900

Pt. 1773 7 CFR Ch. XVII (1–1–00 Edition)

Norwalk, CT 06856–5116.) For purposes of reporting to RUS, Statement No. 94 shall be

applied as follows:

1. A borrower that is a subsidiary of another entity shall prepare and submit to

RUS separate financial statements even

though this financial information is presented in the parent’s consolidated statements.

2. In those cases in which a borrower has a

majority-ownership in a subsidiary, the borrower shall prepare consolidated financial

statements in accordance with the requirements of Statement No. 94. These consolidated statements must also include supplementary schedules presenting a Balance

Sheet and Income Statement for each majority-owned subsidiary included in the consolidated statements.

B. Although Statement No. 94 requires the

consolidation of majority-owned subsidiaries, the RUS Form 479, Financial and Statistical Report for Telecommunications Borrowers, shall be prepared on an unconsolidated basis by all borrowers.

PART 1773—POLICY ON AUDITS OF

RUS BORROWERS

Subpart A—General Provisions

Sec.

1773.1 General.

1773.2 Definitions.

Subpart B—RUS Audit Requirements

1773.3 Annual audit.

1773.4 Borrower responsibilities.

1773.5 Qualifications of CPA.

1773.6 Audit agreement.

1773.7 Audit standards.

1773.8 Audit date.

1773.9 Disclosure of irregularities and illegal acts.

1773.10 Access to audit-related documents.

1773.11–1773.19 [Reserved]

Subpart C—RUS Requirements for the Submission and Review of the Auditor’s

Report, Report on Compliance, Report

on Compliance and on Internal Controls Over Financial Reporting, and

Management Letter

1773.20 CPA’s submission of the auditor’s report, report on compliance, report on

compliance and on internal controls over

financial reporting, and management letter.

1773.21 Borrower’s review and submission of

the auditor’s report, report on compliance, report on compliance and on internal controls over financial reporting, and

management letter.

1773.22–1773.29 [Reserved]

Subpart D—RUS Reporting Requirements

1773.30 General.

1773.31 Auditor’s report.

1773.32 Report on compliance and on internal control over financial reporting.

1773.33 Management letter.

1773.34–1773.37 [Reserved]

Subpart E—RUS Required Audit Procedures

and Documentation

1773.38 Scope of engagement.

1773.39 Utility plant and accumulated depreciation.

1773.40 Regulatory assets.

1773.41 Extraordinary retirement losses.

1773.42 Clearing accounts.

1773.43 Capital and equity accounts.

1773.44 Long-term debt.

1773.45 Regulatory liabilities.

1773.46–1773.49 [Reserved]

APPENDIX A TO PART 1773—SAMPLE AUDITOR’S

REPORT FOR AN ELECTRIC COOPERATIVE

APPENDIX B TO PART 1773—SAMPLE AUDITOR’S

REPORT FOR A CLASS A OR B COMMERCIAL

TELEPHONE COMPANY

APPENDIX C TO PART 1773—ILLUSTRATIVE

INDEPENDENT AUDITOR’S MANAGEMENT

LETTER FOR ELECTRIC BORROWERS

APPENDIX D TO PART 1773—ILLUSTRATIVE

INDEPENDENT AUDITOR’S MANAGEMENT

LETTER FOR TELECOMMUNICATIONS BORROWERS

AUTHORITY: 7 U.S.C. 901 et seq.; 7 U.S.C. 1921

et seq.; Pub. L. 103–354, 108 Stat. 3178 (7 U.S.C.

6941 et seq.).

SOURCE: 56 FR 63360, Dec. 3, 1991, unless

otherwise noted.

EDITORIAL NOTE: Nomenclature changes to

part 1773 appear at 63 FR 38722, July 17, 1998.

Subpart A—General Provisions

§ 1773.1 General.

(a) This part implements those standard provisions of the security instrument utilized by the Rural Utilities

Service (RUS) for both electric and

telephone borrowers and by the Rural

Telephone Bank (RTB) for its telephone borrowers. The provisions require borrowers to prepare and furnish

to RUS, at least once during each 12-

month period, a full and complete report of its financial condition, operations, and cash flows, in form and substance satisfactory to RUS, audited

and certified by an independent certified public accountant (CPA), satisfactory to RUS, and accompanied by a

901

Rural Utilities Service, USDA § 1773.2

report of such audit, in form and substance satisfactory to RUS.

(b) This part 1773 applies to both RUS

and RTB borrowers. For the purposes

of RTB borrowers, as used in this part

1773, RUS means RTB and Administrator

means Governor unless the text indicates otherwise.

(c) This part complies with the 1994

revision of Government Auditing

Standards, issued by the Comptroller

General of the United States, United

States General Accounting Office.

(d) An auditor’s report, report on

compliance, report on compliance and

on internal controls over financial reporting, and management letter are required to meet the reporting provisions

of the RUS security instrument.

(1) The auditor’s report must state

that the audit was conducted in accordance with generally accepted government auditing standards (GAGAS).

(2) The management letter must

state that the audit was conducted in

accordance with this part.

(3) A report of the audit, in form and

substance satisfactory to RUS, cannot

be issued unless and until an audit has

been performed in accordance with

GAGAS and this part.

(4) A borrower is in violation of provisions of its security instrument with

RUS if the borrower fails to provide an

audit performed in compliance with

GAGAS and this part. RUS security instruments normally provide for notice

and an opportunity to cure such violations before RUS can exercise certain

remedies.

(5) A report prepared in connection

with a review or compilation of financial statements, as defined in Statement of Standards for Accounting and

Review Services No. 1, Compilation and

Review of Financial Statements, does

not satisfy the requirements of the

RUS security instrument.

(6) A report, as described in Statement on Auditing Standards (SAS) No.

62, entitled ‘‘Special Reports’’, or in

SAS No. 35, entitled ‘‘Special Reports—

Applying Agreed-upon Procedures to

Specified Elements, Accounts, or Items

of a Financial Statement’’, does not

satisfy the RUS loan security instrument requirements.

(7) An annual report containing audited financial statements does not

satisfy the RUS security instrument

requirements.

(e) This part further implements

those provisions of the standard RUS

security instrument by setting forth

the criteria for CPAs to be deemed satisfactory to RUS and the audit procedures and documentation standards

that must be performed before a report

of the audit satisfactory to RUS can be

prepared and issued.

[56 FR 63360, Dec. 3, 1991, as amended at 61

FR 107, Jan. 3, 1996]

§ 1773.2 Definitions.

As used in this part:

Administrator means the Administrator of RUS and, as provided in

§1773.2 (b), Governor.

AICPA means the American Institute

of Certified Public Accountants.

Audit means an examination of financial statements by an independent CPA

for the purpose of expressing an opinion on the fairness with which those

statements present financial position,

results of operations, and changes in

cash flows in conformity with generally accepted accounting principles

(GAAP) and for determining whether

the borrower has complied with applicable laws, regulations, and contracts

for those transactions and events reflected in the financial statements.

BAD means the Borrower Accounting

Division of RUS.

Borrower means an entity that has an

outstanding RUS, RTB, or FFB loan or

loan guarantee, or that has received a

grant for electric, telecommunications,

distance learning, or telemedicine purposes under the act.

CPA means certified public accountant. The terms CPA and CPA firm are

used interchangeably.

FFB means the Federal Financing

Bank, an instrumentality and wholly

owned corporation of the United

States.

GAAP means generally accepted accounting principles.

GAGAS means generally accepted

government auditing standards as set

forth in Government Auditing Standards, Standards for Audit of Governmental Organizations, Programs, Activities, and Functions, issued by the

Comptroller General of the United

States.

902

§ 1773.3 7 CFR Ch. XVII (1–1–00 Edition)

GAO means the General Accounting

Office.

Governor means the Governor of the

RTB.

Illegal act has the meaning prescribed

in SAS No. 54, entitled ‘‘Illegal Acts by

Clients’’.

Irregularity has the meaning prescribed in SAS No. 53, entitled ‘‘The

Auditor’s Responsibility to Detect and

Report Errors and Irregularities’’.

OIG means the Office of Inspector

General, United States Department of

Agriculture.

OMB means the Office of Management and Budget.

PCPS means the Private Companies

Practice Section of the AICPA.

REA means the Rural Electrification

Administration formerly an agency of

the United States Department of Agriculture and predecessor agency to RUS

with respect to administering certain

electric and telephone loan programs.

Regulatory asset means an asset resulting from an action of a regulator as

prescribed in Statement of Financial

Accounting Standards (SFAS) No. 71,

entitled ‘‘Accounting for the Effects of

Certain Types of Regulation’’.

Regulatory liability means a liability

imposed on a regulated enterprise by

an action of a regulator as prescribed

in SFAS No. 71, entitled ‘‘Accounting

for the Effects of Certain Types of Regulation’’.

Related party has the meaning prescribed in SFAS No. 57, entitled ‘‘Related Party Disclosures’’.

Related party transaction has the

meaning prescribed in SFAS No. 57, entitled ‘‘Related Party Disclosures’’.

Reportable condition has the meaning

prescribed in SAS No. 60, entitled

‘‘Communication of Internal Control

Structure Related Matters Noted in an

Audit’’.

RTB means the Rural Telephone

Bank.

RUS means the Rural Utilities Service, an agency of the United States Department of Agriculture established

pursuant to Section 232 of the Federal

Crop Insurance Reform and Department of Agriculture Reorganization

Act of 1994 (Pub. L. 103–354, 108 Stat.

3178), successor to REA with respect to

administering certain electric and telephone programs. See 7 CFR 1700.1.

SAS means Statement on Auditing

Standards as prescribed by the AICPA.

SEC Practice Section means the Securities and Exchange Commission Practice Section of the AICPA.

SFAS means Statements of Financial

Accounting Standards as prescribed by

the Financial Accounting Standards

Board.

State means any state or territory of

the United States, or the District of

Columbia.

Uniform System of Accounts means, for

telephone borrowers, the Uniform System of Accounts for Telecommunications Companies, prescribed by the

Federal Communications Commission

and set forth at 47 CFR part 32, as supplemented by RUS pursuant to 7 CFR

part 1770, Accounting Requirements for

RUS Telephone Borrowers, subpart B,

Uniform System of Accounts, and, for

electric borrowers, the Uniform System of Accounts Prescribed for Electric Borrowers of the RUS.

[56 FR 63360, Dec. 3, 1991, as amended at 59

FR 66440, Dec. 27, 1994; 60 FR 2874, Jan. 12,

1995; 63 FR 38722, July 17, 1998]

Subpart B—RUS Audit

Requirements

§ 1773.3 Annual audit.

(a) Each borrower must have its financial statements audited annually

by a CPA selected by the borrower and

approved by RUS as set forth in §1773.4.

(b) Each borrower must establish an

annual as of audit date within twelve

months of the date of receipt of the

first advance of RUS or FFB loan funds

and must prepare financial statements

as of the date established.

(c) Until all loans made or guaranteed by RUS have been repaid, the borrower must furnish three copies of the

auditor’s report, report on compliance,

report on compliance and on internal

controls over financial reporting, and

management letter to RUS within 120

days of the as of audit date.

(d) A borrower that qualifies as a

unit of state or local government or Indian tribe as such terms are defined in

the Single Audit Act of 1984 (31 U.S.C.

7501 et seq.), the Single Audit Act

Amendments of 1996 (31 U.S.C. 7505 et

seq.) and OMB Circular A–133, Audits of

States, Local Governments, and NonVerDate 27<JAN>2000 14:06 Feb 12, 2000 Jkt 190019 PO 00000 Frm 00902 Fmt 8010 Sfmt 8010 Y:\SGML\190019T.XXX pfrm02 PsN: 190019T
903

Rural Utilities Service, USDA § 1773.4

Profit Organizations (copy available

from the Executive Office of the President, Publication Services, 725 17th St.,

NW., Suite 2200, Washington, DC 20502;

202–395–7332), must comply with this

part as follows:

(1) A borrower that expends $300,000

or more in a year in Federal awards

must have an audit performed and submit an auditor’s report meeting the requirements of the Single Audit Act of

1984 and the Single Audit Act Amendments of 1996.

(2) A borrower that expends less than

$300,000 in Federal awards during the

year must have an audit performed in

accordance with the requirements of

this part.

(3) A borrower must notify RUS, in

writing, within 30 days of the as of

audit date, of the total Federal awards

expended during the year and must

state whether it will have an audit performed in accordance with the Single

Audit Act of 1984 and the Single Audit

Act Amendments of 1996, or this part.

(i) A borrower that elects to comply

with this part must select a CPA that

meets the qualifications set forth in

§1773.5.

(ii) If an audit is performed in accordance with the Single Audit Act of

1984 and the Single Audit Act Amendments of 1996, an auditor’s report that

meets the requirements of the Single

Audit Act of 1984, and the Single Audit

Act Amendments of 1996, will be sufficient to satisfy that borrower’s obligations under this part.

(e) OMB Circular A–133, Audits of

States, Local Governments, and NonProfit Organizations does not apply to

audits of RUS electric and telecommunications cooperatives and commercial telecommunications borrowers.

[56 FR 63360, Dec. 3, 1991, as amended at 59

FR 659, Jan. 6, 1994; 63 FR 38722, July 17, 1998]

§ 1773.4 Borrower responsibilities.

(a) Selection of a qualified CPA. The

borrower’s board of directors is responsible for the selection of a qualified

CPA that meets the requirements set

forth in §1773.5. When selecting a CPA,

the borrower should consider, among

other matters:

(1) The qualifications of CPAs available to do the work;

(2) The CPA’s experience in performing audits of utilities; and

(3) The CPA’s ability to complete the

audit and submit the reports and management letter within 90 days of the as

of audit date.

(b) Board approval of selection. The

board’s approval of a CPA must be recorded by a board resolution that

states:

(1) The CPA meets RUS’s qualifications to perform an audit; and

(2) The borrower and CPA will enter

into an audit agreement in accordance

with §1773.6.

(c) Notification of selection. When the

initial selection or subsequent change

of a CPA by a borrower has been made,

the borrower must notify RUS, in writing, at least 90 days prior to the as of

audit date.

(1) RUS will notify the borrower, in

writing, within 30 days of the date of

receipt of such notice, if the selection

or change in CPA is not satisfactory.

(2) Notification to RUS that the same

CPA has been selected for succeeding

audits of the borrower’s financial

statements is not required; however,

the procedures outlined in this part

must be followed for each new CPA selected, even though such CPA may previously have been approved by RUS to

audit records of other RUS borrowers.

Changes in the name of a CPA firm are

considered to be a change in the CPA.

(d) Audit agreement. The borrower

must enter into an audit agreement

with the CPA that complies with

§1773.6.

(e) Debarment certification. The borrower is responsible for the receipt,

from the selected CPA, of a lower tier

covered transaction certification, as

required under the provisions of Executive Orders 12549 and 12689, Debarment

and Suspension, and any rules or regulations issued thereunder.

(f) Submission of auditor’s report. The

borrower must submit to RUS the required auditor’s report, report on compliance, report on compliance and on

internal controls over financial reporting, and management letter as set

forth in §1773.21.

(1) An annual auditor’s report, report

on compliance, report on compliance

and on internal controls over financial

reporting, and management letter that

904

§ 1773.5 7 CFR Ch. XVII (1–1–00 Edition)

fail to meet the requirements detailed

in this part will be returned to the borrower with a written explanation of

noncompliance.

(2) The borrower must, within 60 days

of the date of the letter detailing the

noncompliance, submit corrected reports to RUS.

(3) If corrected reports are not received within 60 days of the date of the

letter detailing the noncompliance,

RUS may notify the borrower that a

default has occurred under its security

instrument or take other appropriate

action. The default notice will set forth

the period of time during which the default will be remedied.

(g) Submission of plan of corrective action. The borrower must submit written comments to RUS on the findings

and recommendations in the auditor’s

report, report on compliance, report on

compliance and on internal controls

over financial reporting, and management letter. The borrower must also

submit to RUS:

(1) A written plan for corrective action taken or planned; and

(2) Comments on the status of corrective action taken on previously reported findings and recommendations.

If corrective action is not necessary,

a written statement describing the reason it is not should accompany the

auditor’s report.

§ 1773.5 Qualifications of CPA.

For purposes of the RUS standard security instrument, any CPA that meets

the qualifications criteria of this section and enters into an audit agreement with the borrower that complies

with §1773.6, will be considered satisfactory to RUS.

(a) Certification. The accountant that

audits the financial statements of an

RUS borrower must be a CPA in good

standing of some state. The CPA does

not have to be licensed by the state in

which the borrower is located; however, the CPA must abide by the rules

and regulations of professional conduct

promulgated by the accountancy board

of the state in which the borrower is

located.

(b) Independence. The CPA must be

independent. A CPA will be considered

independent if the CPA:

(1) Meets the standards for independence contained in the AICPA Code of

Professional Conduct in effect at the

time the CPA’s independence is under

review;

(2) Does not have and has not had any

direct financial interest or any material indirect financial interest in the

borrower during the period covered by

the audit; and

(3) Is not and was not, during the period under audit, connected with the

borrower as a promoter, underwriter,

trustee, director, officer, or employee.

(c) Peer review requirement. The CPA

must belong to and participate in a

peer review program, and must have

undergone a satisfactory peer review of

the accounting and audit practice conducted by an approved peer review program under paragraph (c)(4) of this section, unless a waiver is granted under

paragraph (c)(7) of this section. The reviewing organization must not be affiliated with or have had its most recent peer review conducted by the organization currently being reviewed

(reciprocal reviews). After the initial

peer review has been performed, the

CPA must undergo a peer review of the

accounting and audit practice within 36

months of the issuance of the previous

peer review or at such additional times

as designated by the peer review executive committee.

(1) A CPA that receives an unqualified peer review report will be satisfactory to RUS provided that the CPA

meets the other criteria set forth in

this section.

(2) If a CPA receives a qualified or

adverse peer review report, the CPA

must undergo a second peer review

within 18 months of the date of the

qualified or adverse report. A CPA that

receives an unqualified second peer review report will be satisfactory to RUS

provided that the CPA meets the other

criteria set forth in this section.

(3) A CPA that receives a second

qualified or adverse peer review report

will not be satisfactory to RUS.

(4) Approved peer review programs. The

following peer review programs are approved by RUS:

(i) The peer review programs conducted by the AICPA;

(ii) The peer review program conducted by the regulated audit program

905

Rural Utilities Service, USDA § 1773.6

group of the National Conference of

CPA Practitioners; and

(iii) An independent peer review program that, in RUS’s determination, requires its members to:

(A) Ensure that the CPA can legally

engage in the practice of certified public accounting;

(B) Adhere to the quality control

standards established by the AICPA;

(C) Submit to peer reviews of the

CPA’s accounting and audit practice

every 42 months or at such additional

times as designated by its own executive committee; and

(D) Ensure that all professionals in

the firm, including CPAs and nonCPAs,

take part in the qualifying continuing

professional education requirements of

GAGAS, as set forth in paragraphs

(c)(4)(iii)(D)(1) and (c)(4)(iii)(D)(2). A

qualified continuing professional education course is one which meets the

standards of the AICPA.

(1) An auditor responsible for planning, directing, conducting, or reporting on government audits must complete, every two years, at least eighty

hours of continuing education and

training which contributes to the auditor’s professional proficiency. At least

twenty hours must be completed in any

one year of the two-year period; and

(2) An individual responsible for planning, directing, and conducting substantial portions of the field work, or

reporting on the government audit

must complete at least 24 of the 80

hours of continuing education and

training in subjects directly related to

the government environment and to

government auditing. If the audited entity operates in a specific or unique environment, auditors must receive

training that is related to that environment.

(5) Notification. The CPA must notify

the Assistant Administrator, Program

Accounting and Regulatory Analysis,

in writing, of participation in a peer review program. RUS will notify the CPA

within 60 days of receipt of this notice

if the selected peer review program is

acceptable.

(6) Submission of reports. The CPA

must submit to the Assistant Administrator, Program Accounting and Regulatory Analysis, a copy of any peer review report and accompanying letter of

comment, if any, within 60 days of the

date such report and letter of comment

are released by the peer review group.

(i) If the peer review report indicates

that a follow-up review will be made,

the CPA must submit subsequent reports to the Assistant Administrator,

Program Accounting and Regulatory

Analysis, within 60 days of the date

such reports are released by the peer

review group.

(ii) A peer review report must be submitted to the Assistant Administrator,

Program Accounting and Regulatory

Analysis, at least once every 42

months, or more frequently, if required

by the peer review program.

(iii) A copy of the peer review report,

accompanying letter of comment, and

the partners’ inspections must be made

available to OIG, upon request.

(7) Waiver of the peer review requirement. (i) A CPA may request that the

Administrator, RUS, waive the peer review requirement. To be eligible for a

waiver, the following criteria must be

met:

(A) The firm has been in existence for

less than 1 year from the date of the request and has not been previously organized under a different name;

(B) One of the partners organizing

the firm has previously, within 18

months preceding the request, worked

for a firm that has been peer reviewed

and the partner was partner-in-charge

of audits of RUS borrowers in the previous firm;

(C) The firm has enrolled in an approved peer review program; and

(D) The firm agrees to have the peer

review conducted within 18 months of

the date of the RUS waiver.

(ii) Waiver requests must address

each of the criteria in paragraph

(c)(7)(i) of this section and should be

submitted to the Director, Borrower

Accounting Division.

(d) Audit agreement. The CPA must

enter into an audit agreement with the

borrower that complies with §1773.6.

[56 FR 63360, Dec. 3, 1991, as amended at 61

FR 107, Jan. 3, 1996; 63 FR 38722, July 17, 1998]

§ 1773.6 Audit agreement.

(a) An audit agreement must be entered into between the CPA and the

borrower. The audit agreement must

set forth the auditor’s responsibilities

906

§ 1773.7 7 CFR Ch. XVII (1–1–00 Edition)

in a financial statement audit, including the responsibilities for testing and

reporting on internal controls and

compliance with laws and regulations

and the nature of any additional testing of internal controls and compliance

required by laws and regulations.

These responsibilities should be contrasted with the additional procedures

that could be performed that would result in additional assurances or opinions on the internal control structure

and compliance with laws and regulations. The audit agreement must also

include the following:

(1) The borrower and the CPA acknowledge that the audit is being performed and the auditor’s report, report

on compliance, report on compliance

and on internal controls over financial

reporting, and management letter is

being issued in order to enable the borrower to comply with the provisions of

RUS’s security instrument;

(2) The borrower and CPA acknowledge that RUS will consider the borrower to be in violation of its security

instrument with RUS if the borrower

fails to have an audit performed and

documented in compliance with

GAGAS and this part;

(3) The CPA represents that he/she

meets the requirements under this part

to be satisfactory to RUS;

(4) The CPA will perform the audit

and will prepare the auditor’s report,

report on compliance, report on compliance and on internal controls over

financial reporting, and management

letter in accordance with the requirements of this part;

(5) The CPA will document the audit

work performed in accordance with

GAGAS, the professional standards of

the AICPA, and the requirements of

this part;

(6) The CPA will make all audit-related documents, including auditor’s

reports, workpapers, and management

letters available to RUS or its representatives (OIG and GAO), upon request, and will permit the

photocopying of all audit-related documents; and

(7) The CPA will follow the requirements of reporting irregularities and

illegal acts as outlined in §1773.9.

(b) The audit agreement may include

such additional terms and conditions

as the CPA and borrower deem appropriate, including, but not limited to:

(1) The CPA will report all audit findings to the board of directors as required in §1773.20(b); and

(2) The auditor’s report, report on

compliance, report on compliance and

on internal controls over financial reporting, and management letter with

copies for transmittal to RUS, and supplemental lenders, if applicable, will be

submitted to the borrower’s board of

directors within 90 days of the as of

audit date;

(c) A copy of the audit agreement

must be available at the borrower’s office for inspection by RUS personnel.

One copy of the current audit agreement must be maintained in the CPA’s

workpapers or permanent file.

[56 FR 63360, Dec. 3, 1991, as amended at 61

FR 108, Jan 3, 1996; 63 FR 38722, July 17, 1998]

§ 1773.7 Audit standards.

(a) The audit must be performed in

accordance with GAGAS and this part.

The audit must be performed in accordance with GAGAS in effect at the audit

date unless the borrower is directed

otherwise, in writing, by RUS.

(b) The audit must include such tests

of the accounting records and such

other auditing procedures that are sufficient to enable the CPA to express an

opinion on the financial statements

and to issue the required reports on

compliance and internal controls and

the management letter.

(c) Audit scope limitation. (1) The borrower will not limit the scope of the

audit to the extent that the CPA is unable to meet RUS’s audit requirements

or to provide an unqualified opinion

that the financial statements are presented fairly in conformity with

GAAP.

(2) The security instrument provision

requiring the submission of a report of

the audit is not satisfied if the CPA

must qualify the opinion in the auditor’s report due to limitations placed

on the scope of the audit by the borrower.

(3) If the CPA determines during the

audit that an unqualified opinion cannot be issued due to a scope limitation

imposed by the borrower, the CPA

907

Rural Utilities Service, USDA § 1773.9

should use professional judgment to determine what levels of the borrower’s

management should be informed.

(4) After informing the borrower’s

management, if the scope limitation is

not adequately resolved, the CPA

should immediately contact the Assistant Administrator, Program Accounting and Regulatory Analysis, RUS,

U.S. Department of Agriculture, Washington, DC 20250–1500. The Assistant

Administrator, Program Accounting

and Regulatory Analysis, will endeavor

to resolve the matter with the borrower.

§ 1773.8 Audit date.

(a) The annual audit must be performed as of the end of the same calendar month each year unless prior approval to change the as of audit date is

obtained, in writing, from RUS.

(1) A borrower may request a change

in the as of audit date by writing to

the appropriate RUS regional office at

least 60 days prior to the newly requested as of audit date.

(2) The time period between the prior

as of audit date and the newly requested as of audit date must be no

longer than twenty-four months. For

example, a borrower that wishes to

change its as of audit date from December 31, 19X1, to June 30, must make

the change effective no later than June

30, 19X3.

(b) Comparative financial statements

must be prepared and audited for the

twelve months ending as of the new

audit date and for the twelve months

immediately preceding that period.

(c) A borrower that changes its as of

audit date from December 31, 19X1, to

June 30, 19X3, must have the CPA report on statements in the following

manner:

Previously issued statements Statements prepared as of

new audit date

12/31/X1; 12/31/X0 (Statements need not be reissued).

6/30/X3; 6/30/X2

§ 1773.9 Disclosure of irregularities

and illegal acts.

(a) In accordance with GAGAS, the

CPA must design audit steps and procedures to provide reasonable assurance

of detecting errors, irregularities, illegal acts, and noncompliance with the

provisions of contracts or grant agreements that could have a direct and material effect on financial statement

amounts.

(b) If there is an indication that an

irregularity may have occurred or evidence concerning the existence of a

possible instance of noncompliance

with the provisions of contracts or

grant agreements that could have a

material direct or indirect effect on

the financial statements, the CPA

must extend audit steps and procedures

to obtain sufficient, competent evidential matter to determine whether, in

fact, an irregularity or an instance of

noncompliance has occurred and the effect on the borrower’s financial statements.

(c) Pursuant to the terms of its audit

agreement with the borrower, the CPA

must immediately report, in writing,

all irregularities and all indications or

instances of illegal acts, whether material or not, to:

(1) The president of the borrower’s

board of directors;

(2) The Assistant Administrator, Program Accounting and Regulatory Analysis; and

(3) OIG, as follows:

(i) For the States of Delaware, District of Columbia, Maryland, Pennsylvania, Virginia, West Virginia, Connecticut, Maine, Massachusetts, New

Hampshire, New Jersey, New York,

Puerto Rico, Rhode Island, Vermont

and the Virgin Islands, report to

USDA–OIG–Audit, Northeast Region,

Regional Inspector General, 6505

Belcrest Road, room 428–A, Hyattsville,

Maryland 20782;

(ii) For the States of Alabama, Florida, Georgia, Kentucky, Mississippi,

North Carolina, South Carolina, and

Tennessee, report to USDA–OIG–Audit,

Southeast Region, Regional Inspector

General, 401 W. Peachtree Street, NW.,

room 2328, Atlanta, Georgia 30365–3520;

(iii) For the States of Illinois, Indiana, Michigan, Minnesota, Ohio, and

Wisconsin, report to USDA–OIG–Audit,

Midwest Region, Regional Inspector

General, 111 N. Canal Street, Suite

1130, Chicago, Illinois 60606;

(iv) For the States of Arkansas, Louisiana, New Mexico, Oklahoma, and

Texas, report to USDA–OIG–Audit,

908

§ 1773.10 7 CFR Ch. XVII (1–1–00 Edition)

Southwest Region, Regional Inspector

General, 101 South Main, room 324,

Temple, Texas 76501;

(v) For the States of Colorado, Iowa,

Kansas, Missouri, Montana, Nebraska,

North Dakota, South Dakota, Wyoming, and Utah, report to USDA–OIG–

Audit, Great Plains Region, Regional

Inspector General, P.O. Box 293, Kansas

City, Missouri 64141; and

(vi) For the States of Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Territory of Guam, Trust

Territories of Pacific, and Washington,

report to USDA–OIG–Audit, Western

Region, Regional Inspector General, 555

Battery Street, room 511, San Francisco, California 94111.

[56 FR 63360, Dec. 3, 1991, as amended at 61

FR 108, Jan. 3, 1996]

§ 1773.10 Access to audit-related documents.

Pursuant to the terms of the audit

agreement, the CPA must make all

audit-related documents, including

auditors’ reports, workpapers, and

management letters available to RUS,

or its designated representative, upon

request and must permit RUS, or its

designated representative, to photocopy all audit-related documents.

§§ 1773.11–1773.19 [Reserved]

Subpart C—RUS Requirements for

the Submission and Review of

the Auditor’s Report, Report

on Compliance, Report on

Compliance and on Internal

Controls Over Financial Reporting, and Management

Letter

§ 1773.20 CPA’s submission of the auditor’s report, report on compliance,

report on compliance and on internal controls over financial reporting, and management letter.

(a) Time limit. As soon as possible

after completion of the audit, but within 90 days of the as of audit date, the

CPA should deliver the auditor’s report, report on compliance, report on

compliance and on internal controls

over financial reporting, and management letter to the president of the borrower’s board of directors. As a minimum, copies should be provided for

each member of the board of directors

and the manager. Further, three copies

must be provided to the borrower for

transmittal to RUS.

(b) Communication with the board of directors. In addition to providing sufficient copies of the auditor’s report, report on compliance, report on compliance and on internal controls over financial reporting, and management

letter for each member of the borrower’s board of directors, RUS requires that the CPA report all audit

findings to the borrower’s board of directors. RUS recommends that audit

findings be communicated orally; however, the communication may be oral

or written, at the borrower’s discretion. If the information is communicated orally, the CPA must document the communication by appropriate memoranda or notations in the

workpapers. If the CPA communicates

in writing, a copy of the written communication must be included in the

CPA’s audit workpapers or permanent

file.

(c) Matters to be communicated. Matters communicated to the board of directors must include, but are not limited to the matters to be communicated to the audit committee as prescribed in SAS No. 61, entitled ‘‘Communication with Audit Committee’’,:

(1) The initial selection of and

changes in significant accounting policies;

(2) The methods used to account for

significant or unusual transactions and

the effects of significant accounting

policies in controversial or emerging

areas;

(3) The process utilized by management to formulate significant accounting estimates and the basis for the

CPA’s conclusions regarding the reasonableness of these estimates;

(4) Audit findings and recommendations, including audit adjustments that

either individually or in the aggregate

have a significant effect on the borrower’s financial statements;

(5) The CPA’s responsibility for other

information presented with the audited

financial statements, any audit procedures performed, and the results thereof;

909

Rural Utilities Service, USDA § 1773.31

(6) Any disagreements with management, whether or not satisfactorily resolved, concerning matters that individually or in the aggregate may be

significant to the borrower’s financial

statements or the auditor’s report, report on compliance, report on compliance and on internal controls over financial reporting, or management letter;

(7) Significant matters that were the

subject of consultations with other accountants;

(8) Significant issues discussed with

management with regard to the initial

or recurring retention of the CPA; and

(9) Any serious difficulties encountered in dealing with management during the performance of the audit.

[56 FR 63360, Dec. 3, 1991, as amended at 59

FR 659, Jan. 6, 1994]

§ 1773.21 Borrower’s review and submission of the auditor’s report, report on compliance, report on compliance and on internal controls

over financial reporting, and management letter.

(a) The borrower’s board of directors

should note and record receipt of the

auditor’s report, report on compliance,

report on compliance and on internal

controls over financial reporting, and

management letter and any action

taken in response to the reports or

management letter in the minutes of

the board meeting at which such reports and management letter are presented.

(b) The borrower must furnish RUS

with three copies of the auditor’s report, report on compliance, report on

compliance and on internal controls

over financial reporting, and management letter within 120 days of the as of

audit date. Any provision in RUS’s security instrument that requires such

documents to be furnished to RUS in a

shorter period of time may be disregarded.

(c) The borrower must furnish RUS

with three copies of its plan for corrective action, if any, within 180 days of

the as of audit date.

(d) The borrower must furnish RUS,

within 120 days of the as of audit date,

with a copy of each special report,

summary of recommendations or similar communications, if any, received

from the CPA as a result of the audit.

[56 FR 63360, Dec. 3, 1991, as amended at 59

FR 659, Jan. 6, 1994]

§§ 1773.22–1773.29 [Reserved]

Subpart D—RUS Reporting

Requirements

§ 1773.30 General.

(a) The CPA must prepare the following:

(1) An auditor’s report, examples of

which are set forth in appendixes A, exhibit 1 (Electric), and B, exhibit 1

(Telephone) of this part 1773;

(2) A report on compliance and on internal control over financial reporting,

examples of which are set forth in appendices A, exhibits 2 and 3 (Electric)

and B, exhibits 4 and 5 (Telecommunications) of this part 1773; and

(3) A management letter, an example

of which is set forth in appendix C of

this part 1773.

(b) The CPA should deliver the auditor’s report, report on compliance, report on compliance and on internal

controls over financial reporting, and

management letter (with copies as required in §1773.20) to the borrower as

soon as possible after completion of the

audit but not more than 90 days after

the as of audit date.

[56 FR 63360, Dec. 3, 1991, as amended at 63

FR 38723, July 17, 1998]

§ 1773.31 Auditor’s report.

The CPA must prepare a written report on comparative balance sheets,

statements of revenue and patronage

capital (or income and retained earnings, depending upon the structure of

the borrower) and statements of cash

flows. This report must be signed by

the CPA, cover all statements presented, and refer to the separate reports on internal controls and on compliance with laws and regulations

issued in conjunction with the auditor’s report. This report must be signed

by the CPA, cover all statements presented, and refer to the separate report

on compliance and on internal control

910

§ 1773.32 7 CFR Ch. XVII (1–1–00 Edition)

over financial reporting issued in conjunction with the auditor’s report.

[61 FR 108, Jan. 3, 1996, as amended at 63 FR

38723, July 17, 1998]

§ 1773.32 Report on compliance and on

internal control over financial reporting.

As required by GAGAS, the CPA

must prepare a written report on the

tests performed for compliance with

applicable laws, regulations, contracts,

and grants, and on the borrower’s internal control structure and on the assessment of control risk made as part

of the financial statement audit. This

report must be signed by the CPA and

must include, as a minimum:

(a) The scope of the CPA’s work to

obtain an understanding of the borrower’s internal control structure and

in assessing the control risk;

(b) A description of the reportable

conditions noted which include material weaknesses identified as a result of

the CPA’s work in understanding and

assessing control risk;

(c) If no reportable instances of noncompliance and no reportable conditions were found, the CPA must issue a

report as illustrated in appendix A, exhibit 2 (Electric), and appendix B, exhibit 4 (Telecommunications) of this

part 1773;

(d) If material instances of noncompliance and reportable conditions

are identified, the CPA must issue a report as illustrated in appendix A, exhibit 3 (Electric), and appendix B, exhibit 5 (Telecommunications) of this

part 1773;

(e) Other nonmaterial instances of

noncompliance should not be disclosed

in the report on compliance and on internal control over financial reporting,

but should be reported in a separate

communication to the board of directors, preferably in writing. All such

communications must be documented

in the workpapers and submitted to

RUS in compliance with §1773.21.

(f) If the CPA has issued a separate

letter detailing immaterial instances

of noncompliance, the report on compliance and on internal control over financial reporting must be modified to

include a statement such as:

We noted certain immaterial instances of

noncompliance that we have reported to the

management of (borrower’s name) in a separate letter dated (month, day, year).

(g) If the CPA has issued a separate

letter to management to communicate

other matters involving the design and

operation of the internal control over

financial reporting, the report on compliance and on internal control over financial reporting must be modified to

include a statement such as:

However, we noted other matters involving

the internal control over financial reporting

that we have reported to the management of

(borrower’s name) in a separate letter dated

(month, day, year).

(h) The report must contain the status of known but uncorrected significant or material findings and recommendations from prior audits that

affect the current audit objective.

[63 FR 38723, July 17, 1998]

§ 1773.33 Management letter.

The CPA must prepare a management letter that includes, at a minimum, comments on:

(a) Audit procedures. State whether

the audit has been performed in accordance with this part;

(b) Special reports. State whether any

special reports, summaries of recommendations, or similar communications were furnished to the borrower’s

management during the course of the

audit or during interim audit work,

and provide a description of the information furnished;

(c) Accounting and records. Comment

on the adequacy and effectiveness of

the borrower’s accounting procedures,

discuss the general condition of the

records, and outline any recommendations for improvement. Comment on

the adequacy and fairness of the methods used in accumulating and recording

labor, material, and overhead costs,

and the distribution of these costs to

construction, retirement, and maintenance or other expense accounts, and

where appropriate, include:

(1) Whether subsidiary plant records

agree with the controlling general

ledger plant accounts;

(2) Whether construction clearing accounts are cleared promptly of costs of

completed construction to the proper

classified plant accounts and whether

911

Rural Utilities Service, USDA § 1773.33

depreciation was accrued on such completed construction from the date the

plant was placed in service;

(3) Whether retirements of plant are

currently and systematically recorded

and properly priced;

(4) Whether all costs associated with

retirements of plant are properly accounted for in the accumulated provision for depreciation accounts and

comment on any unusual charges or

credits to such accounts; and

(5) Whether RUS approval was obtained for a sale requiring such approval, and whether receipts from sales

of plant, material or scrap were not

handled in conformance with RUS requirements.

(d) Materials control. Comment on the

adequacy of the control over materials

and supplies.

(e) Compliance with RUS loan and security instrument provisions. State

whether the following provisions of

RUS’s loan and security instruments

have been complied with:

(1) For electric borrowers, provisions

relating to:

(i) The requirement for funds to be

deposited in banks or other depositories designated in the loan documents or approved by RUS. For purposes of this part, funds shall be defined as cash proceeds from loans made

or guaranteed by RUS in accordance

with 7 CFR 1717.612.

(ii) The requirement for a borrower

to obtain written approval of mortgagees to enter into any contract for the

management, operation, or maintenance of the borrower’s system if the

contract covers all or substantially all

(90 percent) of the electric system. For

purposes of this part, the following

contracts shall be deemed as requiring

RUS approval:

(A) Management contracts in which

the borrower has contracted to have

another borrower or other entity manage its affairs;

(B) Management contracts in which

the borrower has contracted to manage

another borrower or other utility system;

(C) Operations and maintenance contracts in which the borrower has contracted to have another borrower or

other entity operate and/or maintain

all or substantially all (90 percent) of

the physical plant facilities of the borrower.

(D) Operations and maintenance contracts in which the borrower has contracted to operate and maintain the

physical plant facilities of another borrower or other utility system; and

(iii) The requirement for a borrower

to prepare and furnish mortgagees annual financial and statistical reports

on the borrower’s financial condition

and operations. For borrowers with a

December 31 year end, the CPA must

state whether the information represented by the borrower as having

been submitted to RUS in its most recent December 31 RUS Form 7 or Form

12 is in agreement with the borrower’s

audited records. For borrowers with a

year end other than December 31, the

CPA must state whether the information appears reasonable based upon the

audit procedures performed. If the borrower represents that an amended report has been filed as of December 31,

the comments must relate to the

amended report.

(2) For telephone borrowers, provisions relating to:

(i) The requirement for a borrower to

obtain written approval of the mortgagees to enter into any contract for the

operation or maintenance of property

and for the use of mortgaged property

by others, or for services pertaining to

toll traffic, operator assistance, or

switching. For purposes of this part

1773, the following contracts shall be

deemed as requiring RUS approval:

(A) Any contract, agreement or lease

between the borrower and an affiliate

other than as allowed under 7 CFR part

1744, subpart E;

(B) Any lease of a building or land;

and

(C) Any other contract as defined in

§1773.34 (e)(2)(i) except:

(1) Industry standard traffic settlement agreements involving interexchange and long distance carriers

which, in form and substance, conform

with contracts in general use in the

telecommunications industry;

(2) Billing and collecting agreements;

(3) Toll pooling arrangements involving National Exchange Carrier Association and state associations;

(4) Directory services agreements;

and

912

§ 1773.33 7 CFR Ch. XVII (1–1–00 Edition)

(5) Joint use agreements;

(ii) The requirement for funds to be

deposited in banks or other depositories designated in the loan documents or approved by RUS. For purposes of this part 1773, funds shall be

defined as cash on deposit in demand

and time accounts, and certificates of

deposit; and

(iii) The requirement for a borrower

to prepare and furnish mortgagees annual financial and statistical reports

on the borrower’s financial condition

and operations. For borrowers with a

December 31 year end, the CPA must

state whether the information represented by the borrower as having

been submitted to RUS in its most recent December 31 RUS Form 479 is in

agreement with the borrower’s audited

records. For borrowers with a year end

other than December 31, the CPA must

state whether the information appears

reasonable based upon the audit procedures performed. If the borrower represents that an amended report has

been filed as of December 31, the comments must relate to the amended report.

(iv) The requirement that a borrower

maintain either a net plant to secured

debt ratio or a funded reserve.

(A) For loans approved after June 10,

1991, and before October 7, 1997, if a borrower selected a loan maturity period

in excess of the expected economic life

of the facilities financed, the borrower

must maintain a secured debt ratio of

at least 1.2 or a funded reserve. If, during the audit period, the borrower has

been issued refunding notes that match

the remaining composite economic life

of the facilities thus eliminating the

requirement, the auditor should so

state.

(1) If the net plant to secured debt

ratio option was selected, this ratio

must be achieved one year following

the first advance of funds.

(2) If the funded reserve option was

selected, the reserve must be of such

amount that the balance of the reserve

plus the value of the facilities less depreciation be at least equal to the remaining principal payments on the

loan. Funding of the reserve must

begin within one year of approval of release of funds and must continue regularly over the composite economic life

of the facilities financed.

(B) For loans approved after October

7, 1997, if a borrower selected a loan

maturity period in excess of the expected economic life of the facilities financed, the borrower must maintain a

funded reserve in such amount that the

balance of the reserve plus the value of

the facilities less depreciation be at

least equal to the remaining principal

payments on the loan. Funding of the

reserve must begin within one year of

approval of release of funds and must

continue regularly over the composite

economic life of the facilities financed.

If, during the audit period, the borrower has been issued refunding notes

that match the remaining composite

economic life of the facilities thus

eliminating the requirement for maintaining the funded reserve requirement, the auditor should so state.

(f) Related party transactions. State

whether all material related party

transactions have been disclosed in the

notes to the financial statements in accordance with SFAS No. 57, entitled

‘‘Related Party Disclosures’’. If the

audit did not disclose any related party

transactions considered to be material,

either individually or in the aggregate,

so state;

(g) Depreciation rates. For electric

borrowers, comment when the depreciation rates used in computing monthly accruals are not in compliance with

RUS requirements (See RUS Bulletin

183–1, Depreciation Rates and Procedures), which require the use of depreciation rates that are within the

ranges established by RUS for each primary plant account, or with the requirements of the State regulatory

body having jurisdiction over the borrower’s depreciation rates; and

(h) Deferred debits and deferred credits.

For electric borrowers, provide a detailed analysis of the totals reported as

deferred debits and deferred credits, including, but not limited to, margin stabilization plans, revenue deferral plans,

and expense deferrals. The CPA must

state whether RUS has approved, in

913

Rural Utilities Service, USDA § 1773.39

writing, each regulatory asset and liability.

[56 FR 63360, Dec. 3, 1991, as amended at 59

FR 659, Jan. 6, 1994; 61 FR 108, Jan. 3, 1996.

Redesignated and amended at 63 FR 38723,

July 17, 1998; 63 FR 40169, July 28, 1998]

§§ 1773.34–1773.37 [Reserved]

Subpart E—RUS Required Audit

Procedures and Documentation

§ 1773.38 Scope of engagement.

(a) RUS requires that the audit procedures set forth in §§1773.39 through

1773.45 be performed annually by the

CPA during the audit of the RUS borrowers’ financial statements, which

audit procedures may be in addition to

the conduct of a GAGAS audit.

(b) The CPA must exercise professional judgment in determining whether any auditing procedures in addition

to those mandated by GAGAS or this

part should be performed in order to afford a reasonable basis for rendering

the auditor’s report, report on compliance, report on compliance and on internal controls over financial reporting, and management letter.

§ 1773.39 Utility plant and accumulated depreciation.

(a) General. The audit of these accounts must include tests of additions,

replacements, retirements, and

changes. Based upon the CPA’s determination of materiality, an appropriate sample of transactions must be

selected for testing. The CPA’s

workpapers must document that he/

she:

(1) Examined direct labor and material transactions to determine whether

the borrower’s accounting records reflect a complete accumulation of costs;

(2) Examined indirect costs and overhead charges to determine if they conform to the Uniform System of Accounts;

(3) Reviewed the costs of completed

construction and retirement projects

to determine if they were cleared

promptly from the work in progress accounts to the classified plant in service

accounts and the related depreciation

reserves;

(4) Examined direct purchases of special equipment and general plant;

(5) Determined the degree of accuracy and control of costing retirements, including tests of salvage and

removal costs;

(6) Reviewed the borrower’s work

order procedures; and

(7) Reviewed depreciation rates for

adequate support, compared them to

RUS guidelines, and determined if they

are in compliance.

(b) Construction work in progress. (1)

The workpapers must include a summary of open work orders reconciled to

the general ledger. The CPA must note

on the summary any unusual or nontypical projects.

(2) Based upon the CPA’s determination of materiality, an appropriate

sample of work orders must be selected

for testing. The CPA’s workpapers

must document that he/she:

(i) Reviewed equipment purchases

charged to work orders, including payments and receiving reports;

(ii) Reviewed contracts showing the

scope of the work, the nature of the

contract, the contract amount, and

scheduled payments and reviewed supporting documents to determine that

all services contracted for were in fact

rendered;

(iii) Reviewed time cards and pay

rates for several employees who allocate their time to work orders;

(iv) Reviewed the nature of material

and supplies issued to the project,

traced amounts and quantities to supporting documents, and reviewed the

reasonableness of clearing rates for assignment of stores expense to the work

order;

(v) Reviewed the accuracy of the

computation of overheads applied to

the work order; and

(vi) Reviewed other costs charged to

the work order for support and propriety.

(3) Based upon the CPA’s determination of materiality, an appropriate

sample of completed contracts must be

selected for testing. The CPA’s

workpapers must document that he/

she:

(i) Scheduled payments to contractors and traced to verify payments and

supporting invoices;

(ii) Traced contract costs to final

closeout documents, to the general

914

§ 1773.39 7 CFR Ch. XVII (1–1–00 Edition)

ledger, and to the continuing property

records; and

(iii) Verified the costs of owner furnished materials, if applicable.

(4) The CPA must review the borrower’s procedures for unitization and

classification of work order and contract costs. Based upon the CPA’s determination of materiality, an appropriate sample of transactions must be

selected for testing. The CPA’s

workpapers must document that he/

she:

(i) Reviewed the tabulation of record

units for construction from the work

order staking sheets to the tabulation

of record units, to the unitization

sheets, and to the continuing property

records;

(ii) Reviewed the procedures for unitizing and distributing costs of completed construction to the plant accounts;

(iii) Verified that standard costs were

being used;

(iv) Evaluated the basis for development of standard costs; and

(v) Determined that costs of completed construction were cleared

promptly from work in progress accounts.

(c) Continuing property records. Based

upon the CPA’s determination of materiality, an appropriate sample of transactions must be selected for testing.

The CPA’s workpapers must document

that he/she:

(1) Determined whether the subsidiary plant records agree with the

controlling general ledger plant accounts;

(2) Noted differences in the

workpapers; and

(3) Commented, in the management

letter, on any discrepancies.

(d) Retirement work-in-progress. Based

upon the CPA’s determination of materiality, an appropriate sample of transactions must be selected for testing.

The CPA’s workpapers must document

that he/she:

(1) Determined that plant retirements are currently and systematically recorded and priced on the basis

of the continuing property records, and

determined that costs of removal have

been properly accounted for;

(2) Explained the method used in

computing the cost of units of plant retired if continuing property records

have not been established and determined whether costs appeared reasonable; and

(3) Determined the manner in which

net losses due to retirements were accounted for and traced clearing entries

to the depreciation reserve, the plant

accounts, and the continuing property

records.

(e) Provision for accumulated depreciation. The CPA’s workpapers must include an analysis of transactions.

Based upon the CPA’s determination of

materiality, an appropriate sample of

transactions must be selected for testing. The CPA’s workpapers must document that he/she:

(1) Verified the depreciation accruals

for the period, including the depreciation base;

(2) Reviewed the basis of the depreciation rates, any change in rates and

the reason therefor, and, if appropriate,

determined whether the rates are in

compliance with RUS requirements or

with the requirements of the state regulatory body having jurisdiction over

the borrower’s depreciation rates;

(3) Reviewed salvage and removal

costs; and

(4) Searched for unrecorded retirements.

(f) Other reserves. The CPA’s

workpapers must include an account

analysis for all other material plant reserves, such as the reserve for the amortization of plant acquisition adjustments. Based upon the CPA’s determination of materiality, an appropriate sample of transactions must be

selected for testing. The CPA’s

workpapers must document that appropriate tests of transactions were performed.

(g) Narrative. The CPA must prepare

and include in the workpapers a comprehensive narrative on the scope of

work performed, observations made,

and conclusions reached. Specific matters covered in this narrative must include:

(1) The nature of construction and

other additions;

(2) The control over, and the accuracy of pricing retirements;

(3) The accuracy of distributing costs

to classified utility plant accounts;

(4) An evaluation of the method of:

915

Rural Utilities Service, USDA § 1773.43

(i) Capitalizing the direct loadings on

labor and material costs;

(ii) Distributing transportation costs

and other expense clearing accounts;

and

(iii) Capitalizing overhead costs;

(5) The tests of depreciation;

(6) A review of agreements such as

those relating to acquisitions, property

sales, and leases which affect the plant

accounts; and

(7) Notations, if applicable, of RUS

approval of property sales and the propriety of the disposition of the proceeds.

§ 1773.40 Regulatory assets.

The CPA’s workpapers must document whether all regulatory assets

comply with the requirements of SFAS

No. 71. For electric borrowers only, the

CPA’s workpapers must document

whether all regulatory assets have received RUS approval.

[59 FR 660, Jan. 6, 1994]

§ 1773.41 Extraordinary retirement

losses.

The CPA’s workpapers must contain

an analysis of retirement losses, including any required approval by a regulatory commission with jurisdiction

in the matter, or RUS, in the absence

of commission jurisdiction.

§ 1773.42 Clearing accounts.

The CPA’s workpapers must contain

an analysis of all clearing accounts.

Based upon the CPA’s determination of

materiality, an appropriate sample of

transactions should be selected for

testing. The CPA’s workpapers must

document that transactions were reviewed for proper allocation between

expense and capital accounts.

§ 1773.43 Capital and equity accounts.

(a) Capital stock. For privately owned

companies, the workpapers must include analyses of all stock transactions

during the audit period. Based upon the

CPA’s determination of materiality, an

appropriate sample of transactions

must be selected for testing. The CPA’s

workpapers must document that he/

she:

(1) Reviewed the subsidiary records

and reconciled them to the general

ledger control account;

(2) Reviewed authorizations and

issuances or redemptions of capital

stock for proper approvals by the board

of directors, stockholders, and regulatory commissions;

(3) Determined that transactions

were made in accordance with the appropriate provisions of the articles of

incorporation, bylaws, and RUS loan

documents; and

(4) Determined that transactions

were recorded in accordance with the

Uniform System of Accounts.

(b) Memberships. For cooperative organizations, the workpapers must include an analysis of the membership

transactions during the audit period.

Based upon the CPA’s determination of

materiality, an appropriate sample of

transactions must be selected for testing. The CPA’s workpapers must document that he/she:

(1) Reviewed the subsidiary records

and reconciled them to the general

ledger control account; and

(2) Determined that transactions

were made in accordance with the appropriate provisions of the articles of

incorporation, bylaws, and RUS loan

documents.

(c) Patronage capital, retained earnings, margins, and other equities. The

workpapers must include an analysis of

the patronage capital, retained earnings, margins and other equities, and

any related reserve accounts. Based

upon the CPA’s determination of materiality, an appropriate sample of transactions must be selected for testing.

The CPA’s workpapers must document

that he/she:

(1) Determined that the transactions

were made in accordance with the appropriate provisions of the articles of

incorporation, bylaws, RUS loan documents, Uniform System of Accounts, or

orders of regulatory commissions;

(2) Traced payments to underlying

support; and

(3) Determined whether, under the

terms of the RUS security instrument,

restrictions of retained earnings or

margins are required and, if so, whether they have been properly recorded.

916

§ 1773.44 7 CFR Ch. XVII (1–1–00 Edition)

§ 1773.44 Long-term debt.

The CPA’s workpapers must document that he/she:

(a) Confirmed RUS, FFB, and RTB

debt to the appropriate confirmation

schedule (RUS Form 690, Confirmation

Schedule Obligation to the FFB as of:

or Form 691, Confirmation Schedule—

Long-term Obligation to RUS as of; or

RTB Form 12, Confirmation Schedule);

(b) Confirmed other long-term debt

directly with the lender;

(c) Examined notes executed or canceled during the audit period; and

(d) Tested accrued interest computations.

§ 1773.45 Regulatory liabilities.

The CPA’s workpapers must document whether all regulatory liabilities

comply with the requirements of SFAS

No. 71. For electric borrowers only, the

CPA’s workpapers must document

whether all regulatory liabilities have

received RUS approval.

[59 FR 660, Jan. 6, 1994]

§§ 1773.46–1773.49 [Reserved]

APPENDIX A TO PART 1773—SAMPLE

AUDITOR’S REPORT FOR AN ELECTRIC

COOPERATIVE

Appendix A includes an example of an

auditor’s report, report on compliance, report on compliance and on internal controls

over financial reporting, financial statements and accompanying notes for an electric distribution cooperative. The sample

auditor’s report is intended as a guide only

and, while it is recommended that the format be followed, each auditor’s report should

be prepared to adequately cover the circumstances. To the extent possible, it should

be used as a guide in preparing auditors’ reports for other types of electric borrowers.

For power supply borrowers and for distribution borrowers with production or transmission plant, the same general format

should be followed. However, the Statement

of Revenue and Patronage Capital must be

expanded to show separate totals for operations expenses and maintenance expenses

for each class of production plant and for

transmission plant.

Exhibit 1—Sample Auditor’s Report

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors, Center County Electric Cooperative: Independent Auditor’s

Report

We have audited the accompanying balance sheets of Center County Electric Cooperative as of December 31, 1998 and 1997, and

the related statements of revenue and patronage capital, and cash flows for the years

then ended. These financial statements are

the responsibility of Center County Electric

Cooperative’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audits in accordance

with generally accepted auditing standards

and the standards applicable to financial audits contained in Government Auditing

Standards, issued by the Comptroller General of the United States. Those standards

required that we plan and perform the audit

to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the financial

statements. An audit also includes assessing

the accounting principles used and significant estimates made by management, as well

as evaluating the overall financial statement

presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material

respects, the financial position of Center

County Electric Cooperative as of December

31, 1998 and 1997, and the results of its operations and its cash flows for the years then

ended in conformity with generally accepted

accounting principles.

In accordance with Government Auditing

Standards, we have also issued a report

dated March 2, 1999, on our consideration of

Center County Electric Cooperative’s internal control over financial reporting and our

tests of its compliance with certain provisions of laws, regulations, contracts, and

grants.

Certified Public Accountants

March 2, 1999

Exhibit 2—Sample Report on Compliance and on

Internal Control over Financial Reporting,

the CPA found No Reportable Instances of

Noncompliance and No Material Weaknesses

(No Reportable Conditions Identified).

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors, Center County Electric Cooperative:

We have audited the financial statements

of Center County Electric Cooperative as of

and for the years ended December 31, 1998

and 1997, and have issued our report thereon

dated March 2, 1999. We conducted our audit

in accordance with generally accepted auditing standards and the standards applicable

to financial audits contained in Government

Auditing Standards, issued by the Comptroller General of the United States.

917

Rural Utilities Service, USDA Pt. 1773, App. A

Compliance

As part of obtaining reasonable assurance

about whether Center County Electric Cooperative’s financial statements are free of

material misstatement, we performed tests

of its compliance with certain provisions of

laws, regulations, contracts, and grants,

noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance

with those provisions was not an objective of

our audit, and accordingly, we do not express

such an opinion. The results of our tests disclosed no instances of noncompliance that

are required to be reported under Government Auditing Standards. [If the CPA has

issued a separate letter to the management

detailing immaterial instances of noncompliance, modify this paragraph to include a

statement such as the following: However,

we noted certain immaterial instances of

noncompliance which we have reported to

the management of Center County Electric

Cooperative in a separate letter dated March

2, 1999.]

Internal Control Over Financial Reporting

In planning and performing our audit, we

considered Center County Electric Cooperative’s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to

provide assurance on the internal control

over financial reporting. Our consideration

of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses.

A material weakness is a condition in which

the design or operation of one or more of the

internal control components does not reduce

to a relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial statements being audited may occur and not be

detected within a timely period by employees in the normal course of performing their

assigned functions. We noted no matters involving the internal control over financial

reporting and its operation that we consider

to be material weaknesses. [If the CPA has

issued a separate letter to management to

communicate other matters involving the

design and operation of the internal control

over financial reporting, modify this paragraph to include a statement such as the following: However, we noted other matters involving the internal control over financial

reporting which we have reported to the

management of Center County Electric Cooperative in a separate letter dated March 2,

1999.]

This report is intended for the information

of the audit committee, management, the

Rural Utilities Service, and supplemental

lenders. However, this report is a matter of

public record and its distribution is not limited.

Certified Public Accountants

March 2, 1999

Exhibit 3—Sample Report on Compliance and on

Internal Control over Financial Reporting,

the CPA found Reportable Instances of noncompliance and Reportable Conditions Identified.

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors, Center County Electric Cooperative:

We have audited the financial statements

of Center County Electric Cooperative as of

and for the years ended December 31, 1998

and 1997, and have issued our report thereon

dated March 2, 1999. We conducted our audit

in accordance with generally accepted auditing standards and the standards applicable

to financial audits contained in Government

Auditing Standards, issued by the Comptroller General of the United States.

Compliance

As part of obtaining reasonable assurance

about whether Center County Electric Cooperative’s financial statements are free of

material misstatement, we performed tests

of its compliance with certain provisions of

laws, regulations, contracts, and grants,

noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance

with those provisions was not an objective of

our audit, and accordingly, we do not express

such an opinion. The results of our tests disclosed instances of noncompliance that are

required to be reported under Government

Auditing Standards. [A description of the

findings should be included in the report.][If

the CPA has issued a separate letter to the

management detailing immaterial instances

of noncompliance, modify this paragraph to

include a statement such as the following:

We also noted certain immaterial instances

of noncompliance which we have reported to

the management of Center County Electric

Cooperative in a separate letter dated March

2, 1999.]

Internal Control Over Financial Reporting

In planning and performing our audit, we

considered Center County Electric Cooperative’s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to

provide assurance on the internal control

over financial reporting. However, we noted

918

Pt. 1773, App. A 7 CFR Ch. XVII (1–1–00 Edition)

certain matters involving the internal control over financial reporting and its operation that we consider to be reportable conditions. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over financial

reporting that, in our judgment, could adversely affect Center County Electric Cooperative’s ability to record, process, summarize, and report financial data consistent

with the assertions of management in the financial statements. [A description of the reportable conditions should be included in the

report.]

A material weakness is a condition in

which the design or operation of one or more

of the internal control components does not

reduce to a relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial statements being audited may occur and not be

detected within a timely period by employees in the normal course of performing their

assigned functions. Our consideration of the

internal control over financial reporting

would not necessarily disclose all matters in

the internal control that might be reportable

conditions and, accordingly, would not necessarily disclose all reportable conditions

that are also considered to be material weaknesses. However, we believe none of the reportable conditions described above is a material weakness. [If conditions believed to be

material weaknesses are disclosed, the last

sentence should be deleted and instead the

report should identify which of the reportable conditions described above are considered to be material weaknesses.][If the CPA

has issued a separate letter to management

to communicate other matters involving the

design and operation of the internal control

over financial reporting, modify this paragraph to include a statement such as the following: We also noted other matters involving the internal control over financial reporting which we have reported to the management of Center County Electric Cooperative in a separate letter dated March 2, 1999.]

This report is intended for the information

of the audit committee, management, the

Rural Utilities Service, and supplemental

lenders. However, this report is a matter of

public record and its distribution is not limited.

Certified Public Accountants

March 2, 1999

EXHIBIT 4—SAMPLE FINANCIAL

STATEMENTS

CENTER COUNTY ELECTRIC COOPERATIVE BALANCE SHEETS—DECEMBER 31, 19X9 AND 19X8

ASSETS (NOTES 1 AND 2)

19X9 19X8

ELECTRIC PLANT: (Note 3)

In Service—at cost ................................................................................................................. $9,524,646 $9,365,264

Construction Work in Progress .............................................................................................. 407,943 317,166

9,932,589 9,682,430

Less: Accumulated Provisions for Depreciation .................................................................... 3,117,629 2,917,295

6,814,960 6,765,135

OTHER ASSETS AND INVESTMENTS:

Nonutility Property .................................................................................................................. 20,227 20,227

Investments in Associated Organizations (Note 4) ............................................................... 391,258 292,798

411,485 313,025

CURRENT ASSETS:

Cash—General Funds ........................................................................................................... 37,350 51,544

Cash—Construction Funds .................................................................................................... 10,034 20,193

Accounts Receivable (Less accumulated provision for uncollectible accounts of $2,207 in

19X9 and $1,933 in 19X8) ................................................................................................. 36,527 35,255

Materials and Supplies (at average cost) .............................................................................. 83,652 80,882

Other Current and Accrued Assets ........................................................................................ 8,613 8,692

176,176 196,566

DEFERRED CHARGES (Note 5): ................................................................................................ 5,666 1,762

$7,408,287 $7,276,488

The accompanying notes are an integral part of these statements.

919

Rural Utilities Service, USDA Pt. 1773, App. A

CENTER COUNTY ELECTRIC COOPERATIVE BALANCE SHEETS—DECEMBER 31, 19X9 AND 19X8

EQUITIES AND LIABILITIES (NOTE 1)

19X9 19X8

EQUITIES:

Memberships .......................................................................................................................... $60,145 $59,440

Patronage Capital (Note 6) .................................................................................................... 1,761,798 1,526,833

Other Equities (Note 7) .......................................................................................................... 53,647 35,900

1,875,590 1,622,173

LONG-TERM DEBT:

RUS Mortgage Notes less current maturities (Note 8) .......................................................... 5,249,115 5,396,385

CURRENT LIABILITIES:

Current Maturities of Long-Term Debt ................................................................................... 145,000 140,000

Accounts Payable—Purchased Power .................................................................................. 48,916 52,117

Accounts Payable—Other ...................................................................................................... 21,859 6,556

Consumer Deposits ................................................................................................................ 32,660 33,085

Accrued Taxes ....................................................................................................................... 10,958 9,146

Other Current and Accrued Liabilities .................................................................................... 12,285 6,461

271,678 247,365

DEFERRED CREDITS (Note 10) ................................................................................................. 11,904 10,565

$7,408,287 $7,276,488

The accompanying notes are an integral part of these statements.

CENTER COUNTY ELECTRIC COOPERATIVE STATEMENTS OF REVENUE AND PATRONAGE CAPITAL FOR

THE YEARS ENDED DECEMBER 31, 19X9 AND 19X8

19X9 19X8

OPERATING REVENUES ............................................................................................................ $1,719,467 $1,605,690

OPERATING EXPENSES:

Cost of Power ........................................................................................................................ 587,729 625,411

Distribution—Operation .......................................................................................................... 111,058 121,682

Distribution—Maintenance ..................................................................................................... 158,622 182,740

Consumer Accounts ............................................................................................................... 76,675 72,927

Sales ...................................................................................................................................... 38,378 40,755

Administrative and General .................................................................................................... 94,682 87,058

Depreciation and Amortization ............................................................................................... 288,389 279,776

Taxes ...................................................................................................................................... 34,920 34,438

1,390,453 1,444,787

OPERATING MARGINS BEFORE FIXED CHARGES 329,014 160,903

FIXED CHARGES:

Interest on Long-Term Debt ...................................................................................................... 113,713 115,082

OPERATING MARGINS AFTER FIXED CHARGES .................................................................... 215,301 45,821

G&T AND OTHER CAPITAL CREDITS ....................................................................................... 14,460 17,500

NET OPERATING MARGINS ....................................................................................................... 229,761 63,321

NONOPERATING MARGINS:

Interest Income .............................................................................................................................. 24,289 18,802

Other Nonoperating Income .......................................................................................................... 1,200 1,200

25,489 20,002

NET MARGINS ............................................................................................................................. 255,250 83,323

PATRONAGE CAPITAL—BEGINNING OF YEAR ....................................................................... 1,526,833 1,469,125

1,782,083 1,552,448

RETIREMENT OF CAPITAL CREDITS ........................................................................................ 20,285 25,615

PATRONAGE CAPITAL—END OF YEAR ................................................................................... $1,761,798 $1,526,833

The accompanying notes are an integral part of these statements.

920

Pt. 1773, App. A 7 CFR Ch. XVII (1–1–00 Edition)

CENTER COUNTY ELECTRIC COOPERATIVE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED

DECEMBER 31, 19X9 AND 19X8

19×9 19×8

CASH FLOWS FROM OPERATING ACTIVITIES:

Cash Received from Consumers ....................................................................................... $1,721,496 $1,609,933

Cash Paid to Suppliers and Employees ............................................................................ (1,049,139) (1,126,367)

Interest Received ............................................................................................................... 24,289 18,802

Interest Paid ....................................................................................................................... (114,131) (115,607)

Taxes Paid ......................................................................................................................... (33,108) (32,132)

Net Cash Provided by Operating Activities ....................................................................... 549,407 354,629

CASH FLOWS FROM INVESTING ACTIVITIES:

Construction and Acquisition of Plant ................................................................................ (322,234) (216,427)

Plant Removal Costs ......................................................................................................... (25,994) (19,268)

Materials Salvaged from Retirements ................................................................................ 10,014 7,327

(Increase)/Decrease In:

Materials Inventory ...................................................................................................... (2,770) 1,916

Deferred Charges-Preliminary Survey & Investigation ............................................... (3,486) (2,617)

Investments-CFC Capital Term Certificates ............................................................... (82,472) (69,412)

Inventory Adjustment-Deferred Credit Decrease ............................................................... (2,290) (1,057)

Net Cash Used in Investing Activities ................................................................................ (429,232) (299,538)

CASH FLOWS FROM FINANCING ACTIVITIES:

Retirements of Patronage Capital Credits ......................................................................... (20,285) (25,615)

Retired Capital Credits—Gain ............................................................................................ 1,200 1,200

Donated Capital ................................................................................................................. 16,547 6,178

RUS Loan Advances .......................................................................................................... 174,976 197,450

Payments on RUS Debt ..................................................................................................... (317,246) (279,575)

Increase/(Decrease) In:

Consumer Deposits .................................................................................................... (425) 575

Memberships Issued ................................................................................................... 705 450

Net Cash Used in Financing Activities .............................................................................. (144,528) (99,337)

Net Increase/(Decrease) in Cash ...................................................................................... (24,353) (44,246)

Cash—Beginning of Year .................................................................................................. 71,737 115,983

Cash—End of Year ............................................................................................................ 47,384 71,737

The accompanying notes are an integral part of these statements.

RECONCILIATION OF NET MARGINS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

Net Margins ............................................................................................................................... $255,250 $83,323

Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities:

Depreciation and Amortization .................................................................................... 288,389 279,776

G&T and Other Capital Credits (Non-Cash) ............................................................... (14,460) (17,500)

Patronage Capital Credits-NRUCFC (Non-Cash) ...................................................... (1,528) (1,200)

Provision for Uncollectible Accounts Receivable ....................................................... 274 (526)

(Increase)/Decrease In:

Customer and Other Accounts Receivable ................................................................ (1,546) 2,523

Current and Accrued Assets-Other ............................................................................ 79 112

Increase/(Decrease) In:

Accounts Payable ....................................................................................................... 12,102 5,117

Accrued Taxes ............................................................................................................ 1,812 2,306

Deferred Energy Prepayments ................................................................................... 3,629 2,246

Current and Accrued Liabilities-Other ........................................................................ 5,824 (1,023)

Deferred Interest Expense ................................................................................................. (418) (525)

Total Adjustments ........................................................................................................... 294,157 271,306

Net Cash Provided by Operating Activities ............................................................................... 549,407 354,629

The accompanying notes are an integral part of these statements.

921

Rural Utilities Service, USDA Pt. 1773, App. A

CENTER COUNTY ELECTRIC COOPERATIVE NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 19X9

AND DECEMBER 31, 19X8

19X9 19X8

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Include a brief description of the reporting entity’s significant accounting policies in accordance with Accounting Principles

Board Opinion No. 22, Disclosure of Accounting Policies.

Disclosure of accounting policies should identify and describe the accounting principles followed by the borrower and the

methods of applying those principles that materially affect the determination of financial position, cash flow, and results of

operations.

Disclosures of accounting policies do not have to be duplicated in this section if presented elsewhere as an integral part of

the financial statements.

2. ASSETS PLEDGED:

Substantially all assets are pledged as security for long-term debt to RUS.

3. ELECTRIC PLANT AND DEPRECIATION RATES AND PROCEDURES:

Listed below are the major classes of the electric plant as of December 31, 19X9, and 19X8:

Intangible Plant .......................................................................................................................... $2,194 $2,194

Distribution Plant ....................................................................................................................... 9,011,036 8,873,957

General Plant ............................................................................................................................ 511,416 489,113

Electric Plant in Service ............................................................................................................ 9,524,646 9,365,264

Construction Work in Progress ................................................................................................. 407,943 317,166

9,932,589 9,682,430

Provision has been made for depreciation of distribution plant at a straight-line composite rate of 2.86 percent per annum.

General Plant depreciation rates have been applied on a straight-line basis as follows:

Structures and Improvement .............................................................................................. 2.5%

Office Furniture .................................................................................................................. 6.0%

Transportation Equipment .................................................................................................. 14.0%

Power Operated Equipment ............................................................................................... 12.0%

Other General Plant ........................................................................................................... 4.0%

Communications Equipment .............................................................................................. 6.0%

4. INVESTMENTS IN ASSOCIATED ORGANIZATIONS:

Investments in associated organizations consisted of the following at December 31, 19X9 and 19X8:

Capital Term Certificates of the National Rural Utilities Cooperative Finance Corporation (NRUCFC) ................................................................................................. $385,193 $288,261

NRUCFC Patronage Capital Credits .......................................................................... 5,065 3,537

Other ........................................................................................................................... 1,000 1,000

391,258 292,798’

5. DEFERRED CHARGES:

Following is a summary of amounts recorded as deferred charges as of December 31, 19X9 and 19X8:

Preliminary Surveys 19X0—X1 Work Plan ........................................................................ 5,666 1,762’≤

6. PATRONAGE CAPITAL:

At December 31, 19X9 and 19X8, patronage capital consisted of:

Assignable $255,250 $83,323

Assigned to Date ........................................................................................................ 1,952,448 1,869,125

2,207,698 1,952,448

Less: Retirements to Date .......................................................................................... 445,900 425,615

1,761,798 1,526,833

Under the provisions of the Mortgage Agreement, until the equities and margins equal or exceed forty percent of the total

assets of the cooperative, the return to patrons of contributed capital is generally limited to twenty-five percent of the patronage capital or margins received by the cooperative in the prior calendar year. The equities and margins of the cooperative represent 25.3 percent of the total assets at balance sheet date. Capital credit retirements in the amount of

$20,285 were paid in 19X9.

7. OTHER EQUITIES:

At December 31, 19X9 and 19X8, other equities consisted of:

Retired Capital Credits—Gain .................................................................................... $36,190 $34,990

Donated Capital .......................................................................................................... 17,457 910

53,647 35,900’≤

8. MORTGAGE NOTES—RUS:

Long-term debt is represented by mortgage notes payable to the United States of America. Following is a summary of outstanding long-term debt as of December 31, 19X9 and 19X8:

2% Notes due March 31, 19X5 .................................................................................. $1,057,155 $1,098,700

2% Notes due December 31, 19X6 ............................................................................ 2,485,927 2,502,370

5% Notes due December 31, 19X6 ............................................................................ 1,851,033 1,935,315

Less: Current Maturities .............................................................................................. (145,000) (140,000)

922

Pt. 1773, App. B 7 CFR Ch. XVII (1–1–00 Edition)

CENTER COUNTY ELECTRIC COOPERATIVE NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 19X9

AND DECEMBER 31, 19X8—Continued

19X9 19X8

5,249,115 5,396,385

Unadvanced loan funds of $285,600 are available to the cooperative on loan commitments from RUS.

Principal and interest installments on the above notes are due quarterly in equal amounts of $99,600. As of December 31,

19X9, annual maturities of long-term debt outstanding for the next five years are as follows:

19X0 ............................................................................................................................ $145,000

19X1 ............................................................................................................................ 150,000

19X2 ............................................................................................................................ 151,500

19X3 ............................................................................................................................ 154,000

19X4 ............................................................................................................................ 155,000

Advance payments of $252,300 may be applied to the installments.

9. PENSION PLAN:

Substantially all of the employees of the Cooperative are covered by the ABC Retirement and Security Program, a multiemployer plan. Pension expense for the years ended 19X9 and 19X8 was $22,400.00 and $20,400.00, respectively.

10. DEFERRED CREDITS:

Following is a summary of the amounts recorded as deferred credits as of December 31, 19X9 and 19X8:

Customer Energy Payments ....................................................................................... $6,694 $3,065

Inventory Adjustment .................................................................................................. 5,210 7,500

11,904 10,565

11. LITIGATION:

The cooperative is a defendant in an action in which the plaintiff claims damages totaling $200,000 for personal injuries

sustained. The action has been dismissed by the District Court, but is on appeal before the State Supreme Court. Management is of the opinion that no liability will be incurred by the cooperative as a result of this action.

12. COMMITMENTS:

Under its wholesale power agreement, the cooperative is committed to purchase its electric power and energy requirements from Central Power Cooperative, Inc., until December 31, 19XX. The rates paid for such purchases are subject to

review annually.

[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 109, Jan. 3, 1996; 63 FR 38724, July 17, 1998; 63

FR 40169, July 28, 1998]

APPENDIX B TO PART 1773—SAMPLE

AUDITOR’S REPORT FOR A CLASS A

OR B COMMERCIAL TELEPHONE COMPANY

Appendix B includes an example of a shortform auditor’s report, report on compliance,

report on compliance and on internal controls over financial reporting, financial

statements and accompanying notes for a

commercial telephone company. The sample

auditor’s report is intended as a guide only

and, while it is recommended that the format be followed, each auditor’s report should

be prepared to adequately cover the circumstances. To the extent possible, it should

be used as a guide in preparing auditors’ reports for other types of telephone borrowers.

Exhibit 1—Same Auditor’s Report

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors, Center Telephone

Company: Independent Auditor’s Report

We have audited the accompanying balance sheets of Center Telephone Company as

of December 31, 1998 and 1997, and the related

statements of revenue and patronage capital,

and cash flows for the years then ended.

These financial statements are the responsibility of Center Telephone Company’s management. Our responsibility is to express an

opinion on these financial statements based

on our audit.

We conducted our audit in accordance with

generally accepted auditing standards and

the standards applicable to financial audits

contained in Government Auditing Standards, issued by the Comptroller General of

the United States. Those standards require

that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of material

misstatement. An audit includes examining,

on a test basis, evidence supporting the

amounts and disclosures in the financial

statements. An audit also includes assessing

the accounting principles used and significant estimates made by management, as well

as evaluating the overall financial statement

presentation. We believe that our audits provide a reasonable basis for our audit.

In our opinion, the financial statements referred to above present fairly, in all material

respects, the financial position of Center

Telephone Company as of December 31, 1998

and 1997, and the results of its operations and

its cash flows for the years then ended in

conformity with general accepted accounting principles.

923

Rural Utilities Service, USDA Pt. 1773, App. B

In accordance with Government Auditing

Standards, we have also issued our report

dated March 2, 1999, on our consideration of

Center Telephone Company’s internal control over financial reporting and our tests of

its compliance with certain provisions of

laws, regulations, contracts, and grants.

Certified Public Accountants

March 2, 1999

Exhibit 2—Sample Report on Compliance and on

Internal Control over Financial Reporting,

the CPA found No Reportable Instances of

Noncompliance and No Material Weaknesses

(No Reportable Conditions Identified)

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors, Center Telephone

Company:

We have audited the financial statements

of Center Telephone Company as of and for

the years ended December 31, 1998 and 1997,

and have issued our report thereon dated

March 2, 1999. We conducted our audit in accordance with generally accepted auditing

standards and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller

General of the United States.

Compliance

As part of obtaining reasonable assurance

about whether Center Telephone Company’s

financial statements are free of material

misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing

an opinion on compliance with those provisions was not an objective of our audit, and

accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required

to be reported under Government Auditing

Standards. [If the CPA has issued a separate

letter to the management detailing immaterial instances of noncompliance, modify this

paragraph to include a statement such as the

following: However, we noted certain immaterial instances of noncompliance which we

have reported to the management of Center

Telephone Company in a separate letter

dated March 2, 1999.]

Internal Control Over Financial Reporting

In planning and performing our audit, we

considered Center Telephone Company’s internal control over financial reporting in

order to determine our auditing procedures

for the purpose of expressing our opinion on

the financial statements and not to provide

assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would

not necessarily disclose all matters in the internal control over financial reporting that

might be material weaknesses. A material

weakness is a condition in which the design

or operation of one or more of the internal

control components does not reduce to a relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial statements being audited may occur and not be

detected within a timely period by employees in the normal course of performing their

assigned functions. We noted no matters involving the internal control over financial

reporting and its operation that we consider

to be material weaknesses. [If the CPA has

issued a separate letter to management to

communicate other matters involving the

design and operation of the internal control

over financial reporting, modify this paragraph to include a statement such as the following: However, we noted other matters involving the internal control over financial

reporting which we have reported to the

management of Center Telephone Company

in a separate letter dated March 2, 1999.]

This report is intended for the information

of the audit committee, management, the

Rural Utilities Service, and supplemental

lenders. However, this report is a matter of

public record and its distribution is not limited.

Certified Public Accountants

March 2, 1999

Exhibit 3—Sample Report on Compliance and on

Internal Control over Financial Reporting,

the CPA found Reportable Instances of Noncompliance and Reportable Conditions were

Identified

Certified Public Accountants, 1600 Main

Street, City, State 24105

The Board of Directors, Center Telephone

Company

We have audited the financial statements

of Center Telephone Company as of and for

the years ended December 31, 1998 and 1997,

and have issued our report thereon dated

March 2, 1999. We conducted our audit in accordance with generally accepted auditing

standards and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller

General of the United States.

Compliance

As part of obtaining reasonable assurance

about whether Center County Telephone

Company’s financial statements are free of

material misstatement, we performed tests

of its compliance with certain provisions of

laws, regulations, contracts, and grants,

924

Pt. 1773, App. B 7 CFR Ch. XVII (1–1–00 Edition)

noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance

with those provisions was not an objective of

our audit, and accordingly, we do not express

such an opinion. The results of our tests disclosed instances of noncompliance that are

required to be reported under Government Auditing Standards. [A description of the findings should be included in the report.] [If the

CPA has issued a separate letter to the management detailing immaterial instances of

noncompliance, modify this paragraph to include a statement such as the following: We

also noted certain immaterial instances of

noncompliance which we have reported to

the management of Center Telephone Company in a separate letter dated March 2,

1999.]

Internal Control Over Financial Reporting

In planning and performing our audit, we

considered Center Telephone Company’s internal control over financial reporting in

order to determine our auditing procedures

for the purpose of expressing our opinion on

the financial statements and not to provide

assurance on the internal control over financial reporting. However, we noted certain

matters involving the internal control over

financial reporting and its operation that we

consider to be reportable conditions. Reportable conditions involve matters coming to

our attention relating to significant deficiencies in the design or operation of the internal control over financial reporting that,

in our judgment, could adversely affect Center Telephone Company’s ability to record,

process, summarize and report financial data

consistent with the assertions of management in the financial statements. [A description of the findings pertaining to reportable

conditions should be included in the report.]

A material weakness is a condition in

which the design or operation of one or more

of the internal control components does not

reduce to a relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial statements being audited may occur and not be

detected within a timely period by employees in the normal course of performing their

assigned functions. Our consideration of the

internal control over financial reporting

would not necessarily disclose all matters in

the internal control that might be reportable

conditions and, accordingly, would not necessarily disclose all reportable conditions

that are also considered to be material weaknesses. However, we believe none of the reportable conditions described above is a material weakness. [If conditions believed to be

material weaknesses are disclosed, the last

sentence should be deleted and instead the

report should identify which of the reportable conditions described above are considered to be material weaknesses.][If the CPA

has issued a separate letter to management

to communicate other matters involving the

design and operation of the internal control

over financial reporting, modify this paragraph to include a statement such as the following: We also noted other matters involving the internal control over financial reporting which we have reported to the management of Center Telephone Company in a

separate letter dated March 2, 1999.]

This report is intended for the information

of the audit committee, management, the

Rural Utilities Service, and supplemental

lenders. However, this report is a matter of

public record and its distribution is not limited.

Certified Public Accountants

March 2, 1999

EXHIBIT 4—SAMPLE FINANCIAL

STATEMENTS

CENTER TELEPHONE COMPANY BALANCE SHEETS—DECEMBER 31, 19X9 AND 19X8 ASSETS (NOTES

AND 2)

19X9 19X8

CURRENT ASSETS:

Cash—Construction Funds .................................................................................................... $21,000 $18,000

Cash—General Funds ........................................................................................................... 128,300 140,083

Telecommunications Accounts.

Receivable (less accumulated provision of $11,597 in 19X9 and $1,490 in 19X8) ............. 139,642 122,623

Notes Receivable ................................................................................................................... 2,500 3,000

Materials and Supplies ........................................................................................................... 103,713 73,964

Prepayments (Note 3) ............................................................................................................ 49,185 62,201

Other Current Assets ............................................................................................................. 1,357 10,131

445,697 430,002

NONCURRENT ASSETS:

Nonregulated Investments: (Note 4)

Net CATV Plant .............................................................................................................. 413,511 407,086

Net Nonregulated Customer Premises Equipment ........................................................ 103,618 0

Deferred Maintenance and Retirements (Note 5) ................................................................. 40,000 45,000

925

Rural Utilities Service, USDA Pt. 1773, App. B

CENTER TELEPHONE COMPANY BALANCE SHEETS—DECEMBER 31, 19X9 AND 19X8 ASSETS (NOTES

AND 2)—Continued

19X9 19X8

557,129 452,086

PROPERTY, PLANT, AND EQUIPMENT: (Note 6)

Telecommunications Plant in Service .................................................................................... 7,401,300 6,650,553

Telecommunications Plant Under Construction ..................................................................... 67,626 199,092

Telecommunications Plant Adjustment (Note 7) ................................................................... 176,380 176,380

7,645,306 7,026,025

Less: Accumulated Provision for Depreciation ...................................................................... 1,760,587 1,504,255

5,884,719 5,521,770

6,887,545 6,403,858

The accompanying notes are an integral part of these statements.

CENTER TELEPHONE COMPANY BALANCE SHEETS—DECEMBER 31, 19X9 AND 19X8 LIABILITIES AND

EQUITIES

19X9 19X8

CURRENT LIABILITIES:

Accounts Payable .................................................................................................................. $123,689 $290,484

Notes Payable ........................................................................................................................ 61,600 70,400

Advance Billings and Payments ............................................................................................ 2,137 2,243

Customers Deposits ............................................................................................................... 11,878 4,940

Current Maturities of Long-Term Debt (Note 8) .................................................................... 146,646 145,998

Accrued Taxes ....................................................................................................................... 242,076 224,566

Other Current Liabilities ......................................................................................................... 8,500 9,079

596,526 747,710

LONG-TERM DEBT:

RUS Mortgage Notes (Note 8) .............................................................................................. 4,592,658 4,128,106

OTHER LIABILITIES AND DEFERRED CREDITS:

Unamortized Investment Tax Credits (Note 10) .................................................................... 53,078 61,377

Deferred Income Taxes (Note 11) ......................................................................................... 37,137 35,039

90,215 96,416

STOCKHOLDERS’ EQUITY:

Capital Stock—Common $2 par value—300,000 Shares Authorized; 102,600 Shares Outstanding 19X9 and 19X8 .................................................................................................... 205,200 205,200

Additional Paid-in Capital ....................................................................................................... 820,800 820,800

Retained Earnings (Note 8) ................................................................................................... 582,146 405,626

1,608,146 1,431,626

6,887,545 6,403,858

The accompanying notes are an integral part of these statements.

CENTER TELEPHONE COMPANY STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS

ENDED DECEMBER 31, 19X9 AND 19X8

19X9 19X8

OPERATING REVENUES:

Basic Local Network Services ........................................................................................... $836,822 $862,205

Network Access Services .................................................................................................. 125,042 -0-

Long Distance Network Services ....................................................................................... 897,300 775,073

Miscellaneous ..................................................................................................................... 144,435 147,100

Less: Uncollectible Revenues ............................................................................................ (24,000) (24,500)

1,979,599 1,759,878

OPERATING EXPENSES:

Plant Specific Operations ................................................................................................... 564,486 480,509

Plant Nonspecific Operations ............................................................................................. 187,162 393,143

Depreciation and Amortization ........................................................................................... 274,691

926

Pt. 1773, App. B 7 CFR Ch. XVII (1–1–00 Edition)

CENTER TELEPHONE COMPANY STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS

ENDED DECEMBER 31, 19X9 AND 19X8—Continued

19X9 19X8

Customer Operations ......................................................................................................... 94,473 78,772

Corporate Operations ......................................................................................................... 157,453 134,127

1,278,265 1,086,551

OPERATING TAXES:

Federal and State Income.

Taxes—Operating (Notes 10 and 11) ................................................................................ 159,845 170,687

Other Operating Taxes ...................................................................................................... 225,013 204,230

Provision for Deferred Taxes (Note 10) ............................................................................. 31,566 29,468

Investment Credits—Net .................................................................................................... 6,201 1,640

422,625 406,025

OPERATING INCOME .............................................................................................................. 278,709 267,302

FIXED CHARGES:

Interest on Long-Term Debt ............................................................................................... 88,432 85,854

Interest Charged to Construction Credit ............................................................................ (2,251) (1,516)

86,181 84,338

NONREGULATED INCOME—NET (Note 4) ............................................................................ 19,902 10,593

NET INCOME FOR PERIOD .................................................................................................... 212,430 193,557

Retained Earnings—January 1, 19X9 and 19X8 ............................................................... 405,626 235,153

Dividends Declared ............................................................................................................ (35,910) (23,084)

Retained Earnings—December 31, 19X9 and 19X8 ......................................................... $582,146 $405,626

Earnings Per Share of Common Stock—Average ............................................................ $2.07 $1.89

The accompanying notes are an integral part of these statements.

CENTER COUNTY TELEPHONE COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED

DECEMBER 31, 19X9 AND 19X8

19X9 19X8

CASH FLOWS FROM OPERATING ACTIVITIES:

Cash Received from Consumers ....................................................................................... $1,962,580 $1,733,289

Cash Paid to Suppliers and Employees ............................................................................ (1,159,158) (960,459)

Interest Paid ....................................................................................................................... (86,181) (84,338)

Taxes Paid ......................................................................................................................... (401,316) (376,643)

Net Cash Provided by Operating Activities ....................................................................... 315,925 311,849

CASH FLOWS FROM INVESTING ACTIVITIES:

Construction and Acquisition of Plant ................................................................................ (619,281) (507,617)

Investment in CATV Plant .................................................................................................. (6,425) (18,246)

Investment in Nonregulated CPE ...................................................................................... (103,618)

Plant Removal Costs ......................................................................................................... (18,359) (27,216)

(Increase)/Decrease In:

Materials Inventory ............................................................................................................. (29,749) (19,478)

Notes Receivable ............................................................................................................... 500 1,000

Deferred Maintenance and Retirements ............................................................................ 5,000 (45,000)

Nonregulated Income ......................................................................................................... 19,902 10,593

Net Cash Used in Investing Activities ................................................................................ (752,030) (605,964)

CASH FLOWS FROM FINANCING ACTIVITIES:

Dividends Paid ................................................................................................................... (35,910) (23,084)

Debt Proceeds ................................................................................................................... 465,200 386,000

Payments on Short-term Debt ........................................................................................... (8,800) (7,500)

Increase/(Decrease) In:

Consumer Deposits and Advance Payments .................................................................... 6,832 4,200

Net Cash Provided by Financing Activities ........................................................................ 427,322 359,616

Net Increase/(Decrease) in Cash ...................................................................................... (8,783) 65,501

Cash—Beginning of Year .................................................................................................. 158,083 92,582

927

Rural Utilities Service, USDA Pt. 1773, App. C

CENTER COUNTY TELEPHONE COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED

DECEMBER 31, 19X9 AND 19X8—Continued

19X9 19X8

Cash—End of Year ............................................................................................................ 149,300 158,083

The accompanying notes are an integral part of these statements.

RECONCILIATION OF NET MARGINS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

Net Margins ........................................................................................................................ 212,430 193,557

Less: Nonregulated Income ............................................................................................... (19,902) (10,593)

Net Income from Regulated Operations ............................................................................ 192,528 182,964

Adjustments to Reconcile Net Margins to Net Cash Provided by Operating Activities:

Depreciation and Amortization .................................................................................... 274,691 253,509

Provision for Uncollectible Accounts Receivable ....................................................... 10,107 (3,610)

(Increase)/Decrease In:

Customer and Other Accounts Receivable ................................................................ (27,126) (22,979)

Current and Accrued Assets—Other .......................................................................... 8,774 5,119

Prepaid Taxes ............................................................................................................. 10,000 (10,000)

Other Prepaid Expenses ............................................................................................. 3,016 (5,426)

Increase/(Decrease) In:

Accounts Payable ....................................................................................................... (166,795) (126,472)

Accrued Taxes ............................................................................................................ 17,510 37,742

Other Current Liabilities .............................................................................................. (579) (638)

Deferred Credits .......................................................................................................... (6,201) 1,640

Total Adjustments ....................................................................................................... 123,397 128,885

Net Cash Provided by Operating Activities ............................................................................... 315,925 311,849

The accompanying notes are an integral part of these statements.

[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 111, Jan. 3, 1996; 63 FR 38728, July 17, 1998; 63

FR 40169, July 28, 1998]

APPENDIX C TO PART 1773—ILLUSTRATIVE INDEPENDENT AUDITOR’S

MANAGEMENT LETTER FOR ELECTRIC

BORROWERS

RUS requires that CPAs auditing RUS borrowers provide a management letter in accordance with §1773.33. This letter must be

signed by the CPA, bear the same date as the

auditor’s report, and be addressed to the borrower’s board of directors.

Illustrative Independent Auditors’

Management Letter for Electric Borrowers

March 2, 1999

Board of Directors

[Name of Borrower]

[City, State]

We have audited the financial statements

of [Name of Borrower] for the year ended December 31, 1998, and have issued our report

thereon dated March 2, 1999. We conducted

our audit in accordance with generally accepted auditing standards, the standards applicable to financial audits contained in Government Auditing Standards issued by the

Comptroller General of the United States,

and 7 CFR part 1773, Policy on Audits of

Rural Utilities Service (RUS) Borrowers.

Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

In planning and performing our audit of

the financial statements of [Name of Borrower] for the year ended December 31, 1998,

we considered its internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing an opinion on the financial statements

and not to provide assurance on the internal

control over financial reporting.

A description of the responsibility of management for establishing and maintaining

the internal control over financial reporting

and the objectives of and inherent limitations in such control is set forth in our independent auditors’ report on compliance and

on internal control over financial reporting

dated March 2, 1999, and should be read in

conjunction with this report.

Our consideration of the internal control

over financial reporting would not necessarily disclose all matters in the internal

control over financial reporting that might

be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial statements being audited may occur and not be

928

Pt. 1773, App. C 7 CFR Ch. XVII (1–1–00 Edition)

detected within a timely period by employees in the normal course of performing their

assigned functions. We noted no matters involving the internal control over financial

reporting that we consider to be material

weaknesses. [If a material weakness was

noted, refer the reader to the independent

auditors’ report on compliance and on internal control over financial

reportingstructure.]

7 CFR 1773.33 requires comments on specific aspects of the internal control over financial reporting, compliance with specific

RUS loan and security instrument provisions, and other additional matters. We have

grouped our comments accordingly. In addition to obtaining reasonable assurance about

whether the financial statements are free

from material misstatements, at your request, we performed tests of specific aspects

of the internal control over financial reporting, of compliance with specific RUS loan

and security instrument provisions, and of

additional matters. The specific aspects of

the internal control over financial reporting,

compliance with specific RUS loan and security instrument provisions, and additional

matters tested include, among other things,

the accounting procedures and records, materials control, compliance with specific

RUS loan and security instrument provisions

set forth in 7 CFR 1773.33 (e)(1), related party

transactions, depreciation rates, and a

schedule of deferred debits and credits, upon

which we express an opinion. In addition, our

audit of the financial statements also included the procedures specified in 7 CFR

1773.38—.45. Our objective was not to provide

an opinion on these specific aspects of the internal control over financial reporting, compliance with specific RUS loan and security

instrument provisions, or additional matters, and accordingly, we express no opinion

thereon.

No reports (other than our independent

auditors’ report and our independent auditors’ report on compliance and on internal

control over financial reporting, all dated

March 2, 1999) or summary of recommendations related to our audit have been furnished to management.

Our comments on specific aspects of the internal control over financial reporting, compliance with specific RUS loan and security

instrument provisions, and other additional

matters as required by 7 CFR 1773.33 are presented below.

Comments on Certain Specific Aspects of the

Internal Control Over Financial Reporting

We noted no matters regarding [Name of

Borrower]’s internal control over financial

reporting and its operation that we consider

to be a material weakness as previously defined with respect to:

—The accounting procedures and records

[list other comments];

—The process for accumulating and recording labor, material, and overhead costs,

and the distribution of these costs to construction, retirement, and maintenance or

other expense accounts [list other comments]; and

—The materials control [list other comments].

Comments on Compliance With Specific RUS

Loan and Security Instrument Provisions

Management’s responsibility for compliance with laws, regulations, contracts, and

grants is set forth in our independent auditors’ report on compliance and on internal

control over financial reporting dated March

2, 1999, and should be read in conjunction

with this report. At your request, we have

performed the procedures enumerated below

with respect to compliance with certain provisions of laws, regulations, contracts, and

grants. The procedures we performed are

summarized as follows:

—Procedure performed with respect to the

requirement to maintain all funds from

loans made or guaranteed by RUS in institutions whose accounts are insured by an

Agency of the Federal government:

1. Obtained information from financial institutions with which [Name of Borrower]

maintains cash proceeds from loans that indicated that the institutions are insured by

an Agency of the Federal government.

—Procedures performed with respect to the

requirement for a borrower to obtain written approval of the mortgagee to enter

into any contract for the operation or

maintenance of property, or for the use of

mortgaged property by others for the year

ended December 31, 19X5 of [Name of Borrower]:

1. Obtained and read a borrower-prepared

schedule of new written contracts entered

into during the year for the operation or

maintenance of its property, or for the use of

its property by others as defined in §1773.334

(e)(1)(ii).

2. Reviewed Board of Director minutes to

ascertain whether board-approved written

contracts are included in the borrower-prepared schedule.

3. Noted the existence of written RUS [and

other mortgagee] approval of each contract

listed by the borrower.

—Procedure performed with respect to the

requirement to submit RUS Form 7 or

Form 12 to the RUS:

1. Agreed amounts reported in Form 7 or

Form 12 to [Name of Borrower]’s records.

The results of our tests indicate that, with

respect to the items tested, [Name of Borrower] complied, except as noted below, in

all material respects, with the specific RUS

929

Rural Utilities Service, USDA Pt. 1773, App. D

loan and security instrument provisions referred to below. The specific provisions tested, as well as any exceptions noted, include

the requirements that:

—The borrower maintains all funds from

loans made or guaranteed by RUS in institutions whose accounts are insured by an

agency of the Federal government [list all

exceptions];

—The borrower has obtained written approval of the RUS [and other mortgagees]

to enter into any contract for the operation or maintenance of property, or for

the use of mortgaged property by others as

defined in §1773.334 (e)(1)(ii) [list all exceptions]; and

—The borrower has submitted its Form 7 or

Form 12 to the RUS and the Form 7 or

Form 12, Financial and Statistical Report,

as of December 31, 1998, represented by the

borrower as having been submitted to RUS

is in agreement with the [Name of Borrower]’s audited records in all material respects [list all exceptions] [or if the audit

year end is other than December 31], appears reasonable based upon the audit procedures performed [list all exceptions].

Comments on Other Additional Matters

In connection with our audit of the financial statements of [Name of Borrower], nothing came to our attention that caused us to

believe that [Name of Borrower] failed to

comply with respect to:

—The reconciliation of subsidiary plant

records to the controlling general ledger

plant accounts addressed at 7 CFR 1773.334

(c)(1) [list all exceptions];

—The clearing of the construction accounts

and the accrual of depreciation on completed construction addressed at 7 CFR

1773.334 (c)(2) [list all exceptions];

—The retirement of plant addressed at 7 CFR

1773.33 (c)(3) and (4) [list all exceptions];

—Sales of plant material, or scrap addressed

at 7 CFR 1773.33 (c)(5) [list all exceptions];

—The disclosure of material related party

transactions, in accordance with Statement of Financial Accounting Standards

No. 57, Related Party Transactions, for the

year ended December 31, 1998, in the financial statements referenced in the first

paragraph of this report addressed at 7

CFR 1773.33 (f) [list all exceptions];

—The depreciation rates addressed at 7 CFR

1773.334 (g) [list all exceptions]; and

—The detailed schedule of deferred debits

and deferred credits.

Our audit was made for the purpose of

forming an opinion on the basic financial

statements taken as a whole. The detailed

schedule of deferred debits and deferred credits required by 7 CFR 1773.33 (h) and provided

below is presented for purposes of additional

analysis and is not a required part of the

basic financial statements. This information

has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly

stated in all material respects in relation to

the basic financial statements taken as a

whole.

[The detailed schedule of deferred debits

and deferred credits would be included here.

The total amount of deferred debits and deferred credits as reported in the schedule

must agree with the totals reported on the

Balance Sheet under the specific captions of

‘‘Deferred Debits’’ and ‘‘Deferred Credits’’.

Those items that have been approved, in

writing, by RUS should be clearly indicated.]

This report is intended solely for the information and use of the board of directors,

management, and the RUS and supplemental

lenders. However, this report is a matter of

public record and its distribution is not limited.

Certified Public Accountants

[63 FR 38733, July 17, 1998]

APPENDIX D TO PART 1773—ILLUSTRATIVE INDEPENDENT AUDITOR’S

MANAGEMENT LETTER FOR TELECOMMUNICATIONS BORROWERS

RUS requires that CPAs auditing RUS borrowers provide a management letter in accordance with §1773.33. This letter must be

signed by the CPA, bear the same date as the

auditor’s report, and be addressed to the borrower’s board of directors.

Illustrative Independent Auditors’ Management Letter for Telecommunications Borrowers

March 2, 1999

Board of Directors

[Name of Borrower]

[City, State]

We have audited the financial statements

of [Name of Borrower] for the year ended December 31, 1998, and have issued our report

thereon dated March 2, 1999. We conducted

our audit in accordance with generally accepted auditing standards, the standards applicable to financial audits contained in Government Auditing Standards issued by the

Comptroller General of the United States,

and 7 CFR part 1773, Policy on Audits of

Rural Utilities Service (RUS) Borrowers.

Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

In planning and performing our audit of

the financial statements of [Name of Borrower] for the year ended December 31, 1998,

we considered its internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing an opinion on the financial statements

930

Pt. 1773, App. D 7 CFR Ch. XVII (1–1–00 Edition)

and not to provide assurance on the internal

control over financial reporting.

A description of the responsibility of management for establishing and maintaining

the internal control over financial reporting

and the objectives of and inherent limitations in such control is set forth in our independent auditors’ report on compliance and

on internal control over financial reporting

dated March 2, 1999, and should be read in

conjunction with this report.

Our consideration of the internal control

over financial reporting would not necessarily disclose all matters in the internal

control over financial reporting that might

be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that

misstatements in amounts that would be

material in relation to the financial statements being audited may occur and not be

detected within a timely period by employees in the normal course of performing their

assigned functions. We noted no matters involving the internal control over financial

reporting that we consider to be material

weaknesses. [If a material weakness was

noted, refer the reader to the independent

auditors’ report on compliance and on internal control over financial reporting.]

7 CFR 1773.33 requires comments on specific aspects of the internal control over financial reporting, compliance with specific

RUS loan and security instrument provisions, and other additional matters. We have

grouped our comments accordingly. In addition to obtaining reasonable assurance about

whether the financial statements are free

from material misstatements, at your request, we performed tests of specific aspects

of the internal control over financial reporting, of compliance with specific RUS loan

and security instrument provisions, and of

additional matters. The specific aspects of

the internal control over financial reporting,

compliance with specific RUS loan and security instrument provisions, and additional

matters tested include, among other things,

the accounting procedures and records, materials control, compliance with specific

RUS loan and security instrument provisions

set forth in 7 CFR 1773.33 (e)(2), and related

party transactions. In addition, our audit of

the financial statements also included the

procedures specified in 7 CFR 1773.38–.45. Our

objective was not to provide an opinion on

these specific aspects of the internal control

over financial reporting, compliance with

specific RUS loan and security instrument

provisions, or additional matters, and accordingly, we express no opinion thereon.

No reports (other than our independent

auditors’ report, and our independent auditors’ report on compliance and on internal

control over financial reporting, all dated

March 2, 1999) or summary of recommendations related to our audit have been furnished to management.

Our comments on specific aspects of the internal control over financial reporting, compliance with specific RUS loan and security

instrument provisions, and other additional

matters as required by 7 CFR 1773.33 are presented below.

Comments On Certain Specific Aspects of

the Internal Control Over Financial Reporting

We noted no matters regarding [Name of

Borrower]’s internal control over financial

reporting and its operation that we consider

to be a material weakness as previously defined with respect to:

—The accounting procedures and records

[list other comments];

—The process for accumulating and recording labor, material, and overhead costs,

and the distribution of these costs to construction, retirement, and maintenance or

other expense accounts [list other comments]; and

—The materials control [list other comments].

Comments On Compliance With Specific

RUS Loan and Security Instrument Provisions

Management’s responsibility for compliance with laws, regulations, contracts, and

grants is set forth in our independent auditors’ report on compliance and on internal

control over financial reporting dated March

2, 1999, and should be read in conjunction

with this report. At your request, we have

performed the procedures enumerated below

with respect to compliance with certain provisions of laws, regulations, contracts, and

grants. The procedures we performed are

summarized as follows:

—Procedure performed with respect to the

requirement to maintain all funds in institutions whose accounts are insured by an

Agency of the Federal government:

1. Obtained information from financial institutions with which [Name of Borrower]

maintains funds that indicated that the institutions are insured by an agency of the

Federal government.

—Procedures performed with respect to the

requirement for a borrower to obtain written approval of the mortgagee to enter

into any contract for the operation or

maintenance of property, for the use of

mortgaged property by others, or for services pertaining to toll traffic, operator assistance, or switching for the year ended

December 31, 1998 of [Name of Borrower]:

1. Obtained and read a borrower-prepared

schedule of new written contracts entered

into during the year for the operation or

931

Rural Utilities Service, USDA Pt. 1775

maintenance of its property, for the use of

its property by others, or for services pertaining to toll traffic, operator assistance, or

switching as defined in §1773.33 (e)(2)(i).

2. Reviewed Board of Director minutes to

ascertain whether board-approved written

contracts are included in the borrower-prepared schedule.

3. Noted the existence of written RUS [and

other mortgagee] approval of each contract

listed by the borrower.

—Procedure performed with respect to the

requirement to submit RUS Form 479 to

the RUS:

1. Agreed amounts reported in Form 479 to

[Name of Borrower]’s records.

—Procedure performed with respect to funded reserve and net plant to secured debt

ratio requirements:

1. Reviewed loan security instrument to

ascertain which condition was elected by the

borrower.

2. If the funded reserve option was selected,

review financial institution records to verify

the existence of a separate bank account for

the reserve, and determine that it was funded within one year of approval of release of

funds and that it remained funded over the

composite economic life of the facilities financed.

3. If the net plant to secured debt ratio option was selected, calculate the ratio and

confirm that the 1.2 ratio was achieved one

year following the first advance of loan

funds.

The results of our tests indicate that, with

respect to the items tested, [Name of Borrower] complied, except as noted below, in

all material respects, with the specific RUS

loan and security instrument provisions referred to below. The specific provisions tested, as well as any exceptions noted, include

the requirements that:

—The borrower maintains all funds in institutions whose accounts are insured by an

agency of the Federal government [list all

exceptions];

—The borrower has obtained written approval of the RUS [and other mortgagees]

to enter into any contract for the operation or maintenance of property, for the

use of mortgaged property by others, or for

services pertaining to toll traffic, operator

assistance, or switching as defined in

§1773.33(e)(2)(i) [list all exceptions]; and

—The borrower has submitted its Form 479

to the RUS and the Form 479, Financial

and Statistical Report, as of December 31,

1999, represented by the borrower as having

been submitted to RUS is in agreement

with the [Name of Borrower]’s audited

records in all material respects [list all exceptions] [or if the audit year end is other

than December 31], appears reasonable

based upon the audit procedures performed

[list all exceptions].

Comments on Other Additional Matters

In connection with our audit of the financial statements of [Name of Borrower], nothing came to our attention that caused us to

believe that [Name of Borrower] failed to

comply with respect to:

—The reconciliation of subsidiary plant

records to the controlling general ledger

plant accounts addressed at 7 CFR

1773.33(c)(1) [list all exceptions];

—The clearing of the construction accounts

and the accrual of depreciation on completed construction addressed at 7 CFR

1773.33(c)(2) [list all exceptions];

—The retirement of plant addressed at 7 CFR

1773.33(c)(3) and (4) [list all exceptions];

—Sales of plant material, or scrap addressed

at 7 CFR 1773.33(c)(5) [list all exceptions];

and

—The disclosure of material related party

transactions, in accordance with Statement of Financial Accounting Standards

No. 57, Related Party Transactions, for the

year ended December 31, 1999, in the financial statements referenced in the first

paragraph of this report addressed at 7

CFR 1773.33(f) [list all exceptions].

This report is intended solely for the information and use of the board of directors,

management, and the RUS and supplemental

lenders. However, this report is a matter of

public record and its distribution is not limited.

Certified Public Accountants

Dated: July 8, 1998.

[63 FR 38734, July 17, 1998]

PART 1775—TECHNICAL ASSISTANCE AND TRAINING GRANTS

Sec.

1775.1 General.

1775.2 [Reserved]

1775.3 Objectives.

1775.4 Definitions.

1775.5 Source of funds.

1775.6 Allocation of funds.

1775.7 Eligibility.

1775.8 Purpose.

1775.9 [Reserved]

1775.10 Limitations.

1775.11 Equal opportunity requirements.

1775.12 Environmental requirements.

1775.13 Preapplications.

1775.14 Priority.

1775.15 [Reserved]

1775.16 Application processing.

1775.17 [Reserved]

1775.18 Grant approval and obligation of

funds.

1775.19 Fidelity bond.

1775.20–1775.21 [Reserved]

1775.22 Fund disbursement.