**PART 3 - COMPLIANCE REQUIREMENTS**

**INTRODUCTION**

The objectives of most compliance requirements for Federal programs
administered by States, local governments, Indian tribal governments,
and non-profit organizations are generic in nature. For example, most
programs have eligibility requirements for individuals or organizations.
While the criteria for determining eligibility vary by program, the
objective of the compliance requirement that only eligible individuals
or organizations participate is consistent across all programs.

Rather than repeat these compliance requirements, audit objectives, and
suggested audit procedures for each of the programs contained in Part
4 - Agency Program Requirements and Part 5 - Clusters of Programs, they
are provided once in this part. For each program in this Compliance
Supplement (this Supplement), Part 4 or Part 5 contains additional
information about the compliance requirements that arise from laws and
regulations applicable to each program, including the requirements
specific to each program that should be tested using the guidance in
this part.

**Administrative Requirements**

The administrative requirements that apply to most programs arise from
two sources: the \"Uniform Administrative Requirements for Grants and
Cooperative Agreements to State and Local Governments\" (also known as
the \"A-102 Common Rule\") and OMB Circular A-110, \"Uniform
Administrative Requirements for Grants and Agreements with Institutions
of Higher Education, Hospitals, and Other Non-Profit Organizations,\"
and the agencies\' codification of OMB Circular A-110. The applicable
guidance followed depends on the type of organization undergoing audit.
Other administrative compliance requirements unique to a single program
or a cluster of programs, are provided in the Special Tests and
Provisions sections of Parts 4 and 5.

**State, Local, and Indian Tribal Governments**

Governmentwide guidance for administering grants and cooperative
agreements to States, local governments, and Indian tribal governments
is contained in the A-102 Common Rule which was codified by each Federal
funding agency in its volume of the *Code of Federal Regulations*. The
A-102 Common Rule section numbers are referred to without the Federal
agency\'s part number (e.g., §\_\_\_\_.37 would refer to sections in all
agency regulations). This allows auditors to refer to the same section
numbers when discussing administrative issues with different Federal
funding agencies.

These requirements apply to all grants and subgrants to governments,
except grants and subgrants to State or local (public) institutions of
higher education and hospitals, and except where they are inconsistent
with Federal statutes or with regulations authorized in accordance with
the exception provision of the A-102 Common Rule. Block grants
authorized by the Omnibus Budget Reconciliation Act of 1981 and several
other specifically identified grants or payment programs are exempted
from the A-102 Common Rule. Appendix I to this Compliance Supplement
lists legislation and programs where exclusions exist.

In some cases the A-102 Common Rule permits States to follow their own
laws and procedures, e.g., when addressing equipment management. These
are noted in the sections that follow. The auditor will have to refer to
an individual State\'s rules in those situations.

**Non-Profit Organizations**

The major source of requirements applicable to institutions of higher
education, hospitals and other non-profit organizations is OMB Circular
A-110. The provisions of OMB Circular A-110 are codified in agency
regulations, generally following the section numbers in the circular.
The OMB Circular A-110 section numbers are referred to similar to the
A-102 Common Rule references. However, unlike the A-102 Common Rule,
agencies with OMB approval, could modify certain provisions of A-110 to
meet their special needs. OMB Circular A-110 states \"Federal agencies
responsible for awarding and administering grants ... shall adopt the
language in the circular unless different provisions are required by
Federal statute or are approved by OMB.\" Subpart A, §\_\_\_\_.4, of OMB
Circular A-110 states that \"Federal awarding agencies may apply more
restrictive requirements to a class of recipients when approved by
OMB.\" Federal awarding agencies may apply less restrictive requirements
when awarding small awards, except for those requirements which are
statutory. Exceptions on a case-by-case basis may also be made by
Federal awarding agencies.

Appendix II to this supplement contains a list of agencies that have
codified OMB Circular A-110 and the CFR citations for these
codifications.

**Subrecipients**

Governmental subrecipients are subject to the provisions of the A-102
Common Rule. However, the A-102 Common Rule permits States to impose
their own requirements on their governmental subrecipients, e.g.,
equipment management or procurement. Thus, in some circumstances, the
auditor may need to refer to State rules and regulations rather than
Federal requirements.

All subrecipients who are institutions of higher education, hospitals,
or other non-profits, regardless of the type of organization making the
subaward, shall follow the provisions of OMB Circular A-110 as
implemented by the agency when awarding or administering subgrants
except under block grants authorized by the Omnibus Budget
Reconciliation Act of 1981 and the Job Training Partnership Act where
State rules apply instead.

**Compliance Requirements, Audit Objectives, and Suggested Audit
Procedures**

Auditors shall consider the compliance requirements and related audit
objectives in Part 3 and Part 4 or 5 (for programs included in this
Supplement) in every audit of non-Federal entities conducted under OMB
Circular A-133, with the exception of program-specific audits performed
in accordance with a Federal agency\'s program-specific audit guide. In
making a determination not to test a compliance requirement, the auditor
must conclude that the requirement either does not apply to the
particular non-Federal entity or that noncompliance with the requirement
could not have a material effect on a major program (e.g., the auditor
would not be expected to test Procurement if the non-Federal entity
charges only small amounts of purchases to a major program). The
descriptions of the compliance requirements in Parts 3, 4, and 5 are
generally a summary of the actual compliance requirements. The auditor
should refer to the referenced citations (e.g., laws and regulations)
for the complete compliance requirements.

The suggested audit procedures are provided to assist auditors in
planning and performing tests of non-Federal entity compliance with the
requirements of Federal programs. Auditor judgment will be necessary to
determine whether the suggested audit procedures are sufficient to
achieve the stated audit objective and whether additional or alternative
audit procedures are needed.

The suggested procedures are in lieu of specifying audit procedures for
each of the programs included in this Supplement. This approach has
several advantages. First, it provides guidelines to assist auditors in
designing audit procedures that are appropriate in the circumstance.
Second, it helps auditors develop audit procedures for programs that are
not included in this Supplement. Finally, it simplifies future updates
to this Supplement.

**Internal Control**

Because of the diversity of systems in place among non-Federal entities,
Part 3 does not include suggested audit procedures to test internal
control. The auditor must determine appropriate procedures to test
internal control on a case by case basis considering factors such as the
non-Federal entity\'s internal control, the compliance requirements, the
audit objectives for compliance, the auditor\'s assessment of control
risk, and the audit requirement to test internal control as prescribed
in OMB Circular A-133.

**A. ACTIVITIES ALLOWED OR UNALLOWED**

**Compliance Requirements**

The specific requirements for activities allowed or unallowed are unique
to each Federal program and are found in the laws, regulations, and the
provisions of contract or grant agreements pertaining to the program.
For programs listed in the Compliance Supplement, these specific
requirements are in Part 4 - Agency Program Requirements or Part 5 -
Clusters of Programs, as applicable. This type of compliance requirement
specifies the activities that can or cannot be funded under a specific
program.

**Audit Objectives**

Determine whether Federal awards were expended only for allowable
activities.

**Suggested Audit Procedures**

1\. Identify the types of activities which are either specifically
allowed or prohibited by the laws, regulations, and the provisions of
contract or grant agreements pertaining to the program.

2\. When allowability is determined based upon summary level data,
perform procedures to verify that:

> a\. Activities were allowable.
>
> b\. Individual transactions were properly classified and accumulated
> into the activity total.

3\. When allowability is determined based upon individual transactions,
select a sample of transactions and perform procedures to verify that
the transaction was for an allowable activity.

4\. The auditor should be alert for large transfers of funds from
program accounts which may have been used to fund unallowable
activities.

**B. ALLOWABLE COSTS/COST PRINCIPLES**

**Applicability of OMB Cost Principles Circulars**

The following OMB cost principles circulars prescribe the cost
accounting policies associated with the administration of Federal awards
by non-profit organizations, States, local governments, and Indian
tribal governments. However, for block grants authorized by the Omnibus
Budget Reconciliation Act of 1981 and the Job Training Partnership Act,
State rules for expenditures of State funds apply (Appendix 1). Federal
awards include Federal programs and cost-type contracts and may be in
the form of grants, contracts, and other agreements.

\- OMB Circular A‑87, \"Cost Principles for State, Local and Indian
Tribal Governments\"

\- OMB Circular A-21, \"Cost Principles for Educational Institutions\"

\- OMB Circular A-122, \"Cost Principles for Non-Profit Organizations\"

States, local governments, and Indian tribal governments are subject to
OMB Circular A-87. All institutions of higher education are subject to
the cost principles contained in OMB Circular A‑21 which incorporates
the four Cost Accounting Standards Board (CASB) Standards and the
Disclosure Statement (DS-2) requirements as described in paragraphs C.10
through C.14 and Appendices A and B of OMB Circular A-21. Non-profit
organizations are subject to OMB Circular A-122, except those non-profit
organizations listed in Attachment C of OMB Circular A-122. These
non-profit organizations are not subject to OMB Circular A-122 but are
subject to the commercial cost principles contained in the Federal
Acquisition Regulation (FAR). Also, by contract terms and conditions,
some non-profit organizations may be subject to the CASB\'s Standards
and the Disclosure Statement (DS-1) requirements.

Federal awards administered by publicly-owned hospitals and other
providers of medical care are exempt from OMB\'s cost principles
circulars, but are subject to requirements promulgated by the sponsoring
Federal agencies (45 CFR part 74, appendix E).

The cost principles applicable to a non-Federal entity apply to all
Federal awards received by the entity, regardless of whether the awards
are received directly from the Federal Government or indirectly through
a pass-through entity.

The circulars describe selected cost items, allowable and unallowable
costs, and standard methodologies for calculating indirect costs rates
(e.g., methodologies used to recover facilities and administrative costs
(F&A) at institutions of higher education).

The cost principles articulated in the three circulars are in most cases
substantially identical but a few differences do exist. These
differences are necessary because of the nature of the
Federal/State/local/non-profit organization relationship, programs
administered, and breadth of services offered by some grantees and not
others. Exhibit 1, Selected Cost Items Not Treated the Same Among the
Circulars, lists selected cost items for which treatment are not
substantially identical among the cost principles circulars. Exhibit 2,
Selected Unallowable Cost Items, lists selected items that are
unallowable in one or more of the cost principles circulars.

**Compliance Requirements - Allowability of Costs - General Criteria
(applicable to both direct and indirect costs)**

The general criteria affecting allowability of costs under Federal
awards are:

\- Costs must be reasonable and necessary for the performance and
administration of Federal awards.

\- Costs must be allocable to the Federal awards under the provisions of
the cost principles or CASB Standards, as applicable. A cost is
allocable to a particular cost objective (e.g., a specific function,
program, project, department, or the like) if the goods or services
involved are charged or assigned to such cost objective in accordance
with relative benefits received.

\- Costs must be given consistent treatment through application of those
generally accepted accounting principles appropriate to the
circumstances. A cost may not be assigned to a Federal award as a direct
cost if any other cost incurred for the same purpose in like
circumstances was allocated to the Federal award as an indirect cost.

\- Costs must conform to any limitations or exclusions set forth in the
circulars, Federal laws, State or local laws, sponsored agreements or
other governing regulations as to types or amounts of cost items.

\- Costs must be net of all applicable credits that result from
transactions that reduce or offset direct or indirect costs. Examples of
such transactions include purchase discounts, rebates or allowances,
recoveries or indemnities on losses, insurance refunds or rebates, and
adjustments for overpayments or erroneous charges.

\- Costs must be documented in accordance with OMB Circular A-110 for
non-profit organizations or the A-102 Common Rule for State, local and
Indian Tribal governmental units.

**Compliance Requirements - Indirect Costs**

Indirect costs are those costs that benefit common activities and,
therefore, cannot be readily assigned to a specific direct cost
objective or project.

In order to recover indirect costs, organizations must prepare cost
allocation plans (CAPs) which apply only to States, local and Indian
tribal governments or indirect cost rate proposals (IDCRPs) in
accordance with the guidelines provided in OMB\'s circulars. States,
major local governments, Indian tribal governments, institutions of
higher education, and non-profit organizations must submit CAPs or
IDCRPs to the Federal cognizant agency for indirect cost negotiation for
approval. Other organizations, such as smaller local governments, must
prepare the appropriate CAPs or IDCRPs and maintain them on file for
review. These other organizations may use the allocation methods and
indirect cost rate maintained on file for cost recovery.

At institutions of higher education, indirect costs include the
following categories: building and equipment depreciation or use
allowance, operation and maintenance expenses, interest expenses,
general administrative expenses, departmental administration expenses,
library expenses, and student administration expenses.

At non-profit organizations, indirect costs generally include general
administrative costs (e.g., the president=s office, payroll, general
accounting) and facility costs (e.g., rental costs, operations and
maintenance, interest expense) that are not treated as direct costs.

The indirect cost proposals prepared by institutions of higher education
and other non-profit organizations are based on the most current
financial data supported by the organization=s accounting system and
audited financial statements. These indirect cost proposals can be used
to either establish predetermined or fixed indirect cost rates, or to
establish or finalize provisional rates.

There are three types of plans/proposals submitted by States, local
governments, and Indian tribal governments:

> 1\. *State and Local Governmentwide CAPs* ‑ These plans are used to
> allocate service center costs (or Section I costs) to individual
> departments and agencies and describe the methods used for charging
> billed costs (or Section II costs) to individual user organizations or
> activities.
>
> 2\. *Department or Local IDCRP* ‑ These rate proposals combine the
> billed and allocated costs from the State‑wide or local‑wide plan with
> departmental or local level indirect costs and compute an indirect
> cost rate to be used in charging indirect costs to individual programs
> and activities.
>
> 3\. *Public Assistance CAPs* ‑ These CAPs describe the methods for
> allocating State‑wide or local‑wide allocated and/or billed indirect
> costs and departmental indirect, administrative, and operating costs
> of State or local welfare or human services organizations to the
> Medicaid, Food Stamps and welfare programs, etc. These plans are
> required by the terms of 45 CFR part 95, which incorporates OMB
> Circular A‑87 by reference, and they must be revised and resubmitted
> to the Federal Government whenever an organizational or programmatic
> change invalidates the currently‑approved allocation method.

At States, local governments, and Indian tribal governments, indirect
costs are accumulated at two levels: the State/local-wide level and the
department/agency level. At the State/local-wide level, indirect costs
include: (1) central service costs that are allocated (referred to as
Section I costs, which typically include general accounting, personnel,
and purchasing); and, (2) central service costs that are billed
(referred to as Section II costs, which typically include computer
services, motor pool, insurance, and fringe benefits). Certain costs,
such as facilities and operations and maintenance, can be classified as
Section I or Section II costs by State/local governments.

At State or local governmental departments or agencies, where Federal
awards are usually carried out, indirect costs normally include the
facilities and administrative costs of each department or agency and the
allocated central service costs distributed through the State/local-wide
CAP. Additionally, Section II costs are direct charges to these
departments or agencies. As such, these direct billings may be charged
directly to Federal awards or be included in the department or agency
indirect cost pools.

CAPs are comprised of two parts: a narrative section that describe the
service cost center and allocation methodologies, and a mathematical
allocation of these service center costs to the user departments using
the described allocation methods. CAPs and IDCRPs prepared by States,
local governments, and Indian tribal governments usually are prepared on
a prospective basis using actual financial data for a prior year or
budget data for the current year. When the actual costs for the year
covered by the CAP (or a rate agreement with respect to a fixed rate)
are determined, the difference between the costs recovered based on the
CAP (or rate agreement) and the costs that would have been recovered had
the CAP or rate agreement been based on actual results is either carried
forward to a subsequent CAP or IDCRP or used to adjust individual awards
on a retroactive basis, with the approval of the Federal cognizant
agency for indirect cost negotiation.

Three different types of indirect cost rates can be used by the Federal
cognizant agency for indirect cost negotiation: predetermined, fixed,
and provisional/final. Predetermined rates are established for the
current or multiple future period(s) based on current data (usually data
from the most recently ended fiscal year, known as the base period).
Predetermined rates are not subject to adjustment, except under very
unusual circumstances. Fixed rates are based on current data in the same
manner as predetermined rates, except that the difference between the
costs of the base period used to establish the rate and the actual costs
of the current period is carried forward as an adjustment to the rate
computation for a subsequent period. Provisional rates are temporary
rates used for funding and billing indirect costs, pending the
establishment of a final rate for a period.

**Special Compliance Requirements**

*Disclosure Statements*

OMB Circular A-21 requires institutions of higher education that receive
more than \$25 million in Federal funding in a fiscal year to prepare
and submit a DS-2 that describes the institution=s cost accounting
practices. These institutions are required to submit a DS-2 within six
months after the end of the institution\'s fiscal year that begins after
May 8, 1996, unless the institution is required to submit a DS-2 earlier
due to a receipt of a cost accounting standard covered contract in
accordance with 48 CFR section 9903.202-1.

These institutions are responsible for maintaining an accurate DS-2 and
complying with disclosed cost accounting practices. They are also
responsible for filing amendments to the DS-2 when disclosed practices
are changed or modified.

Also, by contract terms and conditions, some non-profit organizations
may be subject to the CASB\'s Standards and the DS-1 requirements.

*Large Research Facilities Construction Costs*

OMB Circular A-21 requires that for large research facilities (those
with construction costs of more than \$10 million) of which 40 percent
or more of total assignable space is expected for Federal use, an
educational institution (institution) must maintain an adequate review
and approval process to ensure that construction costs are reasonable.
The review process shall address and document relevant factors affecting
construction costs, such as:

‑ Life cycle costs

‑ Unique research needs

‑ Special building needs

‑ Building site preparation

‑ Environmental consideration

‑ Federal construction code requirements

‑ Competitive procurement practices

The approval process shall include review and approval of the projects
by the institution\'s Board of Trustees or other independent entities.

OMB Circular A-21 also requires that for research facilities costing
more than \$25 million, of which 50 percent or more of total assignable
space is expected for Federal use, the institution must document the
review steps performed to assure that construction costs are reasonable.
The review should include an analysis of construction costs and a
comparison of these costs with relevant construction data, including the
National Science Foundation data for research facilities based on its
biennial survey, \"Science and Engineering Facilities at Colleges and
Universities.\"

**Audit Objectives (Both Direct and Indirect Costs)**

Determine whether the organization complied with the provisions of the
applicable OMB cost principles circulars (OMB Circulars A-87, A-21,
A-122) or CASB Standards as follows:

1\. Direct charges to Federal awards were for allowable costs.

2\. Charges to cost pools used in calculating indirect cost rates were
for allowable costs.

3\. For States, local governments, and Indian tribal governments,
charges to cost pools allocated to Federal awards though CAPs were for
allowable costs.

4\. The methods of allocating the costs are in accordance with the
applicable cost principles or CASB Standards and produce an equitable
and consistent distribution of costs (e.g., cost allocation bases
include all allowable and unallowable base costs to which allowable
indirect costs are allocable and the cost allocation methodology
complies with the applicable cost principles and provides equitable and
consistent allocation of indirect costs to benefitting cost objectives).

5\. Indirect cost rates were applied in accordance with approved rate
agreements and associated billings were the result of applying the
approved rate to the proper base amount(s).

6\. For States, local governments, and Indian tribal governments, cost
allocations were in accordance with CAPs approved by the Federal
cognizant agency for indirect cost negotiation or, in cases where such
plans are not subject to approval, in accordance with the plan on file.

7\. Cost accounting practice disclosures, described in the DS-1 or DS-2
(including amendments), represented actual practice consistently
applied. This objective only applies to non-Federal entities that are
required to submit the DS-1 or DS-2.

8\. The institution\'s review of large research facilities under
construction was documented as required.

**Suggested Audit Procedures (Both Direct and Indirect Costs)**

*General*

1\. The following procedures apply to direct charges to Federal awards
as well as to charges to cost pools that are allocated wholly or
partially to Federal awards or used in formulating indirect cost rates
used for recovering indirect costs from Federal awards. If the auditor
identifies unallowable costs, the auditor should be aware that
\"directly associated costs\" may have been charged. Directly associated
costs are costs incurred solely as a result of incurring another cost,
and would not have been incurred if the other cost had not been
incurred. For example, fringe benefits are \"directly associated\" with
payroll costs. When an unallowable cost is incurred, directly associated
costs are also unallowable.

> Test a sample of transactions for conformance with the following
> criteria contained in the \"Basic Guidelines\" section of applicable
> OMB cost principles circulars.
>
> a\. For State and local governments, authorized or not prohibited
> under State or local laws or regulations.
>
> b\. Approved by the Federal awarding agency, if required.
>
> c\. Conform with the allowability of costs provisions of applicable
> cost principles, or limitations in the program agreement, program
> regulations, or program statute.
>
> d\. Conform with the allocability provisions of applicable cost
> principles or CASB Standards.
>
> e\. Represent charges for actual costs, not budgeted or projected
> amounts.
>
> f\. With respect to fringe benefit allocations, charges, or rates,
> such allocations, charges, or rates are based on the benefits received
> by different classes of employees within the organization.
>
> g\. Applied uniformly to Federal and non‑Federal activities.
>
> h\. Given consistent accounting treatment within and between
> accounting periods. Consistency in accounting requires that costs
> incurred for the same purpose, in like circumstances, be treated as
> either direct costs only or indirect costs only with respect to final
> cost objectives.
>
> i\. Calculated in conformity with CASB Standards, generally accepted
> accounting principles, or another comprehensive basis of accounting,
> when required under the applicable cost principles or CASB Standards.
> Costs for post-employment benefits must be funded to be allowable.
>
> j\. Not included as a cost or used to meet cost sharing requirements
> of other Federally‑supported activities of the current or a prior
> period.
>
> k\. Net of all applicable credits, e.g., volume or cash discounts,
> insurance recoveries, refunds, rebates, trade‑ins, adjustments for
> checks not cashed, and scrap sales.
>
> l\. Not included as both a direct billing and as a component of
> indirect costs, e.g., excluded from cost pools included in CAPs and/or
> IDCRPs, if charged directly to Federal awards.
>
> m\. Supported by appropriate documentation, such as approved purchase
> orders, receiving reports, vendor invoices, canceled checks, and time
> and attendance records, and correctly charged as to account, amount,
> and period. Documentation requirements for salaries and wages, and
> time and effort distribution are described in applicable cost
> principles. Documentation may be in an electronic form.

*Internal service, central service, pension, or similar activities or
funds*

2\. When material charges are made from internal service, central
service, pension, or similar activities or funds, the auditor should
verify that the charges from these activities or funds are in accordance
with the applicable cost principles. The auditor should consider
procedures, such as:

> a\. For activities accounted for in separate funds, ascertain if: (1)
> retained earnings/fund balances (including reserves) were computed in
> accordance with the applicable cost principles; (2) working capital
> was not excessive in amount (generally not greater than 60 days for
> cash expenses for normal operations incurred for the period exclusive
> of depreciation, capital costs and debt principal costs); and, (3)
> refunds were made to the Federal Government for its share of any
> amounts transferred or borrowed from internal service or central
> service funds for purposes other than to meet the operating
> liabilities, including interest on debt, of the fund.
>
> b\. Test that all users of services are billed in a consistent manner.
>
> c\. Test that billing rates exclude unallowable costs, in accordance
> with applicable cost principles.
>
> d\. Test, where activities are not accounted for in separate funds,
> that billing rates (or charges) are developed based on actual costs
> and were adjusted to eliminate profits.
>
> e\. For organizations that have self-insurance and a certain type of
> fringe benefit programs (e.g. pension funds), ascertain if independent
> actuarial studies appropriate for such activities are performed at
> least biennially and that current period costs were allocated based on
> an appropriate study which is not over two years old.

*IDCRP (Testing of the proposal)*

3\. The IDCRP is based upon costs charged to cost pools representing
costs of a base year. The base year often precedes the year in which the
IDCRP is prepared and the year the resulting Indirect Cost Rate
Agreement (IDCRA) is used to charge indirect costs. For example, a
non-Federal entity may submit an IDCRP in January 1998, based upon costs
incurred and charged to cost pools during fiscal year ending June 30,
1997 (1997), the base year. The resulting IDCRA negotiated during the
year ending June 30, 1998 (1998) would be used as the basis for charging
indirect costs to Federal awards in the year ended June 30, 1999 (1999).
For this example, the term IDCRA will also include an IDCRP which is not
required to be submitted to the Federal agency for indirect cost
negotiation but is retained on file and is used to charge indirect costs
to Federal awards the same as an approved plan resulting in an IDCRA.

> An audit timing consideration is that the audit for 1997 (which covers
> the applicable cost pools) may be completed before the IDCRP is
> submitted. Therefore, as part of the 1997 audit, the auditor cannot
> complete testing of the IDCRP. Also, if the auditor waits to test the
> IDCRP until 1999 (the year when this IDCRP is first used to charge
> Federal awards), the auditor would be testing 1997 records, which
> would then be two years old.
>
> Continuing this example, when the IDCRA is the basis for material
> charges to a major program in 1999, the auditor for 1999 is required
> to obtain appropriate assurance that the costs collected in the cost
> pools and allocation methods are in compliance with the applicable
> cost principles. The following are some acceptable options the auditor
> may use to obtain this assurance:
>
> \- Perform interim testing of the costs charged to cost pools (e.g.,
> determine from management the cost pools that management expects to
> include in the IDCRP and test the costs charged to those pools for
> compliance with the cost principles circulars) during the 1997 audit.
> As part of the 1998 audit, complete testing and verify management\'s
> representation against the IDCRP finally submitted in 1998.
>
> \- Test costs charged to the cost pools underlying the IDCRP during
> the audit of 1998, the year immediately following the base year. This
> would require testing of 1997 transactions.
>
> \- Wait until 1999, the year in which charges from the IDCRA are
> material to a major program and test costs charged to cost pools
> (1997) used to prepare the IDCRP. This is a much more difficult
> approach because it requires going back two years to audit the cost
> charged to cost pools of the base year.
>
> Advantages of the first two methods are that the testing of the costs
> charged to the cost pools occurs closer to the time when the
> transactions occur (which makes the testing easier to perform) and
> should there be audit exceptions, corrective action may be taken
> earlier to minimize questioned costs (which makes audit exceptions
> easier to resolve). When material indirect costs are charged to any
> Type A program (determined in accordance with Circular A-133),
> auditors are strongly encouraged to use one of the first two methods.
> This is because under the risk-based approach, described in OMB
> Circular A-133, all Type A programs are required to be considered
> major programs at least once in every three years and the IDCRA is
> usually used to charge Federal awards for at least three years.
>
> When the auditee submits the IDCRP, the auditee provides written
> assurances to the Federal government that the plan includes only
> allowable costs. Accordingly, any material unallowable costs reflected
> in the IDCRP should be reported as an audit finding in the year in
> which they are first found by audit.
>
> An IDCRP may result in an IDCRA that covers only one year, but most
> often results in a multi-year IDCRA. When an IDCRP has been tested in
> a prior year and this testing provides the auditor appropriate audit
> assurance, in subsequent years the auditor is only required to perform
> tests to ascertain if there have been material changes to the cost
> accounting practices, including practices that would affect either the
> cost pools or the allocation base and, if so, that the Federal
> cognizant agency for indirect cost negotiation has been informed.
>
> The auditor should take appropriate steps to coordinate testing of
> costs charged to cost pools supporting an IDCRP with the auditee and,
> as appropriate, with the Federal cognizant agency for indirect cost
> negotiation. The auditor should consider consulting with the auditee
> in the base year and the year in which the IDCRP is submitted to
> determine the best (e.g., most efficient) alternative under the
> circumstances.
>
> The following procedures are applicable when material charges are made
> to a major program based upon an IDCRP:
>
> a\. Ascertain if the IDCRP has been tested in a prior year.
>
> \(1\) When the testing performed in a prior year provides appropriate
> audit assurance, further review of the IDCRP is not required unless
> there have been material changes to cost accounting practices
> supporting the IDCRP. To ascertain if there have been material
> changes, the auditor should inquire of auditee management as to
> whether any changes have been made to the cost accounting practices
> and the likely effect of these changes.
>
> \(2\) When the auditor believes the changes in cost accounting
> practices are material, and the auditee is required the file the IDCRP
> with a Federal cognizant agency for indirect cost negotiation, the
> auditor should ascertain if the Federal cognizant agency for indirect
> cost negotiation has been appropriately notified of the changes in
> cost accounting practices. For non-Federal entities that are required
> to file a DS-1 or DS-2, this testing is performed in Step 6 \"DS-1 and
> DS-2 Requirements.\"
>
> *When prior testing of the IDCRP does not provide appropriate audit
> assurance (e.g., was not performed).*
>
> b\. Test the cost pools which form the basis of the IDCRP and the
> resulting charges to Federal awards to ascertain if they include only
> allowable costs in accordance with the cost principles or CASB
> Standards, as applicable. Suggested audit procedure number 1 provides
> guidance for specific tests.
>
> c\. Test the methods of allocating the costs to ascertain if they are
> in accordance with the provisions of the cost principles or CASB
> Standards, as applicable, and produce an equitable distribution of
> costs. Appropriate detailed tests may include:
>
> \(1\) Test statistical data (e.g., square footage, case counts,
> salaries and wages) to ascertain if the proposed allocation or rate
> bases are reasonable, updated as necessary, and do not contain any
> material omissions.
>
> \(2\) Review time studies or time and effort reports (where and if
> used) to ascertain if they are mathematically and statistically
> accurate, are implemented as approved, and are based on the actual
> effort devoted to the various functional and programmatic activities
> to which the salary and wage costs are charged.
>
> \(3\) Review the allocation methodology for consistency and test the
> appropriateness of methods used to make changes.

*CAP (Testing of the plan)*

4\. Since costs allocated through CAPs may include current year and
prior year costs, the auditor should test the costs charged to cost
pools supporting CAPs and the methods of allocating costs from CAPs in
each year when these costs are material to a major program. The auditor
should consider the following procedures:

> a\. Test the cost pools which form the basis of the CAP and the
> resulting charges to Federal awards to ascertain if they include only
> allowable costs in accordance with the applicable cost principles.
> Suggested audit procedure number 1 provides guidance for specific
> tests.
>
> b\. Test the methods of allocating the costs to ascertain if they are
> in accordance with the applicable provisions of the cost principles
> and produce an equitable distribution of costs. Appropriate detailed
> tests may include:
>
> \(1\) Test statistical data (e.g., square footage, case counts,
> salaries and wages) to ascertain if the proposed allocation or rate
> bases are reasonable, updated as necessary, and do not contain any
> material omissions.
>
> \(2\) Review time studies or time and effort reports (where and if
> used) to ascertain if they are mathematically and statistically
> accurate, are implemented as approved, and are based on the actual
> effort devoted to the various functional and programmatic activities
> to which the salary and wage costs are charged.
>
> \(3\) Review the allocation methodology for consistency and test the
> appropriateness of methods use to make charges changes.

*IDCRA and CAPs (Testing of charges based upon plans)*

5\. Perform the following procedures to test the application of charges
to Federal awards based upon an IDCRA and a CAP.

> a\. Ascertain if material indirect costs or centralized or
> administrative services costs were allocated or charged to a major
> program. If not, the following suggested audit procedures b through e
> do not apply.
>
> b\. Obtain and read the current IDCRA and/or CAP and determine the
> terms in effect.
>
> *Indirect Cost Rate Agreements*
>
> c\. Select a sample of claims for reimbursement and verify that the
> rates used are in accordance with the rate agreement, that rates were
> applied to the appropriate bases, and that the amounts claimed were
> the product of applying the rate to the applicable base. Verify that
> the costs included in the base(s) are consistent with the costs that
> were included in the base year (e.g., if the allocation base is total
> direct costs, verify that current year direct costs do not include
> costs items that were treated as indirect costs in the base year).
>
> *Public Assistance CAPs (for States, local governments, and Indian
> tribal governments only)*
>
> d\. Verify that the methods of charging costs to Federal awards are in
> accordance with the provisions of the approved CAP or prepared CAP on
> file.
>
> *State and Local Government-Wide CAPs*
>
> e\. Ascertain if the amounts used for reimbursement of central service
> costs for Federal awards were in accordance with the approved CAPs or
> plans on file, when approval is not required.

*DS-1 and DS-2 Requirements (For applicable non-Federal entities)*

6\. Perform the following procedures for the DS-1 or DS-2, as
applicable:

> a\. Read the DS-1 or DS-2 and its amendments and ascertain if the
> disclosures agree with the policies prescribed in the institution\'s
> policies and procedures documents.
>
> b\. Test that the disclosures agree with actual practices for the
> period covered by audit, including whether the practices were
> consistent throughout the period.

*Large Research Facilities Construction Costs (For applicable
educational institutions)*

7\. Perform the following procedures related to large research
facilities:

> a\. Ascertain if the institution had large research facilities as
> defined in OMB Circular A-21 under construction. If not the following
> suggested audit procedures b and c do not apply.
>
> b\. For large research facilities under construction of which 40
> percent or more of total assignable space is expected for Federal use,
> review the institution\'s approval process that should include board
> minutes or other documentation to ascertain if the institution\'s
> Board of Trustees or other independent entity reviewed and approved
> these construction projects.
>
> c\. For research facilities under construction costing more than \$25
> million of which 50 percent or more of total assignable space is
> expected for Federal use, ascertain if the institution documented the
> review steps performed to assure that construction costs are
> reasonable.

**COMPARISON AMONG OMB COST PRINCIPLES CIRCULARS**

The following two exhibits provide comparisons between the OMB cost
principles circulars. Exhibit 1 lists selected cost items for which
treatment are not substantially identical among the three circulars.
Exhibit 2 lists selected items that are unallowable in one or more of
the cost principles circulars.

Several cost items are unique to one type of entity and not to other
entities (e.g., commencement & convocation costs are only applicable to
universities). The numbers in parentheses refer to the cost item in the
applicable circulars.

  ------------------------------------------------------------------------
  **Selected Cost                                        **Exhibit 1**
  Items Not Treated                                      
  the Same Among the                                     
  Circulars**                                            
  ------------------ ----------------- ----------------- -----------------
  Selected Cost      A-87 - State,     A-21 -            A-122 -
  Items              Local & Indian    Educational       Non-Profit
                     Tribal            Institutions      Organizations
                     Governments                         

  Advertising &      Allowable with    Allowable with    Allowable with
  Public Relations   restrictions -    restrictions -    restrictions -
                     (2)               (1)               (1)

  Bad Debts          Unallowable       Unallowable       Unallowable - (3)
                     unless provided                     
                     in program                          
                     regulations - (7)                   

  Bonding            Allowable - (8)   Not Addressed     Allowable - (5)

  Civil Defense      Not Addressed     Allowable with    Not Addressed
  (local)                              restrictions -    
                                       (5)               

  Compensation for   Unique criteria   Unique criteria   Unique criteria
  Personal Services  for support -     for support - (8) for support - (7)
                     (11)                                

  Defense &          Allowable with    Allowable with    Allowable with
  Prosecution of     restrictions -    restrictions -    restrictions -
  Criminal & Civil   (14)              (11)              (10)
  Proceedings                                            

  Goods or Services  Not Addressed     Unallowable -     Unallowable -
  for Personal Use                     (19)              (18)

  Housing & Personal Not Addressed     Unallowable -     Unallowable as
  Living Expenses                      (20)              overhead costs -
                                                         (19)

  Idle Facilities    Allowable with    Not Addressed     Allowable with
                     restrictions -                      restrictions -
                     (24)                                (20)

  Interest, Fund     Allowable with    Allowable with    Allowable with
  Raising &          restrictions -    restrictions -    restrictions -
  Investment         (21, 26)          (22)              (23)

  Lobbying           Unallowable       Unallowable -     Unallowable -
                     (certain          (17, 24)          (21)
                     exceptions at                       
                     State/local                         
                     level) - (27)                       

  Memberships,       Allowable for     Unallowable for   Unallowable for
  Subscriptions, &   civic, community  civic, community  civic, community
  Professional       & social          & social          & social
  Activities         organizations     organizations -   organizations -
                     with Federal      (28)              (30)
                     approval - (30)                     

  Organizational     Not Addressed     Not Addressed     Allowable with
  Costs                                                  prior approval -
                                                         (31)

  Patents            Not Addressed     Allowable with    Allowable with
                                       restrictions -    restrictions -
                                       (29)              (35)

  Professional       Allowable with    Allowable with    Allowable with
  Services Costs     restrictions -    restrictions -    restrictions -
                     (33)              (32)              (39)

  Proposal Costs     Allowable with    Allowable with    Not Addressed
                     restrictions -    restrictions -    
                     (34)              (34)              

  Publication &      Allowable (35)    Not Addressed     Allowable with
  Printing                                               restrictions -
                                                         (41)

  Recruiting Costs   Allowable with    Allowable with    Allowable with
                     restrictions -    restrictions -    restrictions -
                     (2)               (37.b)            (44)

  Relocation Costs   Not Addressed     Allowable with    Allowable with
                                       restrictions -    restrictions -
                                       (37.b)            (45)

  Royalties          Not Addressed     Allowable with    Allowable with
                                       restrictions -    restrictions -
                                       (39)              (47)

  Selling &          Not Addressed     Unallowable -     Unallowable -
  Marketing                            (42)              (48)

  Specialized        Not Addressed     Allowable with    Allowable with
  Services                             restrictions -    restrictions -
  Facilities                           (44)              (50)

  Substantial        Possible          Possible          Possible
  Relocation -       adjustment if     adjustment if     adjustment if
  Interest Provision relocated within  relocated within  relocated within
                     useful life -     20 years - (22)   20 years - (23)
                     (26)                                

  Taxes              Allowable with    Allowable with    Allowable with
                     restrictions -    restrictions -    restrictions -
                     (39)              (46)              (51)

  Termination Costs  Not Addressed     Allowable with    Allowable with
                                       restrictions -    restrictions -
                                       (49)              (52)

  Training           Allowable for     Allowable - (8.f) Allowable with
                     employee                            limitations -
                     development -                       (53)
                     (40)                                

  Travel             Allowable with    Allowable with    Allowable with
                     restrictions -    restrictions -    restrictions -
                     (41)              (48, 50)          (55)

  Trustees (travel   Not addressed     Unallowable -     Allowable with
  expense)                             (50)              restrictions -
                                                         (56)
  ------------------------------------------------------------------------

+-----------------+-----------------+-----------------+-----------------+
| **Selected      |                 |                 | **Exhibit 2**   |
| Unallowable     |                 |                 |                 |
| Cost Items**    |                 |                 |                 |
+=================+=================+=================+=================+
| Selected Cost   | A-87 - State,   | A-21 -          | A-122 -         |
| Items           | Local & Indian  | Educational     | Non-Profit      |
|                 | Tribal          |                 | Organizations   |
|                 | Governments     | Institutions    |                 |
+-----------------+-----------------+-----------------+-----------------+
| Advertising &   | Allowable with  | Allowable with  | Allowable with  |
| Public          | restrictions -  | restrictions -  | restrictions -  |
| Relations       | (2)             | (1)             | (1)             |
+-----------------+-----------------+-----------------+-----------------+
| Alcoholic       | \(4\)           | \(2\)           | Unallowable -   |
| Beverages       |                 |                 | (2)             |
+-----------------+-----------------+-----------------+-----------------+
| Alumni          | Not Applicable  | \(3\)           | Not Applicable  |
| Activities      |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Audit Services  | Allowable with  | Allowable with  | Allowable with  |
|                 | restrictions -  | restrictions as | restrictions as |
|                 | (5) and as      | addressed in    | addressed in    |
|                 | addressed in    | OMB Circular    | OMB Circular    |
|                 | OMB Circular    | A-133           | A-133           |
|                 | A‑133           |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Civil Defense   | Not Addressed   | Allowable with  | Not Addressed   |
| (local)         |                 | restrictions -  |                 |
|                 |                 | (5)             |                 |
+-----------------+-----------------+-----------------+-----------------+
| Commencement &  | Not Applicable  | \(6\)           | Not Applicable  |
| Convocations    |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Compensation -  | Not Addressed   | (8.g)           | Unallowable as  |
| Institution     |                 |                 | overhead        |
| Automobile      |                 |                 | costs - (7g)    |
+-----------------+-----------------+-----------------+-----------------+
| Contingencies   | \(12\)          | \(9\)           | \(8\)           |
+-----------------+-----------------+-----------------+-----------------+
| Defense &       | Allowable with  | Allowable with  | Allowable with  |
| Prosecution of  | restrictions -  | restrictions -  | restrictions -  |
| Criminal &      | (14)            | (11)            | (10)            |
| Civil           |                 |                 |                 |
| Proceedings     |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Donations &     | \(13\)          | \(13\)          | (9, 12)         |
| Contributions   |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Entertainment   | \(18\)          | \(15\)          | \(14\)          |
+-----------------+-----------------+-----------------+-----------------+
| Fines and       | Allowable with  | Allowable with  | Allowable with  |
| Penalties       | restrictions -  | restrictions -  | restrictions -  |
|                 | (20)            | (18)            | (16)            |
+-----------------+-----------------+-----------------+-----------------+
| General         | \(23\)          | Not Applicable  | Not Applicable  |
| Government      |                 |                 |                 |
| Expenses        |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Goods or        | Not Addressed   | Unallowable -   | Unallowable -   |
| Services for    |                 | (19)            | (18)            |
| Personal Use    |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Housing &       | Not Addressed   | \(20\)          | Unallowable as  |
| Personal Living |                 |                 | overhead        |
| Expenses        |                 |                 | costs - (19)    |
+-----------------+-----------------+-----------------+-----------------+
| Idle Facilities | Allowable with  | Not Addressed   | Allowable with  |
|                 | restrictions -  |                 | restrictions -  |
|                 | (24)            |                 | (20)            |
+-----------------+-----------------+-----------------+-----------------+
| Insurance &     | Allowable with  | Allowable with  | Allowable with  |
| Indemnification | restrictions -  | restrictions -  | restrictions -  |
|                 | (25)            | (21)            | (22)            |
+-----------------+-----------------+-----------------+-----------------+
| Interest, Fund  | Allowable with  | Allowable with  | Allowable with  |
| Raising &       | restrictions -  | restrictions -  | restrictions -  |
| Investment      | (21, 26)        | (22)            | (23)            |
+-----------------+-----------------+-----------------+-----------------+
| Lobbying        | Unallowable     | (17, 24)        | \(25\)          |
|                 | except at       |                 |                 |
|                 | State/local     |                 |                 |
|                 | level - (27)    |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Losses on Other | \(42\)          | \(25\)          | \(26\)          |
| Sponsored       |                 |                 |                 |
| Programs        |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Memberships,    | Allowable with  | Allowable with  | Allowable with  |
| Subscriptions & | restrictions -  | restrictions -  | restrictions -  |
| Professional    | (30)            | (28)            | (30)            |
| Activities      |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Organizational  | Not Addressed   | Not Addressed   | Allowable with  |
| Costs           |                 |                 | prior           |
|                 |                 |                 | approval - (31) |
+-----------------+-----------------+-----------------+-----------------+
| Patents         | Not Addressed   | Allowable with  | Allowable with  |
|                 |                 | restrictions -  | restrictions -  |
|                 |                 | (29)            | (35)            |
+-----------------+-----------------+-----------------+-----------------+
| Pre-Agreement   | Allowable with  | Allowable with  | Allowable with  |
| Costs           | restrictions -  | restrictions -  | restrictions -  |
|                 | (32)            | (31)            | (38)            |
+-----------------+-----------------+-----------------+-----------------+
| Publication &   | Allowable (35)  | Not Addressed   | Allowable with  |
| Printing        |                 |                 | restrictions -  |
|                 |                 |                 | (41)            |
+-----------------+-----------------+-----------------+-----------------+
| Recruiting      | Allowable with  | Allowable with  | Allowable with  |
| Costs           | restrictions -  | restrictions -  | restrictions -  |
|                 | (2)             | (37.b)          | (44)            |
+-----------------+-----------------+-----------------+-----------------+
| Relocation      | Not Addressed   | Allowable with  | Allowable with  |
| Costs           |                 | restrictions -  | restrictions -  |
|                 |                 | (37.b)          | (45)            |
+-----------------+-----------------+-----------------+-----------------+
| Selling &       | Not Addressed   | \(42\)          | Unallowable as  |
| Marketing       |                 |                 | overhead        |
|                 |                 |                 | costs - (48)    |
+-----------------+-----------------+-----------------+-----------------+
| Severance Pay   | Allowable with  | Allowable with  | Allowable with  |
|                 | restrictions -  | restrictions -  | restrictions -  |
|                 | (11.g)          | (43)            | (49)            |
+-----------------+-----------------+-----------------+-----------------+
| Student         | Not Applicable  | \(45\)          | Not Applicable  |
| Activity Costs  |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Taxes           | Allowable with  | Allowable with  | Allowable with  |
|                 | restrictions -  | restrictions-   | restrictions    |
|                 | (39)            | (46)            | (51)            |
+-----------------+-----------------+-----------------+-----------------+
| Termination     | Not Addressed   | Allowable with  | Allowable with  |
| Costs           |                 | restrictions -  | restrictions -  |
|                 |                 | (49)            | (52)            |
+-----------------+-----------------+-----------------+-----------------+
| Travel - First  | \(41\)          | \(48\)          | \(55\)          |
| Class           |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Trustees        | Not Applicable  | \(50\)          | Allowable with  |
| (travel         |                 |                 | restrictions -  |
| expense)        |                 |                 | (56)            |
+-----------------+-----------------+-----------------+-----------------+
| Under recovery  | \(42\)          | \(25\)          | \(26\)          |
| of Costs on     |                 |                 |                 |
| Federal         |                 |                 |                 |
| Agreements      |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+

**C. CASH MANAGEMENT**

**Compliance Requirements**

When entities are funded on a reimbursement basis, program costs must be
paid for by entity funds before reimbursement is requested from the
Federal Government. When funds are advanced, recipients must follow
procedures to minimize the time elapsing between the transfer of funds
from the U.S. Treasury and disbursement. When advance payment procedures
are used, recipients must establish similar procedures for
subrecipients.

Pass-through entities must establish reasonable procedures to ensure
receipt of reports on subrecipients\' cash balances and cash
disbursements in sufficient time to enable the pass-through entities to
submit complete and accurate cash transactions reports to the Federal
awarding agency or pass-through entity. Pass-through entities must
monitor cash drawdowns by their subrecipients to assure that
subrecipients conform substantially to the same standards of timing and
amount as apply to the pass-through entity.

Interest earned on advances by local government grantees and subgrantees
is required to be submitted promptly, but at least quarterly, to the
Federal agency. Up to \$100 per year may be kept for administrative
expenses. Interest earned by non-State nonprofit entities on Federal
fund balances in excess of \$250 is required to be remitted to
Department of Health and Human Services, Payment Management System, P.O.
Box 6021, Rockville, MD 20852.

Treasury regulations at 31 CFR part 205, which implement the Cash
Management Improvement Act of 1990 (CMIA) (Pub. L. No. 101-453), require
State recipients to enter into agreements which prescribe specific
methods of drawing down Federal funds (funding techniques) for selected
large programs. The agreements also specify the terms and conditions in
which an interest liability would be incurred. Programs not covered by a
Treasury-State Agreement are subject to procedures prescribed by
Treasury in Subpart B of 31 CFR part 205 (Subpart B).

The requirements for cash management are contained in the OMB Circular
102 (Paragraph 2.a.), the A-102 Common Rule (§­\_\_.21), OMB Circular
A-110 (§\_\_\_.22), Treasury regulations at 31 CFR part 205, Federal
awarding agency regulations, and the terms and conditions of the award.

**Availability of Other Information**

The U.S. Treasury, Financial Management Service maintains a Cash
Management Improvement Act page on the Internet
(http://www.fms.treas.gov/cmia/).

**Audit Objectives**

Determine whether:

1\. The recipient/subrecipient followed procedures to minimize the time
elapsing between the transfer of funds from the U.S. Treasury, or
pass-through entity, and their disbursement.

2\. States have complied with the terms and conditions of the
Treasury-State Agreement or Subpart B procedures prescribed by Treasury.

3\. The pass-through entity implemented procedures to assure that
subrecipients conformed substantially to the same timing requirements
that apply to the pass-through entity.

4\. Interest earned on advances was reported/remitted as required.

**Suggested Audit Procedures**

Note: The following procedures are intended to be applied to each
program determined to be major. However, due to the nature of cash
management and the system of cash management in place in a particular
entity, it may be appropriate and more efficient to perform these
procedures for all programs collectively rather than separately for each
program.

*States*

1\. For programs tested as major for States, verify which of those
programs are covered by the Treasury-State Agreement in accordance with
the materiality thresholds in Appendix A to subpart A of 31 CFR part 205
(31 CFR section 205.4).

2\. For those programs identified in procedure 1, determine the funding
techniques used for those programs. For those funding techniques that
require clearance patterns to schedule the transfer of funds to the
State, review documentation supporting the clearance pattern and verify
that the clearance pattern conforms to the requirements for developing
and maintaining clearance patterns as specified in the Treasury-State
Agreement (31 CFR sections 205.8 and 205.9(b)(4)).

3\. Select a sample of Federal cash draws and verify that:

> a\. The timing of the Federal cash draws were in compliance with the
> applicable funding techniques specified in the Treasury-State
> Agreement or Subpart B procedures, whichever is applicable (31 CFR
> sections 205.7 and 205.20).
>
> c\. To the extent available, program income, rebates, refunds, and
> other income and receipts were disbursed before requesting additional
> Federal cash draws as required by the A-102 Common Rule (§\_\_\_.21)
> and OMB Circular A-110 (§\_\_\_.22).

4\. Where applicable, select a sample of reimbursement requests and
trace to supporting documentation showing that the costs for which
reimbursement was requested were paid prior to the date of the
reimbursement request (31 CFR section 205.7(c)(5)).

5\. Review the calculation of the interest obligation owed to or by the
Federal Government, reported on the annual report submitted by the State
to ascertain that the calculation was in accordance with Treasury
regulations and the terms of the Treasury-State Agreement or Subpart B
procedures. Trace amounts used in the calculation to supporting
documentation.

*States and Other Recipients*

6\. For those programs where Federal cash draws are passed through to
subrecipients:

> a\. Select a representative sample of subrecipients and ascertain the
> procedures implemented to assure that subrecipients minimize the time
> elapsing between the transfer of Federal funds from the recipient and
> the pay out of funds for program purposes (A-102 Common Rule
> §\_\_\_.37(a)(4)).
>
> b\. Select a representative sample of Federal cash draws by
> subrecipients and ascertain that they conformed to the procedures.

*Other Recipients and Subrecipients*

7\. For those programs which received advances of Federal funds,
ascertain the procedures established with the Federal agency or
pass-through entity to minimize the time between the transfer of Federal
funds and the pay out of funds for program purposes.

8\. Select a sample of Federal cash draws and verify that:

> a\. Established procedures to minimize the time elapsing between
> drawdown and disbursement were followed.
>
> b\. To the extent available, program income, rebates, refunds, and
> other income and receipts were disbursed before requesting additional
> cash payments as required by the A-102 Common Rule (§\_\_\_.21) and
> OMB Circular A-110 (§\_\_\_.22).

9\. Where applicable, select a sample of reimbursement requests and
trace to supporting documentation showing that the costs for which
reimbursement was requested were paid prior to the date of the
reimbursement request.

10\. Review records to determine if interest was earned on Federal cash
draws. If so, review evidence to ascertain whether it was returned to
the appropriate agency.

**D. DAVIS-BACON ACT**

**Compliance Requirements**

When required by the Davis Bacon Act, the Department of Labor\'s (DOL)
governmentwide implementation of the Davis-Bacon Act, or by Federal
program legislation, all laborers and mechanics employed by contractors
or subcontractors to work on construction contracts in excess of \$2000
financed by Federal assistance funds must be paid wages not less than
those established for the locality of the project (prevailing wage
rates) by the DOL (40 USC 276a to 276a-7).

**Availability of Other Information**

The U.S. Department of Labor, Employment Standards Administration,
maintains a Davis-Bacon and Related Acts Internet page
(http://www.dol.gov/dol/esa/public/programs/dbra/index.html).

**Audit Objective**

Determine whether the non-Federal entity ensured that contractors and
subcontractors paid prevailing wage rates for projects covered by the
Davis-Bacon Act.

**Suggested Audit Procedures**

1\. Ascertain if the non-Federal entity receives Federal funds for
construction projects; if so, review program/project requirements to
ascertain if the program/project is covered by the Davis-Bacon Act.

2\. Select a sample of construction contracts and subcontracts and
verify that the required prevailing wage rate clauses were included in
contracts for construction which exceed \$2000.

3\. Determine the prevailing wage rates applicable at the time of the
construction payroll. (DOL\'s Wage and Hour Division publishes a
Register of Wage Determinations. Subscribers to the Davis-Bacon Wage
Determination Database on FedWorld=s Website can obtain wage
determinations online at www.fedworld.gov.)

4\. Examine a sample of contractor or subcontractor payroll submissions
and certifications and ascertain if such submissions indicate that
laborers and mechanics were paid the prevailing wage rates established
by the DOL for the locality at the time of the construction payroll.

**E. ELIGIBILITY**

**Compliance Requirements**

The specific requirements for eligibility are unique to each Federal
program and are found in the laws, regulations, and the provisions of
contract or grant agreements pertaining to the program. For programs
listed in the Compliance Supplement, these specific requirements are in
Part 4 - Agency Program Requirements or Part 5 - Clusters of Programs,
as applicable. This compliance requirement specifies the criteria for
determining the individuals, groups of individuals, or subrecipients
that can participate in the program and the amounts for which they
qualify.

**Audit Objectives**

Determine whether:

1\. Required eligibility determinations were made, (including obtaining
any required documentation/verifications) and that individual program
participants or groups of participants (including area of service
delivery) were determined to be eligible. Only eligible individuals or
groups of individuals (including area of service delivery) participated
in the program.

2\. Subawards were made only to eligible subrecipients.

3\. Amounts provided to or on behalf of eligibles were calculated in
accordance with program requirements.

**Suggested Audit Procedures**

1\. *Eligibility for Individuals*

a.  For some Federal programs with a large number of people receiving
    benefits, the non-Federal entity may use a computer system for
    processing individual eligibility determinations and delivery of
    benefits. Often these computer systems are complex and will be
    separate from the non-Federal entity\'s regular financial accounting
    system. Typical functions a computer system for eligibility may
    perform are:

> \- Perform calculations to assist in determining who is eligible and
> the amount of benefits
>
> \- Pay benefits (e.g., write checks)
>
> \- Maintain eligibility records, including information about each
> individual and benefits paid to or on behalf of the individual
> (regular payments, refunds, and adjustments)
>
> \- Track the period of time an individual is eligible and stop
> benefits at the end of a predetermined period unless, there is a
> redetermination of eligibility
>
> \- Perform matches with other computer data bases to verify
> eligibility (e.g., matches to verify earnings or identify individuals
> who are deceased)
>
> \- Control who is authorized to approve benefits for eligibles (e.g.,
> an employee may be approving benefits on-line and this process may be
> controlled by passwords or other access controls)
>
> \- Produce exception reports indicating likely errors which need
> follow-up (e.g., when benefits exceed a certain amount, would not be
> appropriate for a particular classification of individuals, or are
> paid more frequently than normal)
>
> Because of the diversity of computer systems, both hardware and
> software, it is not practical for the Compliance Supplement to provide
> suggested audit procedures to address each system. However, generally
> accepted auditing standards provide guidance for the auditor when
> computer processing relates to accounting information that can
> materially effect the financial statements being audited. Similarly,
> when eligibility is material to a major program, and a computer system
> is integral to eligibility compliance, the auditor should follow this
> guidance and consider the non-Federal entity\'s computer processing.
> The auditor should perform audit procedures relative to the computer
> system for eligibility as necessary to support the opinion on
> compliance for the major program. Due to the nature and controls of
> computer systems, the auditor may choose to perform these tests of the
> computer systems as part of testing the internal controls for
> eligibility.
>
> b\. Perform procedures to ascertain if the non-Federal entity\'s
> records/database includes all individuals receiving benefits during
> the audit period (e.g., that the population of individuals receiving
> benefits is complete).
>
> c\. Select a sample of individuals receiving benefits and perform
> tests to ascertain if the:
>
> \(1\) Non-Federal entity performed the required eligibility
> determination, (including obtaining any required
> documentation/verifications) and the individual was determined to be
> eligible. Specific individuals were eligible in accordance with the
> compliance requirements of the program. (Note that some programs have
> both initial and continuing eligibility requirements and the auditor
> should design and perform appropriate tests for both.)
>
> \(2\) Benefits paid to or on behalf of the individuals were calculated
> correctly and in compliance with the requirements of the program.
>
> \(3\) Benefits were discontinued when the period of eligibility
> expired.
>
> d\. In some programs, the non-Federal entity is required to use a
> quality control process to obtain assurances about eligibility. Review
> the quality control process and perform tests to ascertain if it is
> operating to effectively meet the objectives of the process and in
> compliance with applicable program requirements.

2\. *Eligibility for Group of Individuals or Area of Service Delivery*

> a\. In some cases, the non-Federal entity may be required to perform
> procedures to determine whether a population or area of service
> delivery is eligible. Test information used in determining eligibility
> and ascertain if the population or area of service delivery was
> eligible.
>
> b\. Perform tests to ascertain if :
>
> \(1\) The population or area served was eligible.
>
> \(2\) The benefits paid to or on behalf of the individuals or area of
> service delivery were calculated correctly.

3\. *Eligibility for Subrecipients*

> a\. If the determination of eligibility is based upon an approved
> application or plan, obtain a copy of this document and identify the
> applicable eligibility requirements.
>
> b\. Select a sample of the awards to subrecipients and perform
> procedures to verify that the subrecipients were eligible and amounts
> awarded were within funding limits.

**F. EQUIPMENT AND REAL PROPERTY MANAGEMENT**

**Compliance Requirements**

*Equipment Management*

Title to equipment acquired by a non-Federal entity with Federal awards
vests with the non-Federal entity. Equipment means tangible
nonexpendable property, including exempt property, charged directly to
the award having a useful life of more than one year and an acquisition
cost of \$5000 or more per unit. However, consistent with a non-Federal
entity\'s policy, lower limits may be established.

A State shall use, manage, and dispose of equipment acquired under a
Federal grant in accordance with State laws and procedures.
Subrecipients of States who are local governments or Indian tribes shall
use State laws and procedures for equipment acquired under a subgrant
from a State.

Local governments and Indian tribes shall follow the A-102 Common Rule
for equipment acquired under Federal awards received directly from a
Federal awarding agency. Institutions of higher education, hospitals,
and other non-profit organizations shall follow the provisions of OMB
Circular A-110. Basically the A-102 Common Rule and OMB Circular A-110
require that equipment be used in the program which acquired it or, when
appropriate, other Federal programs. Equipment records shall be
maintained, a physical inventory of equipment shall be taken at least
once every two years and reconciled to the equipment records, an
appropriate control system shall be used to safeguard equipment, and
equipment shall be adequately maintained. When equipment with a current
per unit fair market value in excess of \$5000, is no longer needed for
a Federal program, it may be retained or sold with the Federal agency
having a right to a proportionate (percent of Federal participation in
the cost of the original project) amount of the current fair market
value. Proper sales procedures shall be used that provide for
competition to the extent practicable and result in the highest possible
return.

The requirements for equipment are contained in the A-102 Common Rule
(§\_\_\_.32), OMB Circular A-110 (§\_\_\_.34), Federal awarding agency
program regulations, and the terms and conditions of the award.

*Real Property Management*

Title to real property acquired by non-Federal entities with Federal
awards vests with the non-Federal entity. Real property shall be used
for the originally authorized purpose as long as needed for that
purpose. For non-Federal entities covered by OMB Circular A-110 and with
written approval from the Federal awarding agency, the real property may
be used in other Federally-sponsored projects or programs that have
purposes consistent with those authorized for support by the Federal
awarding agency. The non-Federal entity may not dispose of or encumber
the title to real property without the prior consent of the awarding
agency.

When real property is no longer needed for the Federally-supported
programs or projects, the non-Federal entity shall request disposition
instructions from the awarding agency. (For purposes of this compliance
requirement, the awarding agency for recipients under OMB Circular A-110
or the A-102 Common Rule and subrecipients under OMB Circular A-110 is
the Federal agency providing the funding. The awarding agency for
subrecipients under the A-102 Common Rule is the pass-through entity.)
When real property is sold, sales procedures should provide for
competition to the extent practicable and result in the highest possible
return. If sold, non-Federal entities are normally required to remit to
the awarding agency the Federal portion (based on the Federal
participation in the project) of net sales proceeds. If retained, the
non-Federal entity shall normally compensate the awarding agency for the
Federal portion of the current fair market value of the property.
Disposition instructions may also provide for transfer of title in which
case, the non-Federal entity is entitled to compensation for its
percentage share of the current fair market value.

The requirements for real property are contained in the A-102 Common
Rule (§\_\_\_.31), OMB Circular A-110 (§\_\_\_.32), Federal awarding
agency regulations, and the terms and conditions of the award.

**Audit Objectives**

Determine whether the:

1\. The non-Federal entity maintains proper records for equipment and
adequately safeguards and maintains equipment.

2\. Disposition or encumbrance of any equipment or real property
acquired under Federal awards is in accordance with Federal requirements
and that the awarding agency was compensated for its share of any
property sold or converted to non-Federal use.

**Suggested Audit Procedures**

*(Procedure 1 only applies to subrecipients of States that are local
governments or Indian tribal governments. Procedure 2 only applies to
States and to subrecipients of States that are local governments or
Indian tribal governments.)*

1\. Obtain entity\'s policies and procedures for equipment management
and ascertain if they comply with the State\'s policies and procedures.

2\. Select a sample of equipment transactions and test for compliance
with the State\'s policies and procedures for management and disposition
of equipment.

*(Procedures 3-4 only apply to institutions of higher education,
hospitals, and other non-profit organizations; and Federal awards
received directly from a Federal awarding agency by a local government
or an Indian tribal government.)*

3\. *Inventory Management of Equipment*

> a\. Inquire if a required physical inventory of equipment acquired
> under Federal awards was taken within the last two years. Test whether
> any differences between the physical inventory and equipment records
> were resolved.
>
> b\. Identify equipment acquired under Federal awards during the audit
> period and trace selected purchases to the property records. Verify
> that the property records contain the following information about the
> equipment: description (including serial number or other
> identification number), source, who holds title, acquisition date and
> cost, percentage of Federal participation in the cost, location,
> condition, and any ultimate disposition data including, the date of
> disposal and sales price or method used to determine current fair
> market value.
>
> c\. Select a sample of equipment identified as acquired under Federal
> awards from the property records and physically inspect the equipment
> including whether the equipment is appropriately safeguarded and
> maintained.

4\. *Dispositions of Equipment*

> a\. Determine the amount of equipment dispositions for the audit
> period and perform procedures to verify that dispositions were
> properly classified between equipment acquired under Federal awards
> and equipment otherwise acquired.
>
> b\. For dispositions of equipment acquired under Federal awards,
> perform procedures to verify that the dispositions were properly
> reflected in the property records.
>
> c\. For dispositions of equipment acquired under Federal awards with a
> current per-unit fair market value in excess of \$5000, test whether
> the awarding agency was reimbursed for the appropriate Federal share.

*(Procedure 5 applies to States, local governments, Indian tribal
governments and non-profit organizations regardless of whether funding
is received as a recipient or subrecipient.)*

5\. *Dispositions of Real Property*

> a\. Determine real property dispositions for the audit period and
> ascertain such real property acquired with Federal awards.
>
> b\. For dispositions of real property acquired under Federal awards,
> perform procedures to verify that the non-Federal entity followed the
> instructions of the awarding agency which will normally require
> reimbursement to the awarding agency for the Federal portion of net
> sales or fair market value at the time of disposition, as applicable.

**G. MATCHING, LEVEL OF EFFORT, EARMARKING**

**Compliance Requirements**

The specific requirements for matching, level of effort, and earmarking
are unique to each Federal program and are found in the laws,
regulations, and the provisions of contract or grant agreements
pertaining to the program. For programs listed in the Compliance
Supplement, these specific requirements are in Part 4 - Agency Program
Requirements or Part 5 - Clusters of Programs, as applicable.

However, for matching, the A-102 Common Rule (§\_\_\_\_.24) and OMB
Circular A-110 (§\_\_\_.23) provide detailed criteria for acceptable
costs and contributions. The following is a list of the basic criteria
for acceptable matching:

\- Are verifiable from the non-Federal entity\'s records.

\- Are not included as contributions for any other Federally-assisted
project or program, unless specifically allowed by Federal program laws
and regulations.

\- Are necessary and reasonable for proper and efficient accomplishment
of project or program objectives.

\- Are allowed under the applicable cost principles.

\- Are not paid by the Federal Government under another award, except
where authorized by Federal statute to be allowable for cost sharing or
matching.

\- Are provided for in the approved budget when required by the Federal
awarding agency.

\- Conform to other applicable provisions of the A-102 Common Rule and
OMB Circular A-110 and the laws, regulations, and provisions of contract
or grant agreements applicable to the program.

Matching, level of effort and earmarking are defined as follows:

\(1\) *Matching* or cost sharing includes requirements to pro­vide
contributions (usually non-Federal) of a specified amount or percentage
to match Federal awards. Matching may be in the form of allowable costs
incurred or in-kind contributions (including third-party in-kind
contributions).

\(2\) *Level of effort* includes requirements for (a) a specified level
of service to be provided from period to period, (b) a specified level
of expendi­tures from non-Federal or Federal sources for speci­fied
activities to be maintained from period to period, and (c) Federal funds
to supple­ment and not supplant non-Federal funding of services.

\(3\) *Earmarking* includes requirements that specify the minimum and/or
maximum amount or percentage of the program\'s funding that must/may be
used for specified activities, in­cluding funds provided to
subrecipients. Earmarking may also be specified in relation to the types
of participants covered.

**Audit Objectives**

1\. *Matching* - Determine whether the minimum amount or percentage of
contributions or matching funds was provided.

2\. *Level of Effort* - Determine whether specified service or
expenditure levels were maintained.

3\. *Earmarking* - Determine whether minimum or maximum limits for
specified purposes or types of participants were met.

**Suggested Audit Procedures**

1\. **Matching**

> a\. Perform tests to verify that the required matching contributions
> were met.
>
> b\. Ascertain the sources of matching contributions and perform tests
> to verify that they were from an allowable source.
>
> c\. Test records to corroborate that the values placed on in-kind
> contributions (including third party in-kind contributions) are in
> accordance with the OMB cost principles circulars, the A-102 Common
> Rule, OMB Circular A-110, program regulations, and the terms of the
> award.
>
> d\. Test transactions used to match for compliance with the allowable
> costs/cost principles requirement. This test may be performed in
> conjunction with the testing of the requirements related to allowable
> costs/cost principles.

2.1 **Level of Effort** - *Maintenance of Effort*

> a\. Identify the required level of effort and perform tests to verify
> that the level of effort requirement was met.
>
> b\. Perform test to verify that only allowable categories of
> expenditures or other effort indicators (e.g., hours, number of people
> served) were included in the computation and that the categories were
> consistent from year to year. For example, in some programs, capital
> expenditures may not be included in the computation.
>
> c\. Perform procedures to verify that the amounts used in the
> computation were derived from the books and records from which the
> audited financial statements were prepared.
>
> d\. Perform procedures to verify that non-monetary effort indicators
> were supported by official records.

2.2 **Level of Effort** - *Supplement Not Supplant*

> a\. Ascertain if the entity used Federal funds to provide services
> which they were required to make available under Federal, State, or
> local law and were also made available by funds subject to a
> supplement not supplant requirement.
>
> b\. Ascertain if the entity used Federal funds to provide services
> which were provided with non-Federal funds in the prior year.
>
> \(1\) Identify the Federally-funded services.
>
> \(2\) Perform procedures to determine whether the Federal program
> funded services that were previously provided with non-Federal funds.
>
> \(3\) Perform procedures to ascertain if the total level of services
> applicable to the requirement increased in proportion to the level of
> Federal contribution.

3\. **Earmarking**

> a\. Identify the applicable percentage or dollar requirements for
> earmarking.
>
> b\. Perform procedures to verify that the amounts recorded in the
> financial records met the requirements (e.g., when a minimum amount is
> required to be spent for a specified type of service, perform
> procedures to verify that the financial records show that at least the
> minimum amount for this type of service was charged to the program;
> or, when the amount spent on a specified type of service may not
> exceed a maximum amount, perform procedures to verify that the
> financial records show no more than this maximum amount for the
> specified type of service was charged to the program).
>
> c\. When earmarking requirements specify a minimum percentage or
> amount, select a sample of transactions supporting the specified
> amount or percentage and perform tests to verify proper classification
> to meet the minimum percentage or amount.
>
> d\. When the earmarking requirements specify a maximum percentage or
> amount, review the financial records to identify transactions for the
> specified activity which were improperly classified in another account
> (e.g., if only 10 percent may be spent for administrative costs,
> review accounts for other than administrative costs to identify
> administrative costs which were improperly classified elsewhere and
> cause the maximum percentage or amount to be exceeded).
>
> e\. When earmarking requirements prescribe the minimum number or
> percentage of specified types of participants that can be served,
> select a sample of participants that are counted toward meeting the
> minimum requirement and perform tests to verify that they were
> properly classified.
>
> f\. When earmarking requirements prescribe the maximum number or
> percentage of specified types of participants that can be served,
> select a sample of other participants and perform tests to verify that
> they were not of the specified type.

**H. PERIOD OF AVAILABILITY OF FEDERAL FUNDS**

**Compliance Requirements**

Federal awards may specify a time period during which the non-Federal
entity may use the Federal funds. Where a funding period is specified, a
non-Federal entity may charge to the award only costs resulting from
obligations incurred during the funding period and any pre-award costs
authorized by the Federal awarding agency . Also, if authorized by the
Federal program, unobligated balances may be carried over and charged
for obligations of the subsequent funding period. Obligations means the
amounts of orders placed, contracts and subgrants awarded, goods and
services received, and similar transactions during a given period that
will require payment by the non-Federal entity during the same or a
future period (A-102 Common Rule, §\_\_\_.23; OMB Circular A-110,
§\_\_\_.28).

Non-Federal entities subject to the A-102 Common Rule shall liquidate
all obligations incurred under the award not later than 90 days after
the end of the funding period (or as specified in a program regulation)
to coincide with the submission of the annual Financial Status report
(SF‑269). The Federal agency may extend this deadline upon request
(A-102 Common Rule, §\_\_\_.23).

An example used by a program to determine when an obligation occurs (is
made) is found under Part 4, Department of Education, CFDA 84.000
(Cross-Cutting Section).

**Audit Objective**

Determine whether Federal funds were obligated within the period of
availability and obligations were liquidated within the required time
period.

**Suggested Audit Procedures**

1\. Review the award documents and regulations pertaining to the program
and determine any award-specific requirements related to the period of
availability and document the availability period.

2\. Test a sample of transactions charged to the Federal award after the
end of the period of availability and verify that the underlying
obligations occurred within the period of availability and that the
liquidation (payment) was made within the allowed time period.

3\. Test a sample of transactions that were recorded during the period
of availability and verify that the underlying obligations occurred
within the period of availability.

4\. Select a sample of adjustments to the Federal funds and verify that
these adjustments were for transactions that occurred during the period
of availability.

**I. PROCUREMENT AND SUSPENSION AND DEBARMENT**

**Compliance Requirements**

*Procurement*

States, and governmental subrecipients of States, shall use the same
policies and procedures used for procurements from non-Federal funds.
They also shall ensure that every purchase order or other contract
includes any clauses required by Federal statutes and executive orders
and their implementing regulations.

Local governments and Indian tribal governments which are not
subrecipients of States will use their own procurement procedures
provided that they conform to applicable Federal law and regulations and
standards identified in the A-102 Common Rule.

Institutions of higher education, hospitals, and other non-profit
organizations shall use procurement procedures that conform to
applicable Federal law and regulations and standards identified in OMB
Circular A-110. All non-Federal entities shall follow Federal laws and
implementing regulations applicable to procurements, as noted in Federal
agency implementation of the A-102 Common Rule and OMB Circular A-110.

Requirements for procurement are contained in the A-102 Common Rule
(§\_\_\_\_.36), OMB Circular A-110 (§\_\_\_\_.40 through §\_\_\_\_.48),
Federal awarding agency regulations, and the terms of the award. The
specific references for the A-102 Common Rule and OMB Circular A-110,
respectively are given for each procedure. (The first number listed
refers to the A-102 Common Rule and the second refers to A-110.)

*Suspension and Debarment*

Non-Federal entities are prohibited from contracting with or making
subawards under covered transactions to parties that are suspended or
debarred or whose principals are suspended or debarred. Covered
transactions include procurement contracts for goods or services equal
to or in excess of \$100,000 and all nonprocurement transactions (e.g.,
subawards to subrecipients).

Contractors receiving individual awards for \$100,000 or more and all
subrecipients must certify that the organization and its principals are
not suspended or debarred. The non-Federal entities may rely upon the
certification unless it knows that the certification is erroneous.
Non-Federal entities may, but are not required to, check for suspended
and debarred parties which are listed in the *List of Parties Excluded
From Federal Procurement or Nonprocurement Programs*, issued by the
General Services Administration (GSA). The information contained on the
list is available in printed and electronic formats. The printed version
is published monthly. Copies may be obtained by purchasing a yearly
subscription from the Superintendent of Documents, U.S. Government
Printing Office, Washington, DC 20402, or by calling the Government
Printing Office Inquiry and Order Desk at (202) 783-3238. The electronic
version can be accessed on the Internet (http://www.arnet.gov/epls).
Please note that the user will be required to record their name and
organization for purposes of the Computer Matching and Privacy Act of
1988.

Requirements for suspension and debarment are contained in the Federal
agencies\' codification of the governmentwide debarment and suspension
common rule (see Appendix II for CFR cites) which implements Executive
Orders 12549 and 12689, Debarment and Suspension, and the terms of the
award.

**Audit Objectives**

Determine whether:

1\. Procurements were made in compliance with the provisions of the
A-102 Common Rule, OMB Circular A-110, and other procurement
requirements specific to an award.

2\. The non-Federal entity obtained the required certifications for
covered contracts and subawards.

**Suggested Audit Procedures**

*(Procedures 1 - 4 apply only to institutions of higher education,
hospitals, and other non-profit organizations; and Federal awards
received directly from a Federal awarding agency by a local government
or an Indian tribal government.)*

1\. Obtain entity\'s procurement policies. Verify that the policies
comply with applicable Federal requirements (§\_\_\_\_.36(b)(1) and
§\_\_\_\_.43).

2\. Ascertain if the entity has a policy to use statutorily or
administratively-imposed in‑State or local geographical preferences in
the evaluation of bids or proposals. If yes, verify that these
limitations were not applied to Federal procurements except where
applicable Federal statutes expressly mandate or encourage geographic
preference (§\_\_\_\_.36(c)(2) and §\_\_\_\_.43).

3\. Examine procurement policies and procedures and verify the
following:

> a\. Written selection procedures require that solicitations
> incorporate a clear and accurate description of the technical
> requirements for the material, product, or service to be procured,
> identify all requirements that the offerors must fulfill, and include
> all other factors to be used in evaluating bids or proposals
> (§\_\_\_\_.36(c)(3) and §\_\_\_\_.44(a)(3)).
>
> b\. There is a written policy pertaining to ethical conduct
> (§\_\_\_\_.36(b)(3) and §\_\_\_\_.42).

4\. Select a sample of procurements and perform the following:

> a\. Examine contract files and verify that they document the
> significant history of the procurement, including the rationale for
> the method of procurement, selection of contract type, contractor
> selection or rejection, and the basis of contract price
> (§\_\_\_\_.36(b)(9) and §\_\_\_\_.46).
>
> b\. Verify that procurements provide full and open competition
> (§\_\_\_\_.36(c)(1) and §\_\_\_\_.43).
>
> c\. Examine documentation in support of the rationale to limit
> competition in those cases where competition was limited and ascertain
> if the limitation was justified (§\_\_\_\_.36(b)(1) and (d)(4); and
> §\_\_\_\_.43 and §\_\_\_\_.44(e)).
>
> d\. Verify that contract files exist and ascertain if appropriate cost
> or price analysis was performed in connection with procurement
> actions, including contract modifications and that this analysis
> supported the procurement action (§\_\_\_\_.36(f) and §\_\_\_\_.45).
>
> e\. Verify that the awarding Federal agency approved procurements
> exceeding \$100,000 when such approval was required. Procurements (1)
> awarded by noncompetitive negotiation, (2) awarded when only a single
> bid or offer was received, (3) awarded to other than the apparent low
> bidder, or (4) specifying a \"brand name\" product (§\_\_\_\_.36(g)(1)
> and §\_\_\_\_.44(e)), may require prior Federal awarding agency
> approval.
>
> f\. Verify compliance with other procurement requirements specific to
> an award.

*(Procedure 5 only applies to States and Federal awards subgranted by
the State to a local government or Indian tribal government.)*

5\. Test a sample of procurements to ascertain if the State\'s laws and
procedures were followed and that the policies and procedures used were
the same as for State funds.

*(Procedures 6 applies to all non-Federal entities)*

6\. Test a sample of procurements and subawards and ascertain if the
required suspension and debarment certifications were received for
subawards and covered contracts. Alternatively, the auditor may test a
sample of procurements and subawards to *the List of Parties Excluded
From Federal Procurement or Nonprocurement Programs*, issued by the
General Services Administration (GSA) and ascertain if contracts were
awarded to suspended or debarred parties.

**J. PROGRAM INCOME**

**Compliance Requirements**

Program income is gross income received that is directly generated by
the Federally-funded project during the grant period. If authorized by
Federal regulations or the grant agreement, costs incident to the
generation of program income may be deducted from gross income to
determine program income. Program income includes, but is not limited
to, income from: fees for services performed, the use or rental of real
or personal property acquired with grant funds, the sale of commodities
or items fabricated under a grant agreement, and payments of principal
and interest on loans made with grant funds. Except as otherwise
provided in the Federal awarding agency regulations or terms and
conditions of the award, program income does not include interest on
grant funds (covered under Cash Management), rebates, credits,
discounts, refunds, etc. (covered under Allowable Costs/Cost
Principles), or interest earned on any of them (covered under Cash
Management). Program income does not include the proceeds from the sale
of equipment or real property (covered under Equipment and Real Property
Management).

Program income may be used in one of three methods: deducted from
outlays, added to the project budget, or used to meet matching
requirements. Unless specified in the Federal awarding agency
regulations or the terms and conditions of the award, program income
shall be deducted from program outlays. However, for research and
development activities by colleges and universities and other non-profit
organizations, the default method is to add program income to the
project budget. Unless Federal awarding agency regulations or the terms
and conditions of the award specify otherwise, non-Federal entities have
no obligation to the Federal Government regarding program income earned
after the end of the grant period.

The requirements for program income are found in the A-102 Common Rule
(§\_\_\_\_.21(payment) and §\_\_\_\_.25), OMB Circular A-110
(§\_\_\_\_.2 (program income definition), §\_\_\_\_.22(payment), and
§\_\_\_\_.24), Federal awarding agency laws, program regulations, and
the provisions of the contract or grant agreements pertaining to the
program.

**Audit Objective**

Determine whether program income is correctly determined, recorded, and
used in accordance with the program requirements, A-102 Common Rule, and
OMB Circular A-110, as applicable.

**Suggested Audit Procedures**

1\. *Identify Program Income*

> a\. Review the laws, regulations, and the provisions of contract or
> grant agreements applicable to the program and ascertain if program
> income was anticipated. If so, ascertain the requirements for
> determining or assessing the amount of program income (e.g., a scale
> for determining user fees, prohibition of assessing fees against
> certain groups of individuals, etc.), and the requirements for
> recording and using program income.
>
> b\. Inquire of management and review accounting records to ascertain
> if program income was received.

2\. *Determining or Assessing Program Income* - Perform tests to verify
that program income was properly determined or calculated in accordance
with stated criteria, and that program income was only collected from
allowable sources.

3\. *Recording of Program Income* - Perform tests to verify that all
program income was properly recorded in the accounting records.

4\. *Use of Program Income* - Perform tests to ascertain if program
income was used in accordance with the program requirements, the A-102
Common Rule, and OMB Circular A-110.

**K. REAL PROPERTY ACQUISITION AND RELOCATION ASSISTANCE**

**Compliance Requirements**

The Uniform Relocation Assistance and Real Property Acquisition Policies
Act of 1970, as amended, (URA) provides for uniform and equitable
treatment of persons displaced by Federally-assisted programs from their
homes, businesses, or farms. Property acquired must be appraised by
qualified independent appraisers. All appraisals must be examined by a
review appraiser to assure acceptability. After acceptance, the review
appraiser certifies the recommended or approved value of the property
for establishment of the offer of just compensation to the owner.
Federal requirements govern the determination of payments for
replacement housing assistance, rental assistance, and down payment
assistance for individuals displaced by Federally-funded projects. The
regulations also cover the payment of moving-related expenses and
reestablishment expenses incurred by displaced businesses and farm
operations.

Governmentwide requirements for real property acquisition and relocation
assistance are contained in Department of Transportation\'s single
governmentwide rule at 49 CFR part 24, Uniform Relocation Assistance and
Real Property Acquisition Regulations for Federal and Federally-Assisted
Programs.

**Audit Objective**

Determine whether the non-Federal entity complied with the real property
acquisition, appraisal, negotiation, and relocation requirements.

**Suggested Audit Procedures**

1\. Inquire of management and review the records of Federal programs to
ascertain if the non-Federal entity administers Federally-assisted
programs that involve the acquisition of real property or the
displacement of households or businesses.

2\. *Property Acquisitions*

> For a sample of acquisitions:
>
> a\. *Appraisal* - Test records to ascertain if: (1) the just
> compensation amount offered the property owner was determined by an
> appraisal process; (2) the appraisal(s) was examined by a review
> appraiser; and, (3) the review appraiser prepared a signed statement
> which explains the basis for adjusting comparable sales to reach the
> review appraiser\'s determination of the fair market value.
>
> b\. *Negotiations* - Test supporting documentation to ascertain if:
> (1) a written offer of the appraised value was made to the property
> owner; and (2) a written justification was prepared if the purchase
> price for the property exceeded the amount offered and that the
> documentation (e.g., recent court awards, estimated trial costs,
> valuation problems) supports such administrative settlement as being
> reasonable, prudent, and in the public interest.
>
> c\. *Residential Relocations* - Test supporting documentation to
> ascertain if the non-Federal entity made available to the displaced
> persons one or more comparable replacement dwellings.

3\. *Replacement Housing Payments* - For a sample, test the non-Federal
entity\'s records to ascertain if there is documentation that supports
the following;

> a\. The owner occupied the displacement dwelling for at least 180 days
> immediately prior to initiation of negotiations.
>
> b\. The non-Federal entity examined at least three comparable
> replacement dwellings available for sale and computed the payment on
> the basis of the price of the dwelling most representative of the
> displacement dwelling.
>
> c\. The asking price for the comparable dwelling was adjusted, to the
> extent justified by local market data, to recognize local area selling
> price reductions.
>
> d\. The allowance for increased mortgage cost \"buy down\" amount was
> computed based on the remaining principal balance, the interest rate,
> and the remaining term of the old mortgage on the displacement
> dwelling.
>
> e\. The non-Federal entity prepared written justification on the need
> to employ last resort housing provisions, if the total replacement
> housing payment exceeded \$22,500.

4\. *Rental or Downpayment Assistance* - For a sample, test the
non-Federal entity\'s records to ascertain if there is documentation
that supports the following:

> a\. The displacee occupied the displacement dwelling for at least 90
> days immediately prior to initiation of negotiations.
>
> b\. The displacee rented, or purchased, and occupied a decent, safe,
> and sanitary replacement dwelling within one year.
>
> c\. The non-Federal entity prepared written justification if the
> payment exceeded \$5250.

5\. *Business Relocations* -

> For a sample of business relocations:
>
> a\. *Moving Expenses* - Test that payments for moving and related
> expenses were for actual costs incurred or that fixed payments, in
> lieu of actual costs, were limited to a maximum of \$20,000 and
> computed based on the average annual net earnings of the business, as
> evidenced by income tax returns, certified financial statements, or
> other reliable evidence.
>
> b\. *Business Reestablishment Expense* - Verify that (1) the displacee
> was eligible as a farm operation, a non-profit organization, or a
> small business to receive reestablishment assistance, and (2) the
> payment was for actual costs incurred and did not exceed \$10,000.

**L. REPORTING**

**Compliance Requirements**

*Financial Reporting*

Recipients should use the standard financial reporting forms or such
other forms as may be authorized by OMB (approval is indicated by an OMB
paperwork control number on the form). These other forms may include
financial, performance, and special reporting. Each recipient must
report program outlays and program income on a cash or accrual basis, as
prescribed by the Federal awarding agency. If the Federal awarding
agency requires accrual information and the recipient\'s accounting
records are not normally maintained on the accrual basis, the recipient
is not required to convert its accounting system to an accrual basis but
may develop such accrual information through analysis. The awarding
agency may accept identical information from the recipient in
machine-readable format, computer printouts, or electronic outputs in
lieu of the prescribed formats. (The open-ended entitlement programs
(Appendix 1) require quarterly reports.)

The reporting requirements for subrecipients are as specified by the
pass-through entity. In many cases, these will be the same as or similar
to the following requirements for recipients.

The standard financial reporting forms are as follows:

1\. *Financial Status Report (FSR) (SF-269 (OMB No. 0348-0039) or
SF-269A (OMB No. 0348-0038))*. Recipients use the FSR to report the
status of funds for all non-construction projects and for construction
projects when the FSR is required in lieu of the SF‑271.

2\. *Request for Advance or Reimbursement (SF-270 (OMB No. 0348-0004))*.
Recipients use the SF‑270 to request Treasury advance payments and
reimbursements under non-construction programs.

3\. *Outlay Report and Request for Reimbursement for Construction
Programs (SF-271 (OMB No. 0348-0002))*. Recipients use the SF-271 to
request funds for construction projects unless advances or the SF-270 is
used.

4\. *Federal Cash Transactions Report (SF-272 (OMB No. 0348-0003) or
SF-272-A (OMB No. 0348-0003))*. Recipients use the SF-272 when payment
is by advances or reimbursements. The awarding agency may waive the
requirement for an SF-272 when electronic payment mechanisms provide
adequate data.

Electronic versions of these standard forms are located on the OMB\'s
Internet home page (http://www.whitehouse.gov/OMB).

*Reporting Under the Payment Management System*

Many recipients utilize the Payment Management System (PMS) operated by
the Division of Payment Management (DPM) within the Department of Health
and Human Services. After a Federal agency awards a grant, DPM is
responsible for controlling payments to the recipient; receiving
collections for unexpended funds, duplicate payments, audit
disallowances, and interest earned on Federal funds; accounting for
disbursement information provided by the recipient; and reporting data
equivalent to the SF-272, ­*Federal Cash Transaction Report*, to the
recipient and Federal agency.

Federal awarding agencies enter authorization amounts in PMS to allow
recipients to draw Federal funds. There are three methods by which
recipients can request funds: (1) the PMS 270 cash request, (2)
SMARTLINK II, or (3) CASHLINE systems. SMARTLINK II enables recipients
to request Federal funds through computer link with DPM, while CASHLINE
allows funds to be requested via a touch tone telephone. Once a quarter,
using the authorization amounts provided by the Federal agency, payments
requested by recipients, cash collection activity, and disbursement
information provided by recipients, DPM generates PMS 272 reports.

The PMS 272 is a series of reports consisting of:

1\. PMS 272, *Federal Cash Transactions Report, Status of Federal Cash
(OMB No. 0937-0200)*. This report provides a total accountability of all
Federal cash received by the recipient. It is partially prepared by DPM
based on data reported to DPM, and is completed and certified by the
recipient.

2\. PMS 272-A, *Federal Cash Transactions Report (OMB No. 0937-0200).*
This report is a continuation of the PMS-272 and is used by the
recipient to report cash disbursements back to DPM.

3\. PMS 272-B, *Statement of Cash Accountability (OMB No. 0937-0200).*
This report is furnished for the recipient\'s information and shows how
the recipient\'s cash accountability was derived by DPM.

4\. PMS 272-C, *Error Correction Document (OMB No. 0937-0200)*. This
report can be used by the recipient to report data reconciliation
problems for awards on the PMS 272-A or the Advances to Payee portion in
the PMS 272-B.

5\. PMS 272-E, *Major Program Statement (OMB No. 0937-0200).* This
report is furnished to States, Indian Tribes, and cross-serviced
organizations for their information only. This report lists individual
payments during the quarter among the various programs, and provides a
cash accountability for all advances received through PMS by major
program. All information provided is pre-printed by DPM.

6\. PMS 272-F, *Authorizations for Future Periods (OMB No. 0937-0200).*
This report is provided for information only and requires no action by
the recipient. It represents all awards posted in the PMS database that
have effective dates in future reporting periods.

7\. PMS 272-G, *Inactive Documents Report (OMB No. 0937-0200).* This
report lists all awards posted in the PMS database that have become
inactive or fully disbursed during the current period or a previous
period. In the event that disbursement adjustments are required, they
should be reported via the PMS 272-A.

The reports are either mailed to the recipient or electronically
downloaded by the recipient using DPM\'s Electronic 272 System.
Recipients should verify the reported amounts. If discrepancies are
noted, the report is annotated (or the PMS 272-C is completed) and
returned to DPM. The recipient uses the PMS 272-A to report the amount
of disbursements made; then signs, dates, and returns the report to DPM.
Recipients may report disbursements data electronically using the
Electronic 272 process. PMS 272 reporting requirements do not apply to
block grant programs; however, DPM does provide block grant recipients
with a PMS 272-E, *Major Program Statement*, quarterly. This report is
provided solely for information and no action is required by the
recipient.

*Performance Reporting*

Recipients shall submit performance reports at least annually but not
more frequently than quarterly. Performance reports generally contain,
for each award, brief information on each of the following:

1\. A comparison of actual accomplishments with the goals and objectives
established for the period.

2\. Reasons why established goals were not met, if appropriate.

3\. Other pertinent information including, when appropriate, analysis
and explanation of cost overruns or high unit costs.

*Special Reporting*

Non-Federal entities may be required to submit other reporting which may
be used by the Federal agency for such purposes as allocating program
funding.

Compliance testing of performance and special reporting are only
required for data that are quantifiable and meet the following criteria:

1\. Have a direct and material effect on the program.

2\. Are capable of evaluation against objective criteria stated in the
laws, regulations, contract or grant agreements pertaining to the
program.

Performance and special reporting data specified in Part 4, Compliance
Requirements, meet the above criteria.

Reporting requirements are contained in the following documents:

> a\. A-102 Common Rule \-- Financial reporting, §\_\_\_\_.41;
> Performance reporting, §\_\_\_\_.40(b).
>
> b\. OMB Circular A-110 \-- Financial reporting, §\_\_\_\_.52;
> Performance reporting, §\_\_\_\_.51.
>
> c\. The laws, regulations, and the provisions of contract or grant
> agreements pertaining to the program.

**Audit Objective**

Determine whether required reports for Federal awards include all
activity of the reporting period, are supported by applicable accounting
or performance records, and are fairly presented in accordance with
program requirements.

**Suggested Audit Procedures**

Note: For recipients using PMS to draw Federal funds, the auditor should
consider the following steps numbered 1 through 5 as they pertain to the
PMS 272, PMS 272-A, PMS 272-B, and PMS 272-E, regardless of the source
of the data included in the PMS reports. Although certain data is
supplied by the Federal awarding agency (i.e., award authorization
amounts) and certain amounts are provided by DPM, the auditor should
ensure that such amounts are in agreement with the recipient\'s records
and are otherwise accurate.

1\. Review applicable laws, regulations, and the provisions of contract
or grant agreements pertaining to the program for reporting
requirements. Determine the types and frequency of required reports.
Obtain and review Federal awarding agency, or pass-through entity in the
case of a subrecipient, instructions for completing the reports.

> a\. For financial reports, ascertain the accounting basis used in
> reporting the data (e.g., cash or accrual).
>
> b\. For performance and special reports, determine the criteria and
> methodology used in compiling and reporting the data.

2\. Perform appropriate analytical procedures and ascertain the reason
for any unexpected differences. Examples of analytical procedures
include:

> a\. Comparing current period reports to prior period reports.
>
> b\. Comparing anticipated results to the data included in the reports.
>
> c\. Comparing information obtained during the audit of the financial
> statements to the reports.
>
> Note: The results of the analytical procedures should be considered in
> determining the nature, timing, and extent of the other audit
> procedures for reporting.

3\. Select a sample of each of the following report types.

> a\. Financial reports:
>
> \(1\) Ascertain if the financial reports were prepared in accordance
> with the required accounting basis.
>
> \(2\) Trace the amounts reported to accounting records that support
> the audited financial statements and the schedule of expenditures of
> Federal awards and verify agreement or perform alternative procedures
> to verify the accuracy and completeness of the reports and that they
> agree with the accounting records.
>
> \(3\) For any discrepancies noted in PMS-272 reports, review
> subsequent PMS-272 reports to ascertain if the discrepancies were
> appropriately resolved with the Department of Health and Human
> Services\' Division of Payment Management.
>
> b\. Performance and special reports:
>
> \(1\) Trace the data to records that accumulate and summarize data.
>
> \(2\) Perform tests of the underlying data to verify that the data
> were accumulated and summarized in accordance with the required or
> stated criteria and methodology, including the accuracy and
> completeness of the reports.
>
> c\. When intervening computations or calculations are required between
> the records and the reports, trace reported data elements to
> supporting worksheets or other documentation that link reports to the
> data.
>
> d\. Test mathematical accuracy of reports and supporting worksheets.

4\. Test the selected reports for completeness.

> a\. For financial reports, review accounting records and ascertain if
> all applicable accounts were included in the sampled reports (e.g.,
> program income, expenditure credits, loans, interest earned on Federal
> funds, and reserve funds).
>
> b\. For performance and special reports, review the supporting records
> and ascertain if all applicable data elements were included in the
> sampled reports.

5\. Obtain written representation from management that the reports
provided to the auditor are true copies of the reports submitted or
electronically transmitted to the Federal awarding agency, the
Department of Health and Human Services\' Division of Payment Management
for recipients using the Payment Management System, or pass-through
entity in the case of a subrecipient.

**M. SUBRECIPIENT MONITORING**

**Compliance Requirements**

A pass-through entity is responsible for:

\- Identifying to the subrecipient the Federal award information (e.g.,
CFDA title and number, award name, name of Federal agency) and
applicable compliance requirements.

\- Monitoring the subrecipient\'s activities to provide reasonable
assurance that the subr­ecip­ient administers Federal awards in compli­ance
with Federal requirements.

\- Ensuring required audits are performed and requiring the subrecipient
to take prompt corrective action on any audit findings.

\- Evaluating the impact of subrecipient activi­ties on the pass-through
entity\'s ability to comply with applica­ble Federal regula­tions.

Factors such as the size of awards, percentage of the total program\'s
funds awarded to subrecipients, and the complexity of the compliance
requirements may influence the extent of monitoring procedures.

Monitoring activities may take various forms, such as reviewing reports
submitted by the subrecipient, performing site visits to the
subrecipient to review financial and programmatic records and observe
operations, arranging for agreed-upon procedures engagements for certain
aspects of subrecipient activities, such as eligibility determinations,
reviewing the subrecipient\'s single audit or program-specific audit
results and evaluating audit findings and the subrecipient\'s corrective
action plan.

The requirements for subrecipient monitoring are contained in the A-102
Common Rule (§\_\_\_.37 and §\_\_\_.40(a)), OMB Circular A-110
(§\_\_\_.50(a), Federal awarding agency program regulations, and the
terms and conditions of the award.

**Audit Objectives**

Determine whether the pass-through entity:

1\. Identified Federal award information and compliance requirements to
the subrecipient, and approved only allowable activities in the award
documents.

2\. Monitored subrecipient activities to provide reasonable assurance
that the subr­ecip­ient administers Federal awards in compli­ance with
Federal requirements.

3\. Ensured required audits are performed and requires appropriate
corrective action on monitoring and audit findings.

4\. Evaluates the impact of subrecipient activities on the pass-through
entity.

**Suggested Audit Procedures**

(Note: The auditor may consider coordinating the tests related to
subrecipients performed as part of Cash Management (tests of cash
reports submitted by subrecipients), Eligibility (tests that subawards
were made only to eligible subrecipients), and Procurement (tests of
suspension and debarment certifications) with the testing of
Subrecipient Monitoring.)

1\. Discuss subrecipient monitoring with the pass-through entity\'s
staff to gain an understanding of the scope of monitoring activities,
including the number, size, and complexity of awards to subrecipients.

2\. Test award documents and/or approved agreements to ascertain if the
pass-through entity made subrecipients aware of the award information
(e.g., CFDA title and number, award name, name of Federal agency) and
requirements imposed by laws, regulations and the provisions of contract
or grant agreements, and to verify that the activities approved in the
award documents were allowable. This testing should include procedures
to verify that the pass-through entity required subrecipients expending
\$300,000 or more in Federal awards during the subrecipient\'s fiscal
year to have audits made in accordance with OMB Circular A-133.

3\. Review the pass-through entity\'s documentation of subrecipient
monitoring to ascertain if the pass-through entity monitored that
subrecipients used Federal funds for authorized purposes and takes
actions in response to monitoring findings. This review should include
procedures to verify that the pass-through entity monitored the
activities of subrecipients not subject to OMB Circular A-133, using
techniques such as those discussed in the Compliance Requirements
provisions of this section.

4\. Verify that the pass-through entity receives audit reports from
subrecipients required to have an audit in accordance with OMB Circular
A-133, issues timely management decisions on audit and monitoring
findings, and requires subrecipients to take timely corrective action on
deficiencies identified in audits and subrecipient monitoring.

5\. Verify that the effects of subrecipient noncompli­ance are properly
reflect­ed in the pass-through entity\'s records.

**N. SPECIAL TESTS AND PROVISIONS**

**Compliance Requirements**

The specific requirements for Special Tests and Provisions are unique to
each Federal program and are found in the laws, regulations, and the
provisions of contract or grant agreements pertaining to the program.
For programs listed in this Supplement, the compliance requirements,
audit objectives, and suggested audit procedures for Special Tests and
Provisions are in Part 4 - Agency Program Requirements or Part 5 -
Clusters of Programs. For programs not listed in this Supplement, the
auditor shall review the program\'s contract and grant agreements and
referenced laws and regulations to identify the compliance requirements
and develop the audit objectives and audit procedures for Special Tests
and Provisions which could have a direct and material effect on a major
program. The auditor should also inquire of the non-Federal entity to
help identify and understand any Special Tests and Provisions.

Additionally, for both programs included and not included in this
Supplement, the auditor shall identify any additional compliance
requirements which are not based in law or regulation (e.g., were agreed
to as part of audit resolution of prior audit findings) which could be
material to a major program. Reasonable procedures to identify such
compliance requirements would be inquiry of non-Federal entity
management and review of the contract and grant agreements pertaining to
the program. Any such requirements which may have a direct and material
on a major program shall be included in the audit.

**Year 2000 Compliance Considerations**

The Year 2000 (Y2K) problem stems from the use in many computer systems
of a two-digit dating system that assumes the first two digits of the
year are 1 and 9, a convention adopted years ago when coding space was a
premium. Without corrective action, the systems may recognize \"00\"
date not as 2000 but as 1900, which could cause systems to shut down or
malfunction. On August 19, 1998, OMB issued an \"Advisory to Federal
Grantees on Responsibility to Address Year 2000 Issue,\" which included
guidance related to Federal awards. This advisory is located under the
grants management heading on OMB\'s Internet home page
(http://www.whitehouse.gov/OMB) and a copy is also included as Appendix
VI to this Supplement.

Many Federal agencies have included in the provisions of contracts and
grant agreements requirements relative to the Y2K problem (e.g., the
non-Federal entity should make specified progress towards becoming Y2K
compliant; meet specified Y2K performance requirements; use, develop, or
acquire equipment and systems that are Y2K compliant; or develop Y2K
contingency plans). The auditor is not expected to plan and perform
procedures to determine whether a non-Federal entity is in compliance
with these Y2K compliance provisions.

However, as with any other issue affecting a non-Federal entity\'s
ability to comply with the requirements related to Federal awards,
auditors will need to consider the effect of the Y2K issue when
performing tests of compliance during the audit period. This will be
particularly important when the audit period or dates affecting
compliance (e.g., eligibility calculations) include dates after December
31, 1999.