, which results in additional burden on Federal agencies, auditees, and auditors. The proposed requirements provide additional guidance to auditees on where and how to present information regarding prior audit findings. While additional time may be required up-front for certain auditees to prepare the summary schedule of prior audit findings, the reporting burden for such entities should be offset by the elimination of the inefficiencies caused by the current practice of having to retrieve and provide information after-the-fact on old audit findings.

The second report management would be required to prepare is the "Data Collection Form" prescribed in ___.320(b) of the proposed revision and discussed previously in Section D (Proposed Requirement for the Auditor to Prepare and Sign the Data Collection Form Required by Circular A-133). The data collection form will facilitate streamlining the report distribution process and improve the governmentwide collection and analysis of single audit results.

OMB believes that the overall reporting burden under the proposed revision could be further reduced by having the auditor prepare the data collection form. Specifically, OMB estimates that if auditors, rather than auditees, prepare the data collection form then the estimate of reporting burden on auditors would increase by two hours (that is, from 14 hours to 16 hours), and the estimate of reporting burden on auditees would decrease by four hours (that is, from 20 hours to 16 hours) per audit under the proposal. This would result in a net decrease of 2 hours per audit, or 50,000 hours in overall reporting burden (25,000 non-Federal entities at 2 hours savings per audit). As a result of having auditors, rather than auditees, prepare the data collection form, overall reporting burden could be reduced from 850,000 to 800,000 hours.

Comments are invited on: (a) whether the proposed information collection is necessary for the proper performance of the functions of the agencies, including whether the information has practical utility; (b) the accuracy of the estimate of the burden of the collection of the information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden related to the collection of information on respondents, including the use of automated collection techniques or other forms of information technology.

G. Edward DeSeve,
Controller.


  1. OMB proposes to rescind Circular A-128 upon issuance of a revised Circular A-133 that covers States and local governments.

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


Circular No. A-133
Revised

TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS

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

1. Purpose. This Circular is issued pursuant to the Single Audit Act of 1984, P.L. 98-502, and the Single Audit Act Amendments of 1996, P.L. 104-156. It sets forth standards for obtaining consistency and uniformity among Federal agencies for the audit of States, local governments, and non-profit organizations expending Federal awards.

2. Authority. Circular A-133 is issued under the authority of sections 503, 1111, and 7501 et seq. of title 31, United States Code, and Executive Orders 8248 and 11541.

3. Rescission and Supersession. This Circular rescinds Circular A-128, "Audits of State and Local Governments," issued April 12, 1985, and supersedes the prior Circular A-133, "Audits of Institutions of Higher Education and Other Non-Profit Institutions," issued April 22, 1996. For effective dates, see paragraph 10.

4. Policy. Except as provided herein, the standards set forth in this Circular shall be applied by all Federal agencies. If any statute specifically prescribes policies or specific requirements that differ from the standards provided herein, the provisions of the statute shall govern.

Federal agencies shall apply the provisions of the sections of this Circular to non-Federal entities, whether they are recipients expending Federal awards received directly from Federal awarding agencies, or are subrecipients expending Federal awards received from a pass-through entity (a recipient or another subrecipient).

This Circular does not apply to non-U.S. based entities expending Federal awards received either directly as a recipient or indirectly as a subrecipient.

5. Definitions. The definitions of key terms used in this Circular are contained in ___.105 in the Attachment to this Circular.

6. Required Action. The specific requirements and responsibilities of Federal agencies and non-Federal entities are set forth in the Attachment to this Circular. Federal agencies making awards to non-Federal entities, either directly or indirectly, shall adopt the language in the Circular in codified regulations as provided in Section 10 (below), unless different provisions are required by Federal statute or are approved by OMB.

7. OMB Responsibilities. OMB will review Federal agency regulations and implementation of this Circular, and will provide interpretations of policy requirements and assistance to ensure uniform, effective and efficient implementation.

8. Information Contact. Further information concerning Circular A-133 may be obtained by contacting the Financial Standards and Reporting Branch, Office of Federal Financial Management, Office of Management and Budget, Washington, DC 20503, telephone (202) 395-3993.

9. Review Date. This Circular will have a policy review three years from the date of issuance.

10. Effective Dates. The standards set forth in ___.400 of the Attachment to this Circular, which apply directly to Federal agencies, shall be effective July 1, 1996, and shall apply to audits of fiscal years beginning after June 30, 1996.

The standards set forth in this Circular that Federal agencies are to apply to non-Federal entities shall be adopted by Federal agencies in codified regulations not later than six months after publication of the final revision in the Federal Register, so that they will apply to audits of fiscal years beginning after June 30, 1996, with the exception that ___.305(b) of the Attachment applies to audits of fiscal years beginning after June 30, 1998. In the interim period, until the standards in this Circular are adopted and become applicable, the audit provisions of Circular A-128 issued April 12, 1985, and Circular A-133, issued April 22, 1996, shall continue in effect.

Franklin D. Raines
Director

Attachment


PART__ --AUDITS OF STATES, LOCAL GOVERNMENTS, AND NON-PROFIT ORGANIZATIONS

Subpart A--General
__.100 Purpose.
__.105 Definitions.
Subpart B--Audits
__.200 Audit requirements.
__.205 Basis for determining Federal awards expended.
__.210 Subrecipient and vendor determinations.
__.215 Relation to other audit requirements.
__.220 Frequency of audits.
__.225 Sanctions.
__.230 Audit costs.
__.235 Program-specific audits.
Subpart C--Auditees
__.300 Auditee responsibilities.
__.305 Auditor selection.
__.310 Financial statements.
__.315 Audit findings follow-up.
__.320 Report submission.
Subpart D--Federal Agencies and Pass-Through Entities
__.400 Responsibilities.
__.405 Management decision.
Subpart E--Auditors
__.500 Scope of audit.
__.505 Audit reporting.
__.510 Audit findings.
__.515 Audit working papers.
__.520 Major program determination.
__.525 Criteria for Federal program risk.
__.530 Criteria for a low-risk auditee.

Subpart A--General
___.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.

___.105 Definitions.

(a) Auditee means any non-Federal entity that expends Federal awards which must be audited under this part.

(b) Auditor means an auditor, that is a public accountant or a Federal, State or local government audit organization, which meets the general standards specified in generally accepted government auditing standards (GAGAS). The term auditor does not include internal auditors of non-profit organizations.

(c) Audit finding means deficiencies which the auditor is required by ___.510(a) to report in the schedule of findings and questioned costs.

(d) CFDA number means the number assigned to a Federal program in the Catalog of Federal Domestic Assistance (CFDA).

(e) Cluster of programs means a grouping of closely related programs that share common compliance requirements. The types of clusters of programs are research and development (R&D), student financial aid (SFA), and other clusters. "Other clusters" are as defined by the Office of Management and Budget (OMB) in the compliance supplements or as designated by a State for Federal awards the State provides to its subrecipients that meet the definition of a cluster of programs. When designating an "other cluster," a State shall identify the Federal awards included in the cluster and advise the subrecipients of compliance requirements applicable to the cluster, consistent with ___.400(d)(1) and ___.400(d)(2), respectively. A cluster of programs shall be considered as one program for determining major programs, as described in ___.520, and, with the exception of R&D as described in ___.200(c), whether a program-specific audit may be elected.

(f) Cognizant agency for audit means the Federal agency designated to carry out the responsibilities described in ___.400(a).

(g) Compliance supplements refers to the Compliance Supplement for Audits of Institutions of Higher Learning and Other Non-Profit Institutions and the Compliance Supplement for Single Audits of State and Local Governments or such documents as OMB or its designee may issue to replace them. These documents are available from the Government Printing Office, Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954, telephone (202) 512-1800.

(h) Corrective action means action taken by the auditee that:

(i) Federal agency has the same meaning as the term agency in Section 551(1) of title 5, United States Code.

(j) 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.

(k) Federal awarding agency means the Federal agency that provides an award directly to the recipient.

(l) Federal financial assistance means assistance that non-Federal entities receive or administer in the form of grants, loans, loan guarantees, property (including donated surplus property), cooperative agreements, interest subsidies, insurance, food commodities, direct appropriations, and other assistance, but does not include amounts received as reimbursement for services rendered to individuals as described in ___.205(h) and ___.205(i).

(m) Federal program means:

(n) GAGAS means generally accepted government auditing standards issued by the Comptroller General of the United States, which are applicable to financial audits.

(o) Generally accepted accounting principles has the meaning specified in generally accepted auditing standards issued by the American Institute of Certified Public Accountants (AICPA).

(p) 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.

(q) 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:

(r) 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:

(s) Loan means a Federal loan or loan guarantee received or administered by a non-Federal entity.

(t) 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.

(u) Major program means a Federal program determined by the auditor to be a major program in accordance with ___.520 or a program identified as a major program by a Federal agency or pass-through entity in accordance with ___.215(c).

(v) 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.

(w) Non-Federal entity means a State, local government, or non-profit organization.

(x) Non-profit organization means:

(y) OMB means the Executive Office of the President, Office of Management and Budget.

(z) 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 ___.400(b).

(aa) Pass-through entity means a non-Federal entity that provides a Federal award to a subrecipient to carry out a Federal program.

(bb) Program-specific audit means an audit of one Federal program as provided for in ___.200(c) and ___.235.

(cc) Questioned cost means a cost that is questioned by the auditor because of an audit finding:

(dd) Recipient means a non-Federal entity that expends Federal awards received directly from a Federal awarding agency to carry out a Federal program.

(ee) 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.

(ff) Single audit means an audit which includes both the entity's financial statements and the Federal awards as described in ___.500.

(gg) State means any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and the Trust Territory of the Pacific Islands, any instrumentality thereof, any multi-State, regional, or interstate entity which has governmental functions, and any Indian tribe as defined in ___.105(p).

(hh) 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.

(ii) 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 ___.210.

(jj) Types of compliance requirements refers to the types of compliance requirements listed in the compliance supplements. Examples include cash management, Federal financial reporting, allowable costs/cost principles, types of services allowed or unallowed, eligibility, and matching.

(kk) 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 ___.210.

Subpart B--Audits
___.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 ___.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 ___.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 ___.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 ___.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.

___.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:

(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.

___.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:

(c) Payment for goods and services. Characteristics indicative of a payment for goods and services received by a vendor are when the organization:

(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.

___.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 ___.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.

___.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.

___.225 Sanctions.

No audit costs may be charged to Federal awards when audits required by this part have not been made or have been made but not in accordance with this part. In cases of continued inability or unwillingness to have an audit conducted in accordance with this part, Federal agencies and pass-through entities shall take appropriate action using sanctions such as:

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

(b) Withholding or disallowing overhead costs;

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

(d) Terminating the Federal award.

___.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:

___.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.

(c) Report submission for program-specific audits.

(d) Other sections of this part may apply. Program-specific audits are subject to ___.100 through ___.215(b), ___.220 through ___.230, ___.300 through ___.305, ___.315, ___.320(f) through ___.320(j), ___.400 through ___.405, ___.510 through ___.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
___.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 ___.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 ___.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 ___.315(b) and ___.315(c), respectively.

___.305 Auditor selection.

(a) Auditor procurement. In arranging for audit services, auditees shall follow the procurement standards prescribed by the Grants Management Common Rule (GMCR) published March 11, 1988 (53 FR 8034) and amended April 19, 1995 (60 FR 19638), Circular A-110, "Uniform Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals and Other Non-Profit Organizations," or the FAR (48 CFR part 42), as applicable. Whenever possible, auditees shall make positive efforts to utilize small businesses, minority-owned firms, and women's business enterprises, in procuring audit services as stated in GMCR, OMB Circular A-110, or the FAR (48 CFR part 42), as applicable. In requesting proposals for audit services, the objectives and scope of the audit should be made clear. Factors to be considered in evaluating each proposal for audit services include the responsiveness to the request for proposal, relevant experience, availability of staff with professional qualifications and technical abilities, the results of external quality control reviews, and price.

(b) Restriction on auditor preparing indirect cost proposals. An auditor who prepares the indirect cost proposal or cost allocation plan may not also be selected to perform the audit required by this part when the indirect costs recovered by the auditee during the prior year exceeded $1 million. This restriction applies to the base year used in the preparation of the indirect cost proposal or cost allocation plan and any subsequent years in which the resulting indirect cost agreement or cost allocation plan is used to recover costs. To minimize any disruption in existing contracts for audit services, this paragraph applies to audits of fiscal years beginning after June 30, 1998.

(c) Use of Federal auditors. Federal auditors may perform all or part of the work required under this part if they comply fully with the requirements of this part.

___.310 Financial statements.

(a) Financial statements. The auditee shall prepare financial statements that reflect its financial position, results of operations, and, where appropriate, cash flows for the fiscal year audited. The financial statements shall be for the same organizational unit and fiscal year that is chosen to meet the requirements of this part.

(b) Schedule of expenditures of Federal awards. The auditee shall also prepare a schedule of expenditures of Federal awards for the period covered by the auditee's financial statements. While not required, it is appropriate for the auditee to provide information requested to make the schedule easier to use by Federal awarding agencies and pass-through entities. For example, when a Federal program has multiple award years, the auditee may list the amount of each award year separately. At a minimum, the schedule shall:

___.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 ___.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.

(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.

___.320 Report submission.

(a) General. The audit shall be completed and the reporting package described in paragraph (c) of this section submitted within nine months after the end of the audit period, unless a longer period is agreed to in advance by the cognizant or oversight agency for audit. (However, for fiscal years beginning on or before June 30, 1998, auditees shall have 13 months after the end of the audit period to complete the audit and submit the reporting package.) The reporting package shall be submitted within 30 days after issuance of the auditor's report(s) to the auditee. Unless restricted by law or regulation, the auditee shall make copies available for public inspection.

(b) Data Collection. The auditee shall complete a data collection form which states whether the audit was completed in accordance with this part and provides information about the auditee, its Federal programs, and the results of the audit. The form shall be approved by OMB, available from the Federal clearinghouse designated by OMB, include data elements similar to those presented in this paragraph, and use a machine-readable format. The auditee's chief executive officer or chief financial officer shall sign a statement that the information on the form is accurate and complete as follows:


Certificate of Audit

This is to certify that, to the best of my knowledge and belief, the [specify name of the auditee] has: (1) engaged an auditor to perform an audit in accordance with the provisions of OMB Circular A-133 for the [specify number] months ended [specify date]; (2) the auditor has completed such audit and presented a signed audit report which states that the audit was conducted in accordance with the provisions of the Circular; and, (3) the information on the attached form is accurate and complete and reflects the results of this audit, as presented in the auditor's report. I declare that the foregoing is true and correct.

Attachment


Data Collection Form

  1. The type of report the auditor issued on the financial statements of the auditee (i.e., unqualified opinion, qualified opinion, adverse opinion, or disclaimer of opinion).

  2. A yes or no statement as to whether the auditor's report on the financial statements indicated that the auditor has substantial doubt about the auditee's ability to continue as a going concern.

  3. The type of report the auditor issued on compliance for major programs (i.e., unqualified opinion, qualified opinion, adverse opinion, or disclaimer of opinion).

  4. A list of the Federal awarding agencies and pass-through entities which will receive a copy of the reporting package pursuant to ___.320(d)(2) and ___.320(e)(2), respectively, of OMB Circular A-133. An explanation should be provided if this list is different from the communication the auditor provides to the auditee under ___.500(f) of OMB Circular A-133.

  5. A yes or no statement as to whether the auditee qualified as a low-risk auditee under ___.530 of OMB Circular A-133.

  6. The dollar threshold used to distinguish between Type A and Type B programs as defined in ___.520(b) of OMB Circular A-133.

  7. The Catalog of Federal Domestic Assistance (CFDA) number for each Federal program, as applicable.

  8. The name of each Federal program and identification of each major program. Individual awards within a cluster of programs should be listed in the same level of detail as they are listed in the schedule of expenditures of Federal awards.

  9. The amount of expenditures in the schedule of expenditures of Federal awards associated with each Federal program.

  10. A yes or no statement as to whether there are audit findings and the amount of any questioned costs related to the following for each Federal program:
    a. Types of services allowed or unallowed
    b. Eligibility
    c. Matching, level of effort, or earmarking
    d. Federal financial reporting
    e. Program income
    f. Procurement
    g. Subrecipient monitoring
    h. Allowable costs/cost principles
    i. Other

  11. Auditee Name: _________________
    Employer Identification Number: _________________
    Name and Title of Responsible Official: _________________
    Telephone Number:_________________
    Signature: _________________
    Date: _________________

  12. Auditor Name: _________________
    Name and Title of Contact Person: _________________
    Auditor Address: _________________
    Auditor Telephone Number: _________________

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

  14. The name of the cognizant or oversight agency for audit determined in accordance with ___.400(a) and ___.400(b), respectively.

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

(d) Submission to clearinghouse. All auditees shall submit to the Federal clearinghouse designated by OMB one copy of the reporting package described in paragraph (c) of this section for:

(e) Additional submission by subrecipients. In addition to the requirements discussed in paragraph (d) of this section, subrecipients shall submit to each pass-through entity one copy of the:

(f) Requests for report copies. In response to requests by a Federal agency or pass-through entity, auditees shall submit the appropriate copies of the reporting package described in paragraph (c) of this section and, if requested, a copy of any management letters issued by the auditor.

(g) Report retention requirements. Auditees shall keep one copy of the reporting package described in paragraph (c) of this section on file for three years from the date of submission to the Federal clearinghouse designated by OMB. Pass-through entities shall keep subrecipients' submissions on file for three years from date of receipt.

(h) Clearinghouse responsibilities. The Federal clearinghouse designated by OMB shall distribute the reporting packages received in accordance with paragraph (d)(2) of this section and ___.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
___.400 Responsibilities.

(a) Cognizant agency for audit responsibilities. Recipients expending more than $25 million a year in Federal awards shall have a cognizant agency for audit. The designated cognizant agency for audit shall be the Federal awarding agency that provides the predominant amount of direct funding to a recipient unless OMB makes a specific cognizant agency for audit assignment and provides notice in the Federal Register. To provide for continuity of cognizance, the determination of the predominant amount of direct funding shall be based upon direct Federal awards expended in the recipient's fiscal years ending in 1995, 2000, 2005, and every fifth year thereafter. For example, audit cognizance for periods ending in 1996 through 2000 will be determined based on Federal awards expended in 1995. A Federal awarding agency with cognizance for an auditee may reassign cognizance to another Federal awarding agency which provides substantial direct funding and agrees to be the cognizant agency for audit. Within 30 days after any reassignment, both the old and the new cognizant agency for audit shall notify the auditee, and, if known, the auditor of the reassignment. The cognizant agency for audit shall:

(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 ___.105(z). The oversight agency for audit:

(c) Federal awarding agency responsibilities. The Federal awarding agency shall perform the following for the Federal awards it makes:

(d) Pass-through entity responsibilities. A pass-through entity shall perform the following for the Federal awards it makes:

___.405 Management decision.

(a) General. The management decision shall clearly state whether or not the audit finding is sustained, the reasons for the decision, and the expected auditee action to repay disallowed costs, make financial adjustments, or take other action. If the auditee has not completed corrective action, a timetable for follow-up should be given. Prior to issuing the management decision, the Federal agency or pass-through entity may request additional information or documentation from the auditee, including a request that the documentation be audited, as a way of mitigating disallowed costs. The management decision should describe any appeal process available to the auditee.

(b) Federal agency. As provided in ___.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 ___.400(c)(4), a Federal awarding agency is responsible for issuing a management decision for findings that relate to Federal awards it makes to recipients. Alternate arrangements may be made on a case-by-case basis by agreement among the Federal agencies concerned.

(c) Pass-through entity. As provided in ___.400(d)(5), the pass-through entity shall be responsible for making the management decision for audit findings that relate to Federal awards it makes to subrecipients.

(d) Time requirements. The entity responsible for making the management decision shall do so within six months of receipt of the audit report. Corrective action should be initiated within six months and proceed as rapidly as possible.

(e) Reference numbers. Management decisions shall include the reference numbers the auditor assigned to each audit finding in accordance with ___.510(c).

Subpart E--Auditors
___.500 Scope of audit.

(a) General. The audit shall be conducted in accordance with GAGAS. The audit shall cover the entire operations of the auditee; or, at the option of the auditee, such audit shall include a series of audits that cover departments, agencies, and other organizational units which expended or otherwise administered Federal awards during such fiscal year, provided that each such audit shall encompass the financial statements and schedule of expenditures of Federal awards for each such department, agency, and organizational unit, which shall be considered to be a non-Federal entity. The financial statements and schedule of expenditures of Federal awards shall be for the same fiscal year.

(b) Financial statements. The auditor shall determine whether the financial statements of the auditee are presented fairly in all material respects in conformity with generally accepted accounting principles. The auditor shall also determine whether the schedule of expenditures of Federal awards is presented fairly in all material respects in relation to the auditee's financial statements taken as a whole.

(c) Internal control.

(d) 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 ___.315(b), and report, as a current year audit finding, when the auditor concludes that the summary schedule of prior audit findings materially misrepresents the status of any prior audit finding. The auditor shall perform audit follow-up procedures regardless of whether a prior audit finding relates to a major program or the allowability of costs charged to cost pools used to support an indirect cost rate or allocated through a cost allocation plan in the current year.

(f) Communication. The auditor shall communicate, preferably in writing, to the auditee which Federal awarding agencies and pass-through entities are required to receive a copy of the reporting package pursuant to ___.320(d)(2) and ___.320(e)(2), respectively. The auditor shall retain a record of this communication in the auditor's working papers.

___.505 Audit reporting.

The auditor's report(s) may be in the form of either combined or separate reports and may be organized differently from the manner presented in this section. The auditor's report(s) shall state that the audit was conducted in accordance with this part and include the following:

(a) An opinion (or disclaimer of opinion) as to whether the financial statements are presented fairly in all material respects in conformity with generally accepted accounting principles and an opinion (or disclaimer of opinion) as to whether the schedule of expenditures of Federal awards is presented fairly in all material respects in relation to the financial statements taken as a whole.

(b) A report on internal control related to the financial statements, major programs, and the allowability of costs charged to cost pools used to support an indirect cost rate or allocated through a cost allocation plan. This report shall describe the scope of testing of internal control and the results of the tests, and, where applicable, refer to the separate schedule of findings and questioned costs described in paragraph (d) of this section.

(c) A report on compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements. This report shall also include an opinion (or disclaimer of opinion) as to whether the auditee complied with laws, regulations, and the provisions of contracts or grant agreements which could have a direct and material effect on each major program and on the allowability of costs charged to cost pools used to support an indirect cost rate or allocated through a cost allocation plan, and, where applicable, refer to the separate schedule of findings and questioned costs described in paragraph (d) of this section.

(d) A schedule of findings and questioned costs which shall include the following three components:

___.510 Audit findings.

(a) Audit findings reported. The auditor shall report the following as audit findings in a schedule of findings and questioned costs:

(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:

(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.

___.515 Audit working papers.

(a) Retention of working papers. The auditor shall retain working papers and reports for a minimum of three years after the date of issuance of the auditor's report(s) to the auditee, unless the auditor is notified in writing by the cognizant agency for audit, oversight agency for audit, or pass-through entity to extend the retention period. When the auditor is aware that the Federal awarding agency, pass-through entity, or auditee is contesting an audit finding, the auditor shall contact the parties contesting the audit finding for guidance prior to destruction of the working papers and reports.

(b) Access to working papers. Audit working papers shall be made available upon request to the cognizant or oversight agency for audit or its designee, a Federal agency providing direct or indirect funding, or GAO at the completion of the audit. Access to working papers includes the right of Federal agencies to obtain copies of working papers, as is reasonable and necessary.

___.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.

(c) Step 2.

(d) Step 3.

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

___.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.

(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.

(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.

___.530 Criteria for a low-risk auditee.

An auditee which meets all of the following conditions for each of the preceding two years shall qualify as a low-risk auditee and be eligible for reduced audit coverage in accordance with ___.520(f):

(a) Single audits were performed on an annual basis in accordance with the provisions of this part. A non-Federal entity that has biennial audits does not qualify as a low-risk auditee.

(b) The auditor's opinions on the financial statements and the schedule of expenditures of Federal awards were unqualified. However, the cognizant or oversight agency for audit may judge that an opinion qualification does not affect the management of Federal awards and provide a waiver.

(c) There were no deficiencies in internal control which were identified as material weaknesses under the requirements of GAGAS. However, the cognizant or oversight agency for audit may judge that any identified material weaknesses do not affect the management of Federal awards and provide a waiver.

(d) None of the Federal programs had audit findings from any of the following in either of the preceding two years in which they were classified as Type A programs:

Billing Code 3110-01-P


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