**Appendix VI**

**Other OMB Circular A-133 Advisories**

**Page**

**Advisory to Federal Grantees on Responsibility to Address the Year
2000 Issue** 8-6-1

**Impact of Y2K on Audits of Federal Awards Under OMB Circular A-133**
8-6-5

August 19, 1998

MEMORANDUM TO THE PRESIDENT=S MANAGEMENT COUNCIL

FROM: G. Edward DeSeve

Deputy Director for Management, Acting

SUBJECT: Advisory to Federal Grantees on Responsibility to Address the
Year 2000 Issue

The year 2000 (Y2K) issue has received a great deal of attention for
some time now. Federal agencies are working hard to ensure internal
systems and those of organizations with which they exchange data are Y2K
compliant. This effort should include ensuring that Federal grantees and
subgrantees are aware that systems that are not Y2K compliant may affect
their ability to account for Federally funded programs in accordance
with Federal requirements.

Governmentwide requirements contained in the OMB Circular A-102 Common
Rule, \"Uniform Administrative Requirements for Grants and Cooperative
Agreements to State and Local Governments\" and OMB Circular A-110,
\"Uniform Administrative Requirements for Grants and Agreements with
Institutions of Higher Education, Hospitals, and Non-Profit
Organizations\" require that grantee and subgrantee financial management
systems be capable of providing specific information about Federal
programs. In addition, program laws and regulations may require
additional information which grantee and subgrantee systems must be
capable of providing. If grantee and subgrantee systems are not Y2K
compliant, they may not be capable of meeting these governmentwide and
program specific requirements.

Federal grantor agencies should advise grantees of their responsibility
to establish and maintain systems that meet governmentwide and program
specific requirements and that systems which are not Y2K compliant may
not be able to satisfy these requirements. Further, Federal grantor
agencies should encourage grantees to inquire of grantor agencies about
the use of grant funds to correct Y2K problems. Grantees should also be
advised of their responsibility to inform their subgrantees of these
requirements and about the use of grant funds to address Y2K problems.

To assist Federal agencies in advising grantees, attached you will find
an advisory that all grant-making agencies should use. This will ensure
uniformity and minimize confusion in instances when grantees receive an
advisory from multiple Federal agencies. Each agency should provide a
contact person for questions from grantees.

Should you or your staff have any questions, please contact Jimmy
Charney in the Office of Federal Financial Management, at (202)
395-3993.

ADVISORY TO GRANTEES AND SUBGRANTEES

FROM: \[*Grants policy officer*\]

SUBJECT: Non Year 2000 Compliant Computer Systems May Not Meet Federal
Grant Requirements

[The Year 2000 Issue]{.underline}

The Year 2000 (Y2K) Issue concerns the ability of data processing
systems to process year-date dependent data accurately beyond the year
1999. It is a broad operational problem, as well as an accounting
systems problem. Systems that are not Y2K compliant may not be able to
continue to process information in accordance with Federal management
and program specific requirements. The inability to process information
in accordance with Federal requirements could result in a requirement to
return funds that have not been accounted for properly.

[Federal Grants Management and Program Specific
Requirements]{.underline}

Federal grants management requirements are contained in the OMB Circular
A-102 Common Rule, \"Uniform Administrative Requirements for Grants and
Cooperative Agreements to State and Local Governments\" and OMB Circular
A-110, \"Uniform Administrative Requirements for Grants and Agreements
with Institutions of Higher Education, Hospitals, and Non-Profit
Organizations.\" These regulations require that grantee and subgrantee
financial management systems be capable of providing certain
information, including: (1) accurate, current, and complete disclosure
of the financial results of each federally‑sponsored project or program
in accordance with the prescribed reporting requirements; (2) the source
and application of funds for federally‑sponsored activities; and (3) the
comparison of outlays with budgeted amounts for each award.

In addition, implementing statutes and regulations for certain Federal
programs may require that systems make certain calculations or provide
specified data, which may not be possible if systems are not Y2K
compliant. For example, programs that provide assistance to individuals
may have time limits. Such systems must be able to calculate the passage
of time accurately to ensure assistance payments do not exceed
prescribed limits. Loan programs may require that interest be calculated
on outstanding balances over time. Accordingly, loan systems must be
capable of calculating interest payments over the period covered by loan
agreements.

[Grantee/Subgrantee Actions]{.underline}

Grantees and subgrantees should identify systems critical to the
management of Federal programs (mission-critical systems) and assess
whether these systems are Y2K compliant. For those systems that are not
Y2K compliant, grantees and subgrantees should take immediate action to
remediate the Y2K problem and validate the success of the remediation
effort. Since grantee and subgrantee data processing may be performed by
outside entities or be dependent upon data received from outside
entities, the assessment should include inquiries of these organizations
about their Y2K assessment, system remediation, and testing efforts. The
timetable for completing this process should ensure that properly
functioning mission-critical systems are in operation before existing
systems will cease performing mission-critical functions.

Grantees should advise Federal grantor agencies if the assessment
discloses significant Y2K problems or if the grantee cannot complete the
remediation and testing phases before systems cease performing properly.
Similarly, subgrantees should advise grantees of significant Y2K
problems or an inability to complete systems testing and validation
before systems cease operating properly. This will assist Federal
agencies, grantees, and subgrantees with contingency planning.
\[*Grantees should contact their Federal grantor agency about the use of
Federal grant funds to address Y2K problems*\] or \[*Attached to this
advisory is guidance about the use of grant funds to address Y2K
problems*.\]

[Questions about this advisory]{.underline}

Grantees should direct questions about this advisory to the \[*Federal
awarding agency designated contact*\]. Subgrantees should direct
questions to the non-federal organization providing them with the most
Federal funding.

[Additional Y2K Resources]{.underline}

The General Services Administration\'s Office of Information Technology
maintains an Internet site (http://www.itpolicy.gsa.gov) which includes
valuable information about addressing the concerns discussed in this
advisory. Check under the heading \"Year 2000 Directories.\"

August 30, 1999

MEMORANDUM FOR INSPECTORS GENERAL AND CHIEF FINANCIAL OFFICERS OF
EXECUTIVE DEPARTMENTS AND AGENCIES

FROM: Sheila O. Conley

> Acting Deputy Controller

SUBJECT: Impact of Y2K on Audits of Federal Awards Under OMB Circular
A-133

**Purpose**

The Year 2000 (Y2K) issue relates to the ability of data processing
systems to process year-date dependent data accurately beyond the year
1999. Systems that are not Y2K compliant may affect the ability of
grantees to administer Federally-funded programs in accordance with
Federal requirements.

The purpose of this memorandum is to:

\- address the impact of opinion qualifications resulting from Y2K
disclosures required by Technical Bulletin (TB) 98-1, *Disclosures About
Year 2000 Issues*, issued by the Governmental Accounting Standards Board
(GASB);

\- describe the procedures to be followed if an auditee elects to submit
revised financial statements to the Federal Government resulting from
GASB TB 99-1, *Disclosures About Year 2000 IssuesBAn Amendment of
Technical Bulletin 98-1*; and

\- provide guidance about an auditor=s responsibility to consider the
Y2K issue when conducting audits in accordance with the Single Audit Act
Amendments of 1996 and Office of Management and Budget (OMB) Circular
A-133, *Audits of States, Local Governments, and Non-Profit
Organizations*.

This memorandum should be provided to officials in your organization
responsible for grants management and implementation of OMB Circular
A-133.

**Summary**

OMB has determined that an opinion qualification resulting solely from
Y2K disclosures, or the omission of such disclosures, required by GASB
TB 98-1 would not preclude an entity from qualifying as a low-risk
auditee under OMB Circular A-133. If an entity chooses to revise its
financial statements as a result of GASB TB 99-1, and elects to submit
its revised financial statements to the Federal Government, the entity
should follow the procedures presented in the Attachment. Also, as with
any other issue affecting an auditee=s ability to comply with Federal
program requirements, auditors must consider the effect of the Y2K issue
when conducting OMB Circular A-133 audits, including applying the
risk-based approach to selecting major Federal programs to audit.
However, the auditor is not expected to plan and perform procedures to
determine whether an auditee is Y2K compliant.

**Impact of GASB Technical Bulletin 98-1 on Single Audits**

In October 1998, GASB issued TB 98-1, which is effective for financial
statements on which the auditor\'s report is dated after October 31,
1998. GASB TB-98-1 requires State and local governments to include in
the notes to the financial statements certain disclosures relating to
the Y2K issue including:

\- significant amounts of resources committed to Y2K compliance;

\- a general description of how the organization is affected by the Y2K
issue; and

\- information about the entity\'s stage of readiness.

On October 22, 1998, the American Institute of Certified Public
Accountants (AICPA) expressed concern that the required Y2K disclosures
are neither assertable by management nor verifiable by auditors. The
AICPA advised auditors to be very cautious about being associated with
the disclosures. Because of the unprecedented nature of the Y2K issue,
its effects and the success of related remediation efforts will not be
fully determinable until the year 2000 and thereafter. Accordingly,
sufficient audit evidence may not exist to support the required Y2K
disclosures. As a result, many audit reports issued after October 31,
1998, are qualified due to either:

\- a scope limitation resulting from the auditor=s inability to obtain
sufficient audit evidence relating to the Y2K note disclosures; or

\- the omission of the Y2K note disclosures required by GASB TB 98-1.
(Omitted Y2K disclosures could result in an adverse opinion.)

OMB has received numerous inquiries about the impact of qualified and
adverse opinions relating to Y2K disclosures on an auditee\'s ability to
qualify as a low-risk auditee under OMB Circular A-133. OMB Circular
A-133 permits entities to qualify as low-risk auditees and be eligible
for reduced audit coverage if certain conditions are met. One condition
is that the auditor\'s opinion on the entity\'s financial statements for
each of the preceding two years is unqualified, unless the Federal
cognizant or oversight agency for audit provides a waiver to this
criterion.

OMB has concluded that a qualified or adverse opinion *resulting solely
from either*:

\- a scope limitation with respect to the Y2K note disclosures required
by GASB TB 98-1, or

\- an omission of the Y2K note disclosures required by GASB TB 98-1

would not preclude an entity from qualifying as a low-risk auditee under
paragraph \_\_\_.530 of OMB Circular A-133. Accordingly, auditees with
qualified or adverse opinions resulting solely from the limited
circumstances described in the preceding sentence do not need to request
separate waivers from their Federal cognizant or oversight agencies for
audit. However, for opinion modifications or disclaimers of opinion for
any other reason, auditees must obtain waivers from their Federal
cognizant or oversight agencies for audit to be considered a low-risk
auditee under paragraph \_\_\_.530 of OMB Circular A-133.

**Procedures for Submitting Revised Financial Statements**

On March 29, 1999, GASB issued TB 99-1, *Disclosures About Year 2000
IssuesBAn Amendment of Technical Bulletin 98-1*. The revision modifies
the Y2K disclosures and allows such disclosures to be presented either
in the notes to the financial statements or as required supplementary
information (RSI). While the auditor is required to perform certain
procedures on RSI, reporting on such information (including an omission
of RSI) *does not affect the auditor\'s opinion* on the basic financial
statements (see Auditing Sections 551, \"Reporting on Information
Accompanying the Basic Financial Statements in Auditor-Submitted
Documents,\" and 558, \"Required Supplementary Information,\" of the
AICPA\'s *Codification of Statements on Auditing Standards*). GASB TB
99-1 became effective upon issuance on March 29, 1999, and retroactive
application is allowed. As a result of permitting retroactive
implementation, some auditees may choose to revise their 1998 financial
statements and have their auditors reissue the related auditor=s
reports.

Auditees are not required to submit financial statements that are
revised based on GASB TB 99-1 to the Federal Government, unless
specifically requested by a Federal awarding agency. Under these
circumstances, the revised financial statements need only be sent to the
requesting agency and are not required to be sent to the Federal Audit
Clearinghouse as provided in the Attachment. However, if an auditee
elects to submit revised financial statements to the Federal Government,
the procedures described in the Attachment should be followed.

**Auditor Consideration of the Y2K Issue Under Single Audit**

As with any other issue affecting an auditee\'s ability to comply with
requirements related to Federal awards, auditors must consider the
effect of the Y2K issue when conducting audits in accordance with OMB
Circular A-133, including applying the risk-based approach to selecting
major programs (paragraph \_\_\_.520 of OMB Circular A-133). However,
the auditor is not expected to plan and perform procedures to determine
whether an auditee is Y2K compliant or has made specified progress
towards becoming Y2K compliant.

When applying the risk-based approach to selecting major programs,
paragraph \_\_\_.520(c)(1) of OMB Circular A-133 states that \"The
auditor shall consider ... whether any changes in personnel or systems
affecting a Type A program have significantly increased risk ... The Y2K
issue poses a greater risk for Federal awards that rely heavily on data
processing systems to administer such awards. Auditors should
specifically assess the risk associated with Y2K for large Federal
programs (i.e., Type A programs) and document this assessment as part of
the risk-based approach.

Auditors should be aware, and consider as part of the major program risk
assessment process, that the Y2K issue may affect the administration of
Federal awards *prior to the year 2000* for certain programs. For
example, programs that provide assistance to individuals may have time
limits on eligibility. Such systems must be able to calculate the
passage of time accurately to ensure that assistance payments do not
exceed prescribed limits. Also, loan programs may require that interest
be calculated on outstanding balances over time. Accordingly, loan
systems must be capable of calculating interest payments over the period
covered by loan agreements.

**Additional Information**

Questions regarding this memorandum should be directed to an auditee\'s
Federal cognizant or oversight agency for audit. (See paragraph
\_\_\_.400 of OMB Circular A-133 for guidance on determining Federal
cognizant or oversight agencies for audit.)

Websites that contain useful information include:

\- http://www.whitehouse.gov/OMB

\- http://www.gasb.org

\- http://www.aicpa.org

Attachment

**Procedures for Submitting an Amended Reporting Package**

**Due to Y2K Disclosures^1^**

**1. Prepare amended reporting package.** The amended reporting package
should *only* include the *revised* financial statements and *reissued*
auditor=s report on the revised financial statements.

**2. Mark contents of amended reporting package:** AREVISED DUE TO Y2K
DISCLOSURES@

**3. Prepare a transmittal letter.** The transmittal letter should
accompany the amended reporting package, in lieu of preparing a revised
data collection form, and include the following:

> \- A description of the nature of the revision and its impact.^1^
>
> \- Name, title, and signature of certifying official (representing the
> auditee).
>
> \- Auditee=s employer identification number (EIN).

**4. Submit *one copy* of the amended reporting package and transmittal
letter to the Federal Audit Clearinghouse.^3^** Amended reporting
packages, along with accompanying transmittal letters, should be
addressed as follows:

Revised Report\--Y2K Disclosure

> Federal Audit Clearinghouse
>
> Bureau of the Census
>
> 1201 E. 10^th^ Street
>
> Jeffersonville, IN 47132

**5. A subrecipient should determine whether an amended reporting
package should be submitted to its pass-through entities.**
Subrecipients required to submit a reporting package to pass-through
entities under paragraph \_\_\_.320(e) of OMB Circular A-133 should also
submit an amended reporting package to those same pass-through entities,
unless otherwise informed by such pass-through entities.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

> ^1^These procedures apply *only* to situations in which an auditee
> chooses to revise its financial statements pursuant to Technical
> Bulletin (TB) 99-1, *Disclosures About Year 2000 IssuesBAn Amendment
> of Technical Bulletin 98-1*, issued by the Governmental Accounting
> Standards Board (GASB). Auditees are not required to submit financial
> statements that have been revised based on GASB TB 99-1 to the Federal
> Government, unless specifically requested by a Federal awarding
> agency. However, if an auditee elects to submit revised financial
> statements to the Federal Government, the auditee should follow the
> procedures presented in this Attachment.
>
> ^2^For example, AAs permitted by GASB TB 99-1, ABC Government revised
> its financial statements as of and for the period ended June 30, 1998.
> Required disclosures about the Year 2000 are presented as required
> supplementary information in the revised financial statements, whereas
> such disclosures were previously presented in the notes to the
> financial statements. As a result, the auditor=s report on the revised
> financial statements is unqualified, whereas a qualified opinion was
> rendered on the previously-issued financial statements.@
>
> ^3^It is not necessary to submit to the Clearinghouse additional
> report copies for Federal awarding agencies. The Clearinghouse will
> retain one archival copy of the amended OMB Circular A-133 reporting
> package and transmittal letter. However, if specifically requested by
> a Federal awarding agency, an auditee should provide additional copies
> directly to the Federal agency.