Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations 45947

PART 2541—UNIFORM

ADMINISTRATIVE REQUIREMENTS

FOR GRANTS AND COOPERATIVE

AGREEMENTS TO STATE AND LOCAL

GOVERNMENTS

1. The authority for part 2541

continues to read as follows:

Authority: 42 U.S.C. 4950 et seq. and

12501 et seq.

§ 2541.260 [ll.26] [Amended]

2. Section 2541.260 [ll.26] is

amended as set forth in amendatory

instruction 1 at the end of the common

preamble.

PART 2543—UNIFORM

ADMINISTRATIVE REQUIREMENTS

FOR GRANTS AND AGREEMENTS

WITH INSTITUTIONS OF HIGHER

EDUCATION, HOSPITALS, AND

OTHER NON-PROFIT ORGANIZATIONS

3. The authority for part 2543

continues to read as follows:

Authority: 42 U.S.C. 12501 et seq.

§ 2543.26 [Amended]

4. Section 2543.26 is amended as set

forth in amendatory instruction 2 at the

end of the common preamble.

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

49 CFR Parts 18 and 19

RIN 2105–AC66

FOR FURTHER INFORMATION CONTACT:

Robert G. Taylor, U.S. Department of

Transportation, Office of Acquisition

and Grant Management, M–62, 400

Seventh Street, S.W., Room 9401,

Washington, DC 20590, (202) 366–4289.

ADDITIONAL SUPPLEMENTAL INFORMATION:

Additional Departmental clarifying

audit requirements contained in 49 CFR

part 18.26 (d) and (e) are no longer

required, and are being deleted as part

of this rulemaking. These paragraphs

make references to audit requirements

that have been superseded by OMB

Circular A–133.

List of Subjects

49 CFR Part 18

Accounting, Audit requirements,

Contract programs, Grant programs,

Intergovernmental relations, Reporting

and recordkeeping requirements.

52 CFR Part 19

Accounting, Administrative practices

and procedures, Audit requirements,

Grant programs, Reporting and

recordkeeping requirements.

Rodney E. Slater,

Secretary of Transportation.

Parts 18 and 19 of title 49 of the Code

of Federal Regulations are amended as

follows:

PART 18—UNIFORM ADMINISTRATIVE

REQUIREMENTS FOR GRANTS AND

COOPERATIVE AGREEMENTS TO

STATE AND LOCAL GOVERNMENTS

1. The authority for part 18 continues

to read as follows:

Authority: 49 U.S.C. 322(a).

§ 18.26 [Amended]

2. Section 18.26 is amended as set

forth in amendatory instruction 1 at the

end of the common preamble.

3. Section 18.26 is further amended

by removing paragraphs (d) and (e).

PART 19—UNIFORM ADMINISTRATIVE

REQUIREMENTS FOR GRANTS AND

AGREEMENTS WITH INSTITUTIONS

OF HIGHER EDUCATION, HOSPITALS,

AND OTHER NON-PROFIT

ORGANIZATIONS

4. The authority for part 19 continues

to read as follows:

Authority: 49 U.S.C. 322(a).

§ 19.26 [Amended]

5. Section 19.26 is amended as set

forth in amendatory instruction 2 at the

end of the common preamble.

[FR Doc. 97–22829 Filed 8–28–97; 8:45 am]

BILLING CODES 3410–KS–M; 6450–01–M; 7510–01–M;

3180–02–M; 4710–05–M; 6116–01–M; 8230–01–M; 4410–

18–M; 4510–23–M; 6372–01–M; 5000–04–M; 4000–01–M;

7515–01–M; 8320–01–M; 6560–50–M; 6820–23–M; 4310–

RF–M; 6718–01–M; 4150–04–M; 7555–01–M; 7537–01–M;

7536–01–M; 5900–04–M; 6050–28–M

DEPARTMENT OF AGRICULTURE

Office of the Chief Financial Officer

7 CFR Chapter XXX and Parts 3015,

3051, and 3052

RIN 0505–AA10

Grants and Cooperative Agreements to

State and Local Governments,

Universities, Hospitals, and Other NonProfit Organizations

AGENCY: Office of the Chief Financial

Officer, USDA.

ACTION: Interim final rule.

SUMMARY: This interim final rule

amendment is issued to implement the

Single Audit Act Amendments of 1996

(Public Law 104–156, 110 Stat. 1396)

and the June 24, 1997, revision of OMB

Circular A–133, ‘‘Audits of States, Local

Governments, and Non-Profit

Organizations’’ and to replace the

existing audit requirements that are

superseded by Public Law 104–156 and

the revised A–133.

DATES: This interim final rule is

effective September 29, 1997. Comments

must be received on or before October

28, 1997 in order to be assured of

consideration.

ADDRESSES: Persons wishing to submit

comments on this interim final rule

should send them to Patricia Wensel,

Director, Planning and Accountability

Division, Department of Agriculture,

1400 Independence Avenue, S.W.,

Room 3027 South Building,

Washington, D.C. 20250. A copy of each

communication submitted will be

available for public inspection during

regular business hours (8:30 a.m.–5:00

p.m.) at the above address.

FOR FURTHER INFORMATION CONTACT:

Patricia Wensel, Director, Office of the

Chief Financial Officer, Planning and

Accountability Division, 202–720–1175.

SUPPLEMENTARY INFORMATION:

Background

USDA is (1) removing existing audit

requirements from 7 CFR Part 3015,

‘‘Uniform Federal Assistance

Regulations,’’ and 7 CFR Part 3051,

‘‘Audits of Institutions of Higher

Education and Other Nonprofit

Institutions,’’ and (2) codifying revised

Office of Management and Budget

(OMB) Circular A–133, ‘‘Audits of

States, Local Governments, and NonProfit Organizations’’ (62 FR 35278,

June 30, 1997) in a new 7 CFR Part

3052, ‘‘Audits of States, Local

Governments, and Non-Profit

Organizations.’’ Elsewhere in this

Federal Register, USDA has published

an interim final rule to amend the

common rule sections on audit in 7 CFR

Parts 3016, ‘‘Uniform Administrative

Requirements for Grants and

Agreements to State and Local

Governments,’’ and 3019, ‘‘Uniform

Administrative Requirements for Grants

and Agreements with Institutions of

Higher Education, Hospitals, and Other

Non-Profit Organizations,’’ and a notice

to withdraw the October 17, 1995 (60 FR

53717), proposed rule whose audit

provisions have been superseded by the

Single Audit Act Amendments of 1996

(Public Law 104–156, 110 Stat. 1396)

and the June 24, 1997, revision of OMB

Circular A–133.

On November 10, 1981, the

Department of Agriculture published 7

CFR Part 3015, as a final rule to provide

Departmentwide policies and standards

for the administration of grants and

cooperative agreements. Part 3015
45948 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations

included Subpart I which set out audit

requirements for State and local

governments in §§ 3015.70 through

3015.77 and audit requirements for

institutions of higher education,

hospitals and other non-profit

organizations in § 3015.79. Section

3015.78 was reserved for future use.

On July 16, 1985, USDA published an

interim rule amending Subpart I of Part

3015 to implement OMB Circular A–

128, ‘‘Audits of State and Local

Governments.’’ Circular A-128 was

issued pursuant to the Single Audit Act

of 1984. Subpart I of Part 3015 was

revised to encompass §§ 3015.70

through 3015.76 for State and local

governments and § 3015.77 for

institutions of higher education,

hospitals and other non-profit

organizations.

USDA published the final rule

implementing Circular A–128 in Part

3015 on January 14, 1986.

On August 3, 1993, USDA published

a final rule to remove the audit

requirements for institutions of higher

education and other nonprofit

organizations from § 3015.77 of Subpart

I, Part 3015. At the same time, USDA

published a final rule in a new 7 CFR

Part 3051 to establish audit

requirements for non-governmental

organizations in accordance with OMB

Circular A–133, ‘‘Audits of Institutions

of Higher Education and Other

Nonprofit Institutions,’’ and to cover in

the scope of the rule Federal cost-type

contracts used to buy services and goods

for the use of the Federal government.

The Single Audit Act Amendments of

1996 and the June 24, 1997, revision of

OMB Circular A–133 require agencies to

adopt in codified regulations the

standards in the revised Circular A–133

by August 29, 1997, so that the

standards will apply to audits of fiscal

years beginning after June 30, 1996. The

revised Circular A–133 co-locates audit

requirements for States, local

governments, and nonprofit

organizations. Consequently, OMB

rescinded OMB Circular A–128, ‘‘Audits

of State and Local Governments.’’

In order to codify revised Circular A–

133 which places audit requirements for

governments and nonprofits in one

Circular, USDA is removing the audit

requirements from 7 CFR Parts 3015 and

3051. To eliminate confusion, USDA is

codifying the audit requirements of

revised Circular A–133 in a new Part

3052 of title 7. The audit provisions in

Part 3052 are verbatim to the revised

Circular A–133 which OMB published

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

Justification for Interim Final Rule

Under the Administrative Procedure

Act, to issue an interim final rule

without a prior notice of proposed

rulemaking, it is necessary to make a

finding that issuing a proposed rule

would be impractical, unnecessary, and

contrary to the public interest. The

Single Audit Act Amendments of 1996

and revised Circular A–133 are effective

for audits of fiscal years beginning after

June 30, 1996 and the statutory date for

publication of the codified Circular A–

133 is August 29, 1997. Given these

time frames, USDA believes publication

of a proposed rule would be impractical,

unnecessary, and contrary to the public

interest. Publication of a proposed final

rule is also unnecessary, as USDA has

no authority to deviate from the

Government-wide policy under Circular

A–133 in response to any public

comments.

OMB published a Notice of Proposed

Rulemaking (NPRM) on November 5,

1996, (61 FR 57232–57249) requesting

comments on the proposal to revise

OMB Circular A–133 and to rescind

OMB Circular A–128, ‘‘Audits of States

and Local Governments.’’ The

comments received on the NPRM were

considered and addressed in developing

the final rule which was published in

regulatory format on June 30, 1997 (62

FR 35278—35319). USDA’s codification

in 7 CFR Part 3052 of the revised

Circular A–133 is verbatim to OMB’s

June 30 final revision to A–133.

Therefore, USDA believes it would be

unnecessary and contrary to the public

interest to ask for comments again.

The existing audit requirements in 7

CFR Part 3015 implement Circular A–

128 and in 7 CFR Part 3051 implement

Circular A–133 before the June 30

revision. Circular A–128 has been

rescinded and A–133 has been revised.

USDA’s action to remove obsolete audit

requirements from Parts 3015 and 3051

is a necessary action triggered by the A–

133 revision and the Public Law 104–

156. Therefore, it is in the public

interest to remove the audit

requirements from existing regulations

at the same time as the new revised A–

133 standards are codified in the new

Part 3052. Accordingly, it is impractical

to publish the related Part 3015 and Part

3051 amendments as proposed rules

and it is necessary and in the public

interest to publish them as an interim

final rule with the codification of

Circular A–133.

Impact Analysis

Executive Order 12866

Executive Order 12866 requires that a

regulatory impact analysis be prepared

for ‘‘major’’ rules which are defined in

the Order as any rule that has an annual

effect on the national economy of $100

million or more or certain other

specified effects.

USDA does not believe that this

revision to its rules will have an annual

impact of $100 million or more or the

other effects listed in the Order.

However, the interim final rule would

result in some savings to organizations

administering grants or subgrants,

primarily due to the increase in the

threshold (from $25,000 to $300,000)

that triggers an audit requirement. For

this reason, USDA has determined that

this interim final rule would not create

a major rule within the meaning of the

Order.

Regulatory Flexibility Act of 1980

The Regulatory Flexibility Act (5

U.S.C. 601 et seq.) requires that, for each

rule with a ‘‘significant economic

impact on a substantial number of small

entities,’’ an analysis must be prepared

describing the rule’s impact on small

entities and identifying any significant

alternatives to the rule that would

minimize the economic impact on small

entities (5 U.S.C. 605(b)).

USDA certifies that this interim final

rule will not have a significant

economic impact on a substantial

number or small entities. The interim

final rule does not affect the amount of

funds provided in the covered

programs, but rather increases the

threshold for non-Federal entities

subject to audit, thereby reducing the

burden on some small entities.

Unfunded Mandates Act of 1995

The Unfunded Mandates Act of 1995

(Pub. L. 104–4) requires agencies to

prepare several analytic statements

before proposing any rule that may

result in annual expenditures of $100

million by State, local, and Indian tribal

governments or the private sector. Since

this interim final rule will not result in

expenditures of this magnitude, USDA

certifies that such statements are not

necessary.

Paperwork Reduction Act

This interim final rule will impose

additional reporting or record keeping

requirements under the Paperwork

Reduction Act of 1980 (44 U.S.C.

Chapter 35) after OMB finalizes the new

SF–SAC, ‘‘Data Collection Form for

Reporting on Audits of States, Local

Governments, and Non-Profit

Organizations.’’ On June 30, 1997, OMB

requested public comments on the

proposed SF–SAC (62 FR 35302).
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations 45949

List of Subjects

7 CFR Part 3015

Accounting, Grant programs

(Agriculture), Intergovernmental

regulations.

7 CFR Part 3051

Accounting, Auditing, Colleges and

universities, Grant programs, Nonprofit

organizations.

7 CFR Part 3052

Grant programs (Agriculture),

Auditing.

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

1997.

Approved:

Irvin T. David,

Acting Chief Financial Officer.

Dan Glickman,

Secretary of Agriculture.

For the reasons stated in the

preamble, 7 CFR chapter XXX is

amended as follows:

CHAPTER XXX—OFFICE OF THE CHIEF

FINANCIAL OFFICER, DEPARTMENT OF

AGRICULTURE

1. The heading of Chapter XXX is

revised to read as set forth above.

PART 3015—UNIFORM FEDERAL

ASSISTANCE REGULATIONS

1. The authority citation for part 3015

continues to read as follows:

Authority: 5 U.S.C. 301.

Subpart A—General

2. Section 3015.1 is amended by

revising paragraph (a)(2) as follows:

§ 3015.1 Purpose and scope of this part.

(a) * * *

(2) Additionally, this part establishes

intergovernmental review provisions

required by Executive Order 12372 for

any programs listed in the Federal

Register as covered, and policy on

competition in awarding discretionary

grants and cooperative agreements.

* * * * *

Subpart I—[Removed and Reserved]

3. Subpart I of Part 3015 (§§ 3015.70–

3015.77 and appendix to subpart) is

removed and reserved.

PART 3051—[REMOVED]

4. Part 3051 is removed.

5. Part 3052 is added as follows:

PART 3052—AUDITS OF STATES,

LOCAL GOVERNMENTS, AND NONPROFIT ORGANIZATIONS

Sec.

Subpart A—General

3052.100 Purpose.

3052.105 Definitions.

Subpart B—Audits

3052.200 Audit requirements.

3052.205 Basis for determining Federal

awards expended.

3052.210 Subrecipient and vendor

determinations.

3052.215 Relation to other audit

requirements.

3052.220 Frequency of audits.

3052.225 Sanctions.

3052.230 Audit costs.

3052.235 Program-specific audits.

Subpart C—Auditees

3052.300 Auditee responsibilities.

3052.305 Auditor selection.

3052.310 Financial statements.

3052.315 Audit findings follow-up.

3052.320 Report submission.

Subpart D—Federal Agencies and PassThrough Entities

3052.400 Responsibilities.

3052.405 Management decision.

Subpart E—Auditors

3052.500 Scope of audit.

3052.505 Audit reporting.

3052.510 Audit findings.

3052.515 Audit working papers.

3052.520 Major program determination.

3052.525 Criteria for Federal program risk.

3052.530 Criteria for a low-risk auditee.

Authority: 5 U.S.C. 301

Subpart A—General

§ 3052.100 Purpose.

This part sets forth standards for

obtaining consistency and uniformity

among Federal agencies for the audit of

non-Federal entities expending Federal

awards.

§ 3052.105 Definitions.

Audit finding means deficiencies

which the auditor is required by

§ 3052.510(a) to report in the schedule

of findings and questioned costs.

Auditee means any non-Federal entity

that expends Federal awards which

must be audited under this part.

Auditor means an auditor, that is a

public accountant or a Federal, State or

local government audit organization,

which meets the general standards

specified in generally accepted

government auditing standards

(GAGAS). The term auditor does not

include internal auditors of non-profit

organizations.

CFDA number means the number

assigned to a Federal program in the

Catalog of Federal Domestic Assistance

(CFDA).

Cluster of programs means a grouping

of closely related programs that share

common compliance requirements. The

types of clusters of programs are

research and development (R&D),

student financial aid (SFA), and other

clusters. ‘‘Other clusters’’ are as defined

by the Office of Management and

Budget (OMB) in the compliance

supplement or as designated by a State

for Federal awards the State provides to

its subrecipients that meet the definition

of a cluster of programs. When

designating an ‘‘other cluster,’’ a State

shall identify the Federal awards

included in the cluster and advise the

subrecipients of compliance

requirements applicable to the cluster,

consistent with § 3052.400(d)(1) and

§ 3052.400(d)(2), respectively. A cluster

of programs shall be considered as one

program for determining major

programs, as described in § 3052.520,

and, with the exception of R&D as

described in § 3052.200(c), whether a

program-specific audit may be elected.

Cognizant agency for audit means the

Federal agency designated to carry out

the responsibilities described in

§ 3052.400(a).

Compliance supplement refers to the

Circular A–133 Compliance

Supplement, included as Appendix B to

Circular A–133, or such documents as

OMB or its designee may issue to

replace it. This document is available

from the Government Printing Office,

Superintendent of Documents,

Washington, DC 20402–9325.

Corrective action means action taken

by the auditee that:

(1) Corrects identified deficiencies;

(2) Produces recommended

improvements; or

(3) Demonstrates that audit findings

are either invalid or do not warrant

auditee action.

Federal agency has the same meaning

as the term agency in Section 551(1) of

title 5, United States Code.

Federal award means Federal

financial assistance and Federal costreimbursement contracts that nonFederal entities receive directly from

Federal awarding agencies or indirectly

from pass-through entities. It does not

include procurement contracts, under

grants or contracts, used to buy goods or

services from vendors. Any audits of

such vendors shall be covered by the

terms and conditions of the contract.

Contracts to operate Federal

Government owned, contractor operated

facilities (GOCOs) are excluded from the

requirements of this part.

Federal awarding agency means the

Federal agency that provides an award

directly to the recipient.

Federal financial assistance means

assistance that non-Federal entities

receive or administer in the form of

grants, loans, loan guarantees, property

(including donated surplus property),
45950 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations

cooperative agreements, interest

subsidies, insurance, food commodities,

direct appropriations, and other

assistance, but does not include

amounts received as reimbursement for

services rendered to individuals as

described in § 3052.205(h) and

§ 3052.205(i).

Federal program means:

(1) All Federal awards to a nonFederal entity assigned a single number

in the CFDA.

(2) When no CFDA number is

assigned, all Federal awards from the

same agency made for the same purpose

should be combined and considered one

program.

(3) Notwithstanding paragraphs (1)

and (2) of this definition, a cluster of

programs. The types of clusters of

programs are:

(i) Research and development (R&D);

(ii) Student financial aid (SFA); and

(iii) ‘‘Other clusters,’’ as described in

the definition of cluster of programs in

this section.

GAGAS means generally accepted

government auditing standards issued

by the Comptroller General of the

United States, which are applicable to

financial audits.

Generally accepted accounting

principles has the meaning specified in

generally accepted auditing standards

issued by the American Institute of

Certified Public Accountants (AICPA).

Indian tribe means any Indian tribe,

band, nation, or other organized group

or community, including any Alaskan

Native village or regional or village

corporation (as defined in, or

established under, the Alaskan Native

Claims Settlement Act) that is

recognized by the United States as

eligible for the special programs and

services provided by the United States

to Indians because of their status as

Indians.

Internal control means a process,

effected by an entity’s management and

other personnel, designed to provide

reasonable assurance regarding the

achievement of objectives in the

following categories:

(1) Effectiveness and efficiency of

operations;

(2) Reliability of financial reporting;

and

(3) Compliance with applicable laws

and regulations.

Internal control pertaining to the

compliance requirements for Federal

programs (Internal control over Federal

programs) means a process—effected by

an entity’s management and other

personnel—designed to provide

reasonable assurance regarding the

achievement of the following objectives

for Federal programs:

(1) Transactions are properly recorded

and accounted for to:

(i) Permit the preparation of reliable

financial statements and Federal

reports;

(ii) Maintain accountability over

assets; and

(iii) Demonstrate compliance with

laws, regulations, and other compliance

requirements;

(2) Transactions are executed in

compliance with:

(i) Laws, regulations, and the

provisions of contracts or grant

agreements that could have a direct and

material effect on a Federal program;

and

(ii) Any other laws and regulations

that are identified in the compliance

supplement; and

(3) Funds, property, and other assets

are safeguarded against loss from

unauthorized use or disposition.

Loan means a Federal loan or loan

guarantee received or administered by a

non-Federal entity.

Local government means any unit of

local government within a State,

including a county, borough,

municipality, city, town, township,

parish, local public authority, special

district, school district, intrastate

district, council of governments, and

any other instrumentality of local

government.

Major program means a Federal

program determined by the auditor to be

a major program in accordance with

§ 3052.520 or a program identified as a

major program by a Federal agency or

pass-through entity in accordance with

§ 3052.215(c).

Management decision means the

evaluation by the Federal awarding

agency or pass-through entity of the

audit findings and corrective action

plan and the issuance of a written

decision as to what corrective action is

necessary.

Non-Federal entity means a State,

local government, or non-profit

organization.

Non-profit organization means:

(1) any corporation, trust, association,

cooperative, or other organization that:

(i) Is operated primarily for scientific,

educational, service, charitable, or

similar purposes in the public interest;

(ii) Is not organized primarily for

profit; and

(iii) Uses its net proceeds to maintain,

improve, or expand its operations; and

(2) The term non-profit organization

includes non-profit institutions of

higher education and hospitals.

OMB means the Executive Office of

the President, Office of Management

and Budget.

Oversight agency for audit means the

Federal awarding agency that provides

the predominant amount of direct

funding to a recipient not assigned a

cognizant agency for audit. When there

is no direct funding, the Federal agency

with the predominant indirect funding

shall assume the oversight

responsibilities. The duties of the

oversight agency for audit are described

in § 3052.400(b).

Pass-through entity means a nonFederal entity that provides a Federal

award to a subrecipient to carry out a

Federal program.

Program-specific audit means an

audit of one Federal program as

provided for in § 3052.200(c) and

§ 3052.235.

Questioned cost means a cost that is

questioned by the auditor because of an

audit finding:

(1) Which resulted from a violation or

possible violation of a provision of a

law, regulation, contract, grant,

cooperative agreement, or other

agreement or document governing the

use of Federal funds, including funds

used to match Federal funds;

(2) Where the costs, at the time of the

audit, are not supported by adequate

documentation; or

(3) Where the costs incurred appear

unreasonable and do not reflect the

actions a prudent person would take in

the circumstances.

Recipient means a non-Federal entity

that expends Federal awards received

directly from a Federal awarding agency

to carry out a Federal program.

Research and development (R&D)

means all research activities, both basic

and applied, and all development

activities that are performed by a nonFederal entity. Research is defined as a

systematic study directed toward fuller

scientific knowledge or understanding

of the subject studied. The term research

also includes activities involving the

training of individuals in research

techniques where such activities utilize

the same facilities as other research and

development activities and where such

activities are not included in the

instruction function. Development is the

systematic use of knowledge and

understanding gained from research

directed toward the production of useful

materials, devices, systems, or methods,

including design and development of

prototypes and processes.

Single audit means an audit which

includes both the entity’s financial

statements and the Federal awards as

described in § 3052.500.

State means any State of the United

States, the District of Columbia, the

Commonwealth of Puerto Rico, the

Virgin Islands, Guam, American Samoa,

the Commonwealth of the Northern

Mariana Islands, and the Trust Territory
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations 45951

of the Pacific Islands, any

instrumentality thereof, any multi-State,

regional, or interstate entity which has

governmental functions, and any Indian

tribe as defined in this section.

Student Financial Aid (SFA) includes

those programs of general student

assistance, such as those authorized by

Title IV of the Higher Education Act of

1965, as amended, (20 U.S.C. 1070 et

seq.) which is administered by the U.S.

Department of Education, and similar

programs provided by other Federal

agencies. It does not include programs

which provide fellowships or similar

Federal awards to students on a

competitive basis, or for specified

studies or research.

Subrecipient means a non-Federal

entity that expends Federal awards

received from a pass-through entity to

carry out a Federal program, but does

not include an individual that is a

beneficiary of such a program. A

subrecipient may also be a recipient of

other Federal awards directly from a

Federal awarding agency. Guidance on

distinguishing between a subrecipient

and a vendor is provided in § 3052.210.

Types of compliance requirements

refers to the types of compliance

requirements listed in the compliance

supplement. Examples include:

activities allowed or unallowed;

allowable costs/cost principles; cash

management; eligibility; matching, level

of effort, earmarking; and, reporting.

Vendor means a dealer, distributor,

merchant, or other seller providing

goods or services that are required for

the conduct of a Federal program. These

goods or services may be for an

organization’s own use or for the use of

beneficiaries of the Federal program.

Additional guidance on distinguishing

between a subrecipient and a vendor is

provided in § 3052.210.

Subpart B—Audits

§ 3052.200 Audit requirements.

(a) Audit required. Non-Federal

entities that expend $300,000 or more in

a year in Federal awards shall have a

single or program-specific audit

conducted for that year in accordance

with the provisions of this part.

Guidance on determining Federal

awards expended is provided in

§ 3052.205.

(b) Single audit. Non-Federal entities

that expend $300,000 or more in a year

in Federal awards shall have a single

audit conducted in accordance with

§ 3052.500 except when they elect to

have a program-specific audit

conducted in accordance with

paragraph (c) of this section.

(c) Program-specific audit election.

When an auditee expends Federal

awards under only one Federal program

(excluding R&D) and the Federal

program’s laws, regulations, or grant

agreements do not require a financial

statement audit of the auditee, the

auditee may elect to have a programspecific audit conducted in accordance

with § 3052.235. A program-specific

audit may not be elected for R&D unless

all of the Federal awards expended were

received from the same Federal agency,

or the same Federal agency and the

same pass-through entity, and that

Federal agency, or pass-through entity

in the case of a subrecipient, approves

in advance a program-specific audit.

(d) Exemption when Federal awards

expended are less than $300,000. NonFederal entities that expend less than

$300,000 a year in Federal awards are

exempt from Federal audit requirements

for that year, except as noted in

§ 3052.215(a), but records must be

available for review or audit by

appropriate officials of the Federal

agency, pass-through entity, and

General Accounting Office (GAO).

(e) Federally Funded Research and

Development Centers (FFRDC).

Management of an auditee that owns or

operates a FFRDC may elect to treat the

FFRDC as a separate entity for purposes

of this part.

§ 3052.205 Basis for determining Federal

awards expended.

(a) Determining Federal awards

expended. The determination of when

an award is expended should be based

on when the activity related to the

award occurs. Generally, the activity

pertains to events that require the nonFederal entity to comply with laws,

regulations, and the provisions of

contracts or grant agreements, such as:

expenditure/expense transactions

associated with grants, costreimbursement contracts, cooperative

agreements, and direct appropriations;

the disbursement of funds passed

through to subrecipients; the use of loan

proceeds under loan and loan guarantee

programs; the receipt of property; the

receipt of surplus property; the receipt

or use of program income; the

distribution or consumption of food

commodities; the disbursement of

amounts entitling the non-Federal entity

to an interest subsidy; and, the period

when insurance is in force.

(b) Loan and loan guarantees (loans).

Since the Federal Government is at risk

for loans until the debt is repaid, the

following guidelines shall be used to

calculate the value of Federal awards

expended under loan programs, except

as noted in paragraphs (c) and (d) of this

section:

(1) Value of new loans made or

received during the fiscal year; plus

(2) Balance of loans from previous

years for which the Federal Government

imposes continuing compliance

requirements; plus

(3) Any interest subsidy, cash, or

administrative cost allowance received.

(c) Loan and loan guarantees (loans) at

institutions of higher education. When

loans are made to students of an

institution of higher education but the

institution does not make the loans,

then only the value of loans made

during the year shall be considered

Federal awards expended in that year.

The balance of loans for previous years

is not included as Federal awards

expended because the lender accounts

for the prior balances.

(d) Prior loan and loan guarantees

(loans). Loans, the proceeds of which

were received and expended in prioryears, are not considered Federal

awards expended under this part when

the laws, regulations, and the provisions

of contracts or grant agreements

pertaining to such loans impose no

continuing compliance requirements

other than to repay the loans.

(e) Endowment funds. The cumulative

balance of Federal awards for

endowment funds which are federally

restricted are considered awards

expended in each year in which the

funds are still restricted.

(f) Free rent. Free rent received by

itself is not considered a Federal award

expended under this part. However, free

rent received as part of an award to

carry out a Federal program shall be

included in determining Federal awards

expended and subject to audit under

this part.

(g) Valuing non-cash assistance.

Federal non-cash assistance, such as

free rent, food stamps, food

commodities, donated property, or

donated surplus property, shall be

valued at fair market value at the time

of receipt or the assessed value provided

by the Federal agency.

(h) Medicare. Medicare payments to a

non-Federal entity for providing patient

care services to Medicare eligible

individuals are not considered Federal

awards expended under this part.

(i) Medicaid. Medicaid payments to a

subrecipient for providing patient care

services to Medicaid eligible individuals

are not considered Federal awards

expended under this part unless a State

requires the funds to be treated as

Federal awards expended because

reimbursement is on a costreimbursement basis.
45952 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations

(j) Certain loans provided by the

National Credit Union Administration.

For purposes of this part, loans made

from the National Credit Union Share

Insurance Fund and the Central

Liquidity Facility that are funded by

contributions from insured institutions

are not considered Federal awards

expended.

§ 3052.210 Subrecipient and vendor

determinations.

(a) General. An auditee may be a

recipient, a subrecipient, and a vendor.

Federal awards expended as a recipient

or a subrecipient would be subject to

audit under this part. The payments

received for goods or services provided

as a vendor would not be considered

Federal awards. The guidance in

paragraphs (b) and (c) of this section

should be considered in determining

whether payments constitute a Federal

award or a payment for goods and

services.

(b) Federal award. Characteristics

indicative of a Federal award received

by a subrecipient are when the

organization:

(1) Determines who is eligible to

receive what Federal financial

assistance;

(2) Has its performance measured

against whether the objectives of the

Federal program are met;

(3) Has responsibility for

programmatic decision making;

(4) Has responsibility for adherence to

applicable Federal program compliance

requirements; and

(5) Uses the Federal funds to carry out

a program of the organization as

compared to providing goods or services

for a program of the pass-through entity.

(c) Payment for goods and services.

Characteristics indicative of a payment

for goods and services received by a

vendor are when the organization:

(1) Provides the goods and services

within normal business operations;

(2) Provides similar goods or services

to many different purchasers;

(3) Operates in a competitive

environment;

(4) Provides goods or services that are

ancillary to the operation of the Federal

program; and

(5) Is not subject to compliance

requirements of the Federal program.

(d) Use of judgment in making

determination. There may be unusual

circumstances or exceptions to the

listed characteristics. In making the

determination of whether a subrecipient

or vendor relationship exists, the

substance of the relationship is more

important than the form of the

agreement. It is not expected that all of

the characteristics will be present and

judgment should be used in determining

whether an entity is a subrecipient or

vendor.

(e) For-profit subrecipient. Since this

part does not apply to for-profit

subrecipients, the pass-through entity is

responsible for establishing

requirements, as necessary, to ensure

compliance by for-profit subrecipients.

The contract with the for-profit

subrecipient should describe applicable

compliance requirements and the forprofit subrecipient’s compliance

responsibility. Methods to ensure

compliance for Federal awards made to

for-profit subrecipients may include

pre-award audits, monitoring during the

contract, and post-award audits.

(f) Compliance responsibility for

vendors. In most cases, the auditee’s

compliance responsibility for vendors is

only to ensure that the procurement,

receipt, and payment for goods and

services comply with laws, regulations,

and the provisions of contracts or grant

agreements. Program compliance

requirements normally do not pass

through to vendors. However, the

auditee is responsible for ensuring

compliance for vendor transactions

which are structured such that the

vendor is responsible for program

compliance or the vendor’s records

must be reviewed to determine program

compliance. Also, when these vendor

transactions relate to a major program,

the scope of the audit shall include

determining whether these transactions

are in compliance with laws,

regulations, and the provisions of

contracts or grant agreements.

§ 3052.215 Relation to other audit

requirements.

(a) Audit under this part in lieu of

other audits. An audit made in

accordance with this part shall be in

lieu of any financial audit required

under individual Federal awards. To the

extent this audit meets a Federal

agency’s needs, it shall rely upon and

use such audits. The provisions of this

part neither limit the authority of

Federal agencies, including their

Inspectors General, or GAO to conduct

or arrange for additional audits (e.g.,

financial audits, performance audits,

evaluations, inspections, or reviews) nor

authorize any auditee to constrain

Federal agencies from carrying out

additional audits. Any additional audits

shall be planned and performed in such

a way as to build upon work performed

by other auditors.

(b) Federal agency to pay for

additional audits. A Federal agency that

conducts or contracts for additional

audits shall, consistent with other

applicable laws and regulations, arrange

for funding the full cost of such

additional audits.

(c) Request for a program to be

audited as a major program. A Federal

agency may request an auditee to have

a particular Federal program audited as

a major program in lieu of the Federal

agency conducting or arranging for the

additional audits. To allow for planning,

such requests should be made at least

180 days prior to the end of the fiscal

year to be audited. The auditee, after

consultation with its auditor, should

promptly respond to such request by

informing the Federal agency whether

the program would otherwise be audited

as a major program using the risk-based

audit approach described in § 3052.520

and, if not, the estimated incremental

cost. The Federal agency shall then

promptly confirm to the auditee

whether it wants the program audited as

a major program. If the program is to be

audited as a major program based upon

this Federal agency request, and the

Federal agency agrees to pay the full

incremental costs, then the auditee shall

have the program audited as a major

program. A pass-through entity may use

the provisions of this paragraph for a

subrecipient.

§ 3052.220 Frequency of audits.

Except for the provisions for biennial

audits provided in paragraphs (a) and

(b) of this section, audits required by

this part shall be performed annually.

Any biennial audit shall cover both

years within the biennial period.

(a) A State or local government that is

required by constitution or statute, in

effect on January 1, 1987, to undergo its

audits less frequently than annually, is

permitted to undergo its audits pursuant

to this part biennially. This requirement

must still be in effect for the biennial

period under audit.

(b) Any non-profit organization that

had biennial audits for all biennial

periods ending between July 1, 1992,

and January 1, 1995, is permitted to

undergo its audits pursuant to this part

biennially.

§ 3052.225 Sanctions.

No audit costs may be charged to

Federal awards when audits required by

this part have not been made or have

been made but not in accordance with

this part. In cases of continued inability

or unwillingness to have an audit

conducted in accordance with this part,

Federal agencies and pass-through

entities shall take appropriate action

using sanctions such as:

(a) Withholding a percentage of

Federal awards until the audit is

completed satisfactorily;
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations 45953

(b) Withholding or disallowing

overhead costs;

(c) Suspending Federal awards until

the audit is conducted; or

(d) Terminating the Federal award.

§ 3052.230 Audit costs.

(a) Allowable costs. Unless prohibited

by law, the cost of audits made in

accordance with the provisions of this

part are allowable charges to Federal

awards. The charges may be considered

a direct cost or an allocated indirect

cost, as determined in accordance with

the provisions of applicable OMB cost

principles circulars, the Federal

Acquisition Regulation (FAR) (48 CFR

parts 30 and 31), or other applicable

cost principles or regulations.

(b) Unallowable costs. A non-Federal

entity shall not charge the following to

a Federal award:

(1) The cost of any audit under the

Single Audit Act Amendments of 1996

(31 U.S.C. 7501 et seq.) not conducted

in accordance with this part.

(2) The cost of auditing a non-Federal

entity which has Federal awards

expended of less than $300,000 per year

and is thereby exempted under

§ 3052.200(d) from having an audit

conducted under this part. However,

this does not prohibit a pass-through

entity from charging Federal awards for

the cost of limited scope audits to

monitor its subrecipients in accordance

with § 3052.400(d)(3), provided the

subrecipient does not have a single

audit. For purposes of this part, limited

scope audits only include agreed-upon

procedures engagements conducted in

accordance with either the AICPA’s

generally accepted auditing standards or

attestation standards, that are paid for

and arranged by a pass-through entity

and address only one or more of the

following types of compliance

requirements: activities allowed or

unallowed; allowable costs/cost

principles; eligibility; matching, level of

effort, earmarking; and, reporting.

§ 3052.235 Program-specific audits.

(a) Program-specific audit guide

available. In many cases, a programspecific audit guide will be available to

provide specific guidance to the auditor

with respect to internal control,

compliance requirements, suggested

audit procedures, and audit reporting

requirements. The auditor should

contact the Office of Inspector General

of the Federal agency to determine

whether such a guide is available. When

a current program-specific audit guide is

available, the auditor shall follow

GAGAS and the guide when performing

a program-specific audit.

(b) Program-specific audit guide not

available.

(1) When a program-specific audit

guide is not available, the auditee and

auditor shall have basically the same

responsibilities for the Federal program

as they would have for an audit of a

major program in a single audit.

(2) The auditee shall prepare the

financial statement(s) for the Federal

program that includes, at a minimum, a

schedule of expenditures of Federal

awards for the program and notes that

describe the significant accounting

policies used in preparing the schedule,

a summary schedule of prior audit

findings consistent with the

requirements of § 3052.315(b), and a

corrective action plan consistent with

the requirements of § 3052.315(c).

(3) The auditor shall:

(i) Perform an audit of the financial

statement(s) for the Federal program in

accordance with GAGAS;

(ii) Obtain an understanding of

internal control and perform tests of

internal control over the Federal

program consistent with the

requirements of § 3052.500(c) for a

major program;

(iii) Perform procedures to determine

whether the auditee has complied with

laws, regulations, and the provisions of

contracts or grant agreements that could

have a direct and material effect on the

Federal program consistent with the

requirements of § 3052.500(d) for a

major program; and

(iv) Follow up on prior audit findings,

perform procedures to assess the

reasonableness of the summary

schedule of prior audit findings

prepared by the auditee, and report, as

a current year audit finding, when the

auditor concludes that the summary

schedule of prior audit findings

materially misrepresents the status of

any prior audit finding in accordance

with the requirements of § 3052.500(e).

(4) The auditor’s report(s) may be in

the form of either combined or separate

reports and may be organized differently

from the manner presented in this

section. The auditor’s report(s) shall

state that the audit was conducted in

accordance with this part and include

the following:

(i) An opinion (or disclaimer of

opinion) as to whether the financial

statement(s) of the Federal program is

presented fairly in all material respects

in conformity with the stated

accounting policies;

(ii) A report on internal control

related to the Federal program, which

shall describe the scope of testing of

internal control and the results of the

tests;

(iii) A report on compliance which

includes an opinion (or disclaimer of

opinion) as to whether the auditee

complied with laws, regulations, and

the provisions of contracts or grant

agreements which could have a direct

and material effect on the Federal

program; and

(iv) A schedule of findings and

questioned costs for the Federal

program that includes a summary of the

auditor’s results relative to the Federal

program in a format consistent with

§ 3052.505(d)(1) and findings and

questioned costs consistent with the

requirements of § 3052.505(d)(3).

(c) Report submission for programspecific audits.

(1) The audit shall be completed and

the reporting required by paragraph

(c)(2) or (c)(3) of this section submitted

within the earlier of 30 days after

receipt of the auditor’s report(s), or nine

months after the end of the audit period,

unless a longer period is agreed to in

advance by the Federal agency that

provided the funding or a different

period is specified in a program-specific

audit guide. (However, for fiscal years

beginning on or before June 30, 1988,

the audit shall be completed and the

required reporting shall be submitted

within the earlier of 30 days after

receipt of the auditor’s report(s), or 13

months after the end of the audit period,

unless a different period is specified in

a program-specific audit guide.) Unless

restricted by law or regulation, the

auditee shall make report copies

available for public inspection.

(2) When a program-specific audit

guide is available, the auditee shall

submit to the Federal clearinghouse

designated by OMB the data collection

form prepared in accordance with

§ 3052.320(b), as applicable to a

program-specific audit, and the

reporting required by the programspecific audit guide to be retained as an

archival copy. Also, the auditee shall

submit to the Federal awarding agency

or pass-through entity the reporting

required by the program-specific audit

guide.

(3) When a program-specific audit

guide is not available, the reporting

package for a program-specific audit

shall consist of the financial

statement(s) of the Federal program, a

summary schedule of prior audit

findings, and a corrective action plan as

described in paragraph (b)(2) of this

section, and the auditor’s report(s)

described in paragraph (b)(4) of this

section. The data collection form

prepared in accordance with

§ 3052.320(b), as applicable to a

program-specific audit, and one copy of

this reporting package shall be
45954 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations

submitted to the Federal clearinghouse

designated by OMB to be retained as an

archival copy. Also, when the schedule

of findings and questioned costs

disclosed audit findings or the summary

schedule of prior audit findings

reported the status of any audit findings,

the auditee shall submit one copy of the

reporting package to the Federal

clearinghouse on behalf of the Federal

awarding agency, or directly to the passthrough entity in the case of a

subrecipient. Instead of submitting the

reporting package to the pass-through

entity, when a subrecipient is not

required to submit a reporting package

to the pass-through entity, the

subrecipient shall provide written

notification to the pass-through entity,

consistent with the requirements of

§ 3052.320(e)(2). A subrecipient may

submit a copy of the reporting package

to the pass-through entity to comply

with this notification requirement.

(d) Other sections of this part may

apply. Program-specific audits are

subject to § 3052.100 through

§ 3052.215(b), § 3052.220 through

§ 3052.230, § 3052.300 through

§ 3052.305, § 3052.315, § 3052.320(f)

through § 3052.320(j), § 3052.400

through § 3052.405, § 3052.510 through

§ 3052.515, and other referenced

provisions of this part unless contrary to

the provisions of this section, a

program-specific audit guide, or

program laws and regulations.

Subpart C—Auditees

§ 3052.300 Auditee responsibilities.

The auditee shall:

(a) Identify, in its accounts, all

Federal awards received and expended

and the Federal programs under which

they were received. Federal program

and award identification shall include,

as applicable, the CFDA title and

number, award number and year, name

of the Federal agency, and name of the

pass-through entity.

(b) Maintain internal control over

Federal programs that provides

reasonable assurance that the auditee is

managing Federal awards in compliance

with laws, regulations, and the

provisions of contracts or grant

agreements that could have a material

effect on each of its Federal programs.

(c) Comply with laws, regulations,

and the provisions of contracts or grant

agreements related to each of its Federal

programs.

(d) Prepare appropriate financial

statements, including the schedule of

expenditures of Federal awards in

accordance with § 3052.310.

(e) Ensure that the audits required by

this part are properly performed and

submitted when due. When extensions

to the report submission due date

required by § 3052.320(a) are granted by

the cognizant or oversight agency for

audit, promptly notify the Federal

clearinghouse designated by OMB and

each pass-through entity providing

Federal awards of the extension.

(f) Follow up and take corrective

action on audit findings, including

preparation of a summary schedule of

prior audit findings and a corrective

action plan in accordance with

§ 3052.315(b) and § 3052.315(c),

respectively.

§ 3052.305 Auditor selection.

(a) Auditor procurement. In procuring

audit services, auditees shall follow the

procurement standards prescribed by

the Grants Management Common Rule

(hereinafter referred to as the ‘‘A–102

Common Rule’’) 7 CFR Part 3016,

Circular A–110, ‘‘Uniform

Administrative Requirements for Grants

and Agreements with Institutions of

Higher Education, Hospitals and Other

Non-Profit Organizations,’’ or the FAR

(48 CFR part 42), as applicable (OMB

Circulars are available from the Office of

Administration, Publications Office,

room 2200, New Executive Office

Building, Washington, DC 20503).

Whenever possible, auditees shall make

positive efforts to utilize small

businesses, minority-owned firms, and

women’s business enterprises, in

procuring audit services as stated in the

A–102 Common Rule, OMB Circular A–

110, or the FAR (48 CFR part 42), as

applicable. In requesting proposals for

audit services, the objectives and scope

of the audit should be made clear.

Factors to be considered in evaluating

each proposal for audit services include

the responsiveness to the request for

proposal, relevant experience,

availability of staff with professional

qualifications and technical abilities,

the results of external quality control

reviews, and price.

(b) Restriction on auditor preparing

indirect cost proposals. An auditor who

prepares the indirect cost proposal or

cost allocation plan may not also be

selected to perform the audit required

by this part when the indirect costs

recovered by the auditee during the

prior year exceeded $1 million. This

restriction applies to the base year used

in the preparation of the indirect cost

proposal or cost allocation plan and any

subsequent years in which the resulting

indirect cost agreement or cost

allocation plan is used to recover costs.

To minimize any disruption in existing

contracts for audit services, this

paragraph applies to audits of fiscal

years beginning after June 30, 1998.

(c) Use of Federal auditors. Federal

auditors may perform all or part of the

work required under this part if they

comply fully with the requirements of

this part.

§ 3052.310 Financial statements.

(a) Financial statements. The auditee

shall prepare financial statements that

reflect its financial position, results of

operations or changes in net assets, and,

where appropriate, cash flows for the

fiscal year audited. The financial

statements shall be for the same

organizational unit and fiscal year that

is chosen to meet the requirements of

this part. However, organization-wide

financial statements may also include

departments, agencies, and other

organizational units that have separate

audits in accordance with § 3052.500(a)

and prepare separate financial

statements.

(b) Schedule of expenditures of

Federal awards. The auditee shall also

prepare a schedule of expenditures of

Federal awards for the period covered

by the auditee’s financial statements.

While not required, the auditee may

choose to provide information requested

by Federal awarding agencies and passthrough entities to make the schedule

easier to use. For example, when a

Federal program has multiple award

years, the auditee may list the amount

of Federal awards expended for each

award year separately. At a minimum,

the schedule shall:

(1) List individual Federal programs

by Federal agency. For Federal programs

included in a cluster of programs, list

individual Federal programs within a

cluster of programs. For R&D, total

Federal awards expended shall be

shown either by individual award or by

Federal agency and major subdivision

within the Federal agency. For example,

the National Institutes of Health is a

major subdivision in the Department of

Health and Human Services.

(2) For Federal awards received as a

subrecipient, the name of the passthrough entity and identifying number

assigned by the pass-through entity

shall be included.

(3) Provide total Federal awards

expended for each individual Federal

program and the CFDA number or other

identifying number when the CFDA

information is not available.

(4) Include notes that describe the

significant accounting policies used in

preparing the schedule.

(5) To the extent practical, passthrough entities should identify in the

schedule the total amount provided to

subrecipients from each Federal

program.
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations 45955

(6) Include, in either the schedule or

a note to the schedule, the value of the

Federal awards expended in the form of

non-cash assistance, the amount of

insurance in effect during the year, and

loans or loan guarantees outstanding at

year end. While not required, it is

preferable to present this information in

the schedule.

§ 3052.315 Audit findings follow-up.

(a) General. The auditee is responsible

for follow-up and corrective action on

all audit findings. As part of this

responsibility, the auditee shall prepare

a summary schedule of prior audit

findings. The auditee shall also prepare

a corrective action plan for current year

audit findings. The summary schedule

of prior audit findings and the

corrective action plan shall include the

reference numbers the auditor assigns to

audit findings under § 3052.510(c).

Since the summary schedule may

include audit findings from multiple

years, it shall include the fiscal year in

which the finding initially occurred.

(b) Summary schedule of prior audit

findings. The summary schedule of

prior audit findings shall report the

status of all audit findings included in

the prior audit’s schedule of findings

and questioned costs relative to Federal

awards. The summary schedule shall

also include audit findings reported in

the prior audit’s summary schedule of

prior audit findings except audit

findings listed as corrected in

accordance with paragraph (b)(1) of this

section, or no longer valid or not

warranting further action in accordance

with paragraph (b)(4) of this section.

(1) When audit findings were fully

corrected, the summary schedule need

only list the audit findings and state that

corrective action was taken.

(2) When audit findings were not

corrected or were only partially

corrected, the summary schedule shall

describe the planned corrective action

as well as any partial corrective action

taken.

(3) When corrective action taken is

significantly different from corrective

action previously reported in a

corrective action plan or in the Federal

agency’s or pass-through entity’s

management decision, the summary

schedule shall provide an explanation.

(4) When the auditee believes the

audit findings are no longer valid or do

not warrant further action, the reasons

for this position shall be described in

the summary schedule. A valid reason

for considering an audit finding as not

warranting further action is that all of

the following have occurred:

(i) Two years have passed since the

audit report in which the finding

occurred was submitted to the Federal

clearinghouse;

(ii) The Federal agency or passthrough entity is not currently following

up with the auditee on the audit

finding; and

(iii) A management decision was not

issued.

(c) Corrective action plan. At the

completion of the audit, the auditee

shall prepare a corrective action plan to

address each audit finding included in

the current year auditor’s reports. The

corrective action plan shall provide the

name(s) of the contact person(s)

responsible for corrective action, the

corrective action planned, and the

anticipated completion date. If the

auditee does not agree with the audit

findings or believes corrective action is

not required, then the corrective action

plan shall include an explanation and

specific reasons.

§ 3052.320 Report submission.

(a) General. The audit shall be

completed and the data collection form

described in paragraph (b) of this

section and reporting package described

in paragraph (c) of this section shall be

submitted within the earlier of 30 days

after receipt of the auditor’s report(s), or

nine months after the end of the audit

period, unless a longer period is agreed

to in advance by the cognizant or

oversight agency for audit. (However,

for fiscal years beginning on or before

June 30, 1998, the audit shall be

completed and the data collection form

and reporting package shall be

submitted within the earlier of 30 days

after receipt of the auditor’s report(s), or

13 months after the end of the audit

period.) Unless restricted by law or

regulation, the auditee shall make

copies available for public inspection.

(b) Data Collection. (1) The auditee

shall submit a data collection form

which states whether the audit was

completed in accordance with this part

and provides information about the

auditee, its Federal programs, and the

results of the audit. The form shall be

approved by OMB, available from the

Federal clearinghouse designated by

OMB, and include data elements similar

to those presented in this paragraph. A

senior level representative of the auditee

(e.g., State controller, director of

finance, chief executive officer, or chief

financial officer) shall sign a statement

to be included as part of the form

certifying that: the auditee complied

with the requirements of this part, the

form was prepared in accordance with

this part (and the instructions

accompanying the form), and the

information included in the form, in its

entirety, are accurate and complete.

(2) The data collection form shall

include the following data elements:

(i) The type of report the auditor

issued on the financial statements of the

auditee (i.e., unqualified opinion,

qualified opinion, adverse opinion, or

disclaimer of opinion).

(ii) Where applicable, a statement that

reportable conditions in internal control

were disclosed by the audit of the

financial statements and whether any

such conditions were material

weaknesses.

(iii) A statement as to whether the

audit disclosed any noncompliance

which is material to the financial

statements of the auditee.

(iv) Where applicable, a statement

that reportable conditions in internal

control over major programs were

disclosed by the audit and whether any

such conditions were material

weaknesses.

(v) The type of report the auditor

issued on compliance for major

programs (i.e., unqualified opinion,

qualified opinion, adverse opinion, or

disclaimer of opinion).

(vi) A list of the Federal awarding

agencies which will receive a copy of

the reporting package pursuant to

§ 3052.320(d)(2) of OMB Circular A–

133.

(vii) A yes or no statement as to

whether the auditee qualified as a lowrisk auditee under § 3052.530 of OMB

Circular A–133.

(viii) The dollar threshold used to

distinguish between Type A and Type B

programs as defined in § 3052.520(b) of

OMB Circular A–133.

(ix) The Catalog of Federal Domestic

Assistance (CFDA) number for each

Federal program, as applicable.

(x) The name of each Federal program

and identification of each major

program. Individual programs within a

cluster of programs should be listed in

the same level of detail as they are listed

in the schedule of expenditures of

Federal awards.

(xi) The amount of expenditures in

the schedule of expenditures of Federal

awards associated with each Federal

program.

(xii) For each Federal program, a yes

or no statement as to whether there are

audit findings in each of the following

types of compliance requirements and

the total amount of any questioned

costs:

(A) Activities allowed or unallowed.

(B) Allowable costs/cost principles.

(C) Cash management.

(D) Davis-Bacon Act.

(E) Eligibility.

(F) Equipment and real property

management.

(G) Matching, level of effort,

earmarking.
45956 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations

(H) Period of availability of Federal

funds.

(I) Procurement and suspension and

debarment.

(J) Program income.

(K) Real property acquisition and

relocation assistance.

(L) Reporting.

(M) Subrecipient monitoring.

(N) Special tests and provisions.

(xiii) Auditee Name, Employer

Identification Number(s), Name and

Title of Certifying Official, Telephone

Number, Signature, and Date.

(xiv) Auditor Name, Name and Title

of Contact Person, Auditor Address,

Auditor Telephone Number, Signature,

and Date.

(xv) Whether the auditee has either a

cognizant or oversight agency for audit.

(xvi) The name of the cognizant or

oversight agency for audit determined in

accordance with § 3052.400(a) and

§ 3052.400(b), respectively.

(3) Using the information included in

the reporting package described in

paragraph (c) of this section, the auditor

shall complete the applicable sections of

the form. The auditor shall sign a

statement to be included as part of the

data collection form that indicates, at a

minimum, the source of the information

included in the form, the auditor’s

responsibility for the information, that

the form is not a substitute for the

reporting package described in

paragraph (c) of this section, and that

the content of the form is limited to the

data elements prescribed by OMB.

(c) Reporting package. The reporting

package shall include the:

(1) Financial statements and schedule

of expenditures of Federal awards

discussed in § 3052.310(a) and

§ 3052.310(b), respectively;

(2) Summary schedule of prior audit

findings discussed in § 3052.315(b);

(3) Auditor’s report(s) discussed in

§ 3052.505; and

(4) Corrective action plan discussed in

§ 3052.315(c).

(d) Submission to clearinghouse. All

auditees shall submit to the Federal

clearinghouse designated by OMB the

data collection form described in

paragraph (b) of this section and one

copy of the reporting package described

in paragraph (c) of this section for:

(1) The Federal clearinghouse to

retain as an archival copy; and

(2) Each Federal awarding agency

when the schedule of findings and

questioned costs disclosed audit

findings relating to Federal awards that

the Federal awarding agency provided

directly or the summary schedule of

prior audit findings reported the status

of any audit findings relating to Federal

awards that the Federal awarding

agency provided directly.

(e) Additional submission by

subrecipients. (1) In addition to the

requirements discussed in paragraph (d)

of this section, auditees that are also

subrecipients shall submit to each passthrough entity one copy of the reporting

package described in paragraph (c) of

this section for each pass-through entity

when the schedule of findings and

questioned costs disclosed audit

findings relating to Federal awards that

the pass-through entity provided or the

summary schedule of prior audit

findings reported the status of any audit

findings relating to Federal awards that

the pass-through entity provided.

(2) Instead of submitting the reporting

package to a pass-through entity, when

a subrecipient is not required to submit

a reporting package to a pass-through

entity pursuant to paragraph (e)(1) of

this section, the subrecipient shall

provide written notification to the passthrough entity that: an audit of the

subrecipient was conducted in

accordance with this part (including the

period covered by the audit and the

name, amount, and CFDA number of the

Federal award(s) provided by the passthrough entity); the schedule of findings

and questioned costs disclosed no audit

findings relating to the Federal award(s)

that the pass-through entity provided;

and, the summary schedule of prior

audit findings did not report on the

status of any audit findings relating to

the Federal award(s) that the passthrough entity provided. A subrecipient

may submit a copy of the reporting

package described in paragraph (c) of

this section to a pass-through entity to

comply with this notification

requirement.

(f) Requests for report copies. In

response to requests by a Federal agency

or pass-through entity, auditees shall

submit the appropriate copies of the

reporting package described in

paragraph (c) of this section and, if

requested, a copy of any management

letters issued by the auditor.

(g) Report retention requirements.

Auditees shall keep one copy of the data

collection form described in paragraph

(b) of this section and one copy of the

reporting package described in

paragraph (c) of this section on file for

three years from the date of submission

to the Federal clearinghouse designated

by OMB. Pass-through entities shall

keep subrecipients’ submissions on file

for three years from date of receipt.

(h) Clearinghouse responsibilities.

The Federal clearinghouse designated

by OMB shall distribute the reporting

packages received in accordance with

paragraph (d)(2) of this section and

§ 3052.235(c)(3) to applicable Federal

awarding agencies, maintain a data base

of completed audits, provide

appropriate information to Federal

agencies, and follow up with known

auditees which have not submitted the

required data collection forms and

reporting packages.

(i) Clearinghouse address. The

address of the Federal clearinghouse

currently designated by OMB is Federal

Audit Clearinghouse, Bureau of the

Census, 1201 E. 10th Street,

Jeffersonville, IN 47132.

(j) Electronic filing. Nothing in this

part shall preclude electronic

submissions to the Federal

clearinghouse in such manner as may be

approved by OMB. With OMB approval,

the Federal clearinghouse may pilot test

methods of electronic submissions.

Subpart D—Federal Agencies and

Pass-Through Entities

§ 3052.400 Responsibilities.

(a) Cognizant agency for audit

responsibilities. Recipients expending

more than $25 million a year in Federal

awards shall have a cognizant agency

for audit. The designated cognizant

agency for audit shall be the Federal

awarding agency that provides the

predominant amount of direct funding

to a recipient unless OMB makes a

specific cognizant agency for audit

assignment. To provide for continuity of

cognizance, the determination of the

predominant amount of direct funding

shall be based upon direct Federal

awards expended in the recipient’s

fiscal years ending in 1995, 2000, 2005,

and every fifth year thereafter. For

example, audit cognizance for periods

ending in 1997 through 2000 will be

determined based on Federal awards

expended in 1995. (However, for States

and local governments that expend

more than $25 million a year in Federal

awards and have previously assigned

cognizant agencies for audit, the

requirements of this paragraph are not

effective until fiscal years beginning

after June 30, 2000.) Notwithstanding

the manner in which audit cognizance

is determined, a Federal awarding

agency with cognizance for an auditee

may reassign cognizance to another

Federal awarding agency which

provides substantial direct funding and

agrees to be the cognizant agency for

audit. Within 30 days after any

reassignment, both the old and the new

cognizant agency for audit shall notify

the auditee, and, if known, the auditor

of the reassignment. The cognizant

agency for audit shall:

(1) Provide technical audit advice and

liaison to auditees and auditors.

(2) Consider auditee requests for

extensions to the report submission due
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations 45957

date required by § 3052.320(a). The

cognizant agency for audit may grant

extensions for good cause.

(3) Obtain or conduct quality control

reviews of selected audits made by nonFederal auditors, and provide the

results, when appropriate, to other

interested organizations.

(4) Promptly inform other affected

Federal agencies and appropriate

Federal law enforcement officials of any

direct reporting by the auditee or its

auditor of irregularities or illegal acts, as

required by GAGAS or laws and

regulations.

(5) Advise the auditor and, where

appropriate, the auditee of any

deficiencies found in the audits when

the deficiencies require corrective

action by the auditor. When advised of

deficiencies, the auditee shall work with

the auditor to take corrective action. If

corrective action is not taken, the

cognizant agency for audit shall notify

the auditor, the auditee, and applicable

Federal awarding agencies and passthrough entities of the facts and make

recommendations for follow-up action.

Major inadequacies or repetitive

substandard performance by auditors

shall be referred to appropriate State

licensing agencies and professional

bodies for disciplinary action.

(6) Coordinate, to the extent practical,

audits or reviews made by or for Federal

agencies that are in addition to the

audits made pursuant to this part, so

that the additional audits or reviews

build upon audits performed in

accordance with this part.

(7) Coordinate a management decision

for audit findings that affect the Federal

programs of more than one agency.

(8) Coordinate the audit work and

reporting responsibilities among

auditors to achieve the most costeffective audit.

(9) For biennial audits permitted

under § 3052.220, consider auditee

requests to qualify as a low-risk auditee

under § 3052.530(a).

(b) Oversight agency for audit

responsibilities. An auditee which does

not have a designated cognizant agency

for audit will be under the general

oversight of the Federal agency

determined in accordance with

§ 3052.105. The oversight agency for

audit:

(1) Shall provide technical advice to

auditees and auditors as requested.

(2) May assume all or some of the

responsibilities normally performed by

a cognizant agency for audit.

(c) Federal awarding agency

responsibilities. The Federal awarding

agency shall perform the following for

the Federal awards it makes:

(1) Identify Federal awards made by

informing each recipient of the CFDA

title and number, award name and

number, award year, and if the award is

for R&D. When some of this information

is not available, the Federal agency shall

provide information necessary to clearly

describe the Federal award.

(2) Advise recipients of requirements

imposed on them by Federal laws,

regulations, and the provisions of

contracts or grant agreements.

(3) Ensure that audits are completed

and reports are received in a timely

manner and in accordance with the

requirements of this part.

(4) Provide technical advice and

counsel to auditees and auditors as

requested.

(5) Issue a management decision on

audit findings within six months after

receipt of the audit report and ensure

that the recipient takes appropriate and

timely corrective action.

(6) Assign a person responsible for

providing annual updates of the

compliance supplement to OMB.

(d) Pass-through entity

responsibilities. A pass-through entity

shall perform the following for the

Federal awards it makes:

(1) Identify Federal awards made by

informing each subrecipient of CFDA

title and number, award name and

number, award year, if the award is

R&D, and name of Federal agency.

When some of this information is not

available, the pass-through entity shall

provide the best information available to

describe the Federal award.

(2) Advise subrecipients of

requirements imposed on them by

Federal laws, regulations, and the

provisions of contracts or grant

agreements as well as any supplemental

requirements imposed by the passthrough entity.

(3) Monitor the activities of

subrecipients as necessary to ensure that

Federal awards are used for authorized

purposes in compliance with laws,

regulations, and the provisions of

contracts or grant agreements and that

performance goals are achieved.

(4) Ensure that subrecipients

expending $300,000 or more in Federal

awards during the subrecipient’s fiscal

year have met the audit requirements of

this part for that fiscal year.

(5) Issue a management decision on

audit findings within six months after

receipt of the subrecipient’s audit report

and ensure that the subrecipient takes

appropriate and timely corrective

action.

(6) Consider whether subrecipient

audits necessitate adjustment of the

pass-through entity’s own records.

(7) Require each subrecipient to

permit the pass-through entity and

auditors to have access to the records

and financial statements as necessary

for the pass-through entity to comply

with this part.

§ 3052.405 Management decision.

(a) General. The management decision

shall clearly state whether or not the

audit finding is sustained, the reasons

for the decision, and the expected

auditee action to repay disallowed costs,

make financial adjustments, or take

other action. If the auditee has not

completed corrective action, a timetable

for follow-up should be given. Prior to

issuing the management decision, the

Federal agency or pass-through entity

may request additional information or

documentation from the auditee,

including a request for auditor

assurance related to the documentation,

as a way of mitigating disallowed costs.

The management decision should

describe any appeal process available to

the auditee.

(b) Federal agency. As provided in

§ 3052.400(a)(7), the cognizant agency

for audit shall be responsible for

coordinating a management decision for

audit findings that affect the programs

of more than one Federal agency. As

provided in § 3052.400(c)(5), a Federal

awarding agency is responsible for

issuing a management decision for

findings that relate to Federal awards it

makes to recipients. Alternate

arrangements may be made on a caseby-case basis by agreement among the

Federal agencies concerned.

(c) Pass-through entity. As provided

in § 3052.400(d)(5), the pass-through

entity shall be responsible for making

the management decision for audit

findings that relate to Federal awards it

makes to subrecipients.

(d) Time requirements. The entity

responsible for making the management

decision shall do so within six months

of receipt of the audit report. Corrective

action should be initiated within six

months after receipt of the audit report

and proceed as rapidly as possible.

(e) Reference numbers. Management

decisions shall include the reference

numbers the auditor assigned to each

audit finding in accordance with

§ 3052.510(c).

Subpart E—Auditors

§ 3052.500 Scope of audit.

(a) General. The audit shall be

conducted in accordance with GAGAS.

The audit shall cover the entire

operations of the auditee; or, at the

option of the auditee, such audit shall

include a series of audits that cover
45958 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations

departments, agencies, and other

organizational units which expended or

otherwise administered Federal awards

during such fiscal year, provided that

each such audit shall encompass the

financial statements and schedule of

expenditures of Federal awards for each

such department, agency, and other

organizational unit, which shall be

considered to be a non-Federal entity.

The financial statements and schedule

of expenditures of Federal awards shall

be for the same fiscal year.

(b) Financial statements. The auditor

shall determine whether the financial

statements of the auditee are presented

fairly in all material respects in

conformity with generally accepted

accounting principles. The auditor shall

also determine whether the schedule of

expenditures of Federal awards is

presented fairly in all material respects

in relation to the auditee’s financial

statements taken as a whole.

(c) Internal control. (1) In addition to

the requirements of GAGAS, the auditor

shall perform procedures to obtain an

understanding of internal control over

Federal programs sufficient to plan the

audit to support a low assessed level of

control risk for major programs.

(2) Except as provided in paragraph

(c)(3) of this section, the auditor shall:

(i) Plan the testing of internal control

over major programs to support a low

assessed level of control risk for the

assertions relevant to the compliance

requirements for each major program;

and

(ii) Perform testing of internal control

as planned in paragraph (c)(2)(i) of this

section.

(3) When internal control over some

or all of the compliance requirements

for a major program are likely to be

ineffective in preventing or detecting

noncompliance, the planning and

performing of testing described in

paragraph (c)(2) of this section are not

required for those compliance

requirements. However, the auditor

shall report a reportable condition

(including whether any such condition

is a material weakness) in accordance

with § 3052.510, assess the related

control risk at the maximum, and

consider whether additional compliance

tests are required because of ineffective

internal control.

(d) Compliance. (1) In addition to the

requirements of GAGAS, the auditor

shall determine whether the auditee has

complied with laws, regulations, and

the provisions of contracts or grant

agreements that may have a direct and

material effect on each of its major

programs.

(2) The principal compliance

requirements applicable to most Federal

programs and the compliance

requirements of the largest Federal

programs are included in the

compliance supplement.

(3) For the compliance requirements

related to Federal programs contained in

the compliance supplement, an audit of

these compliance requirements will

meet the requirements of this part.

Where there have been changes to the

compliance requirements and the

changes are not reflected in the

compliance supplement, the auditor

shall determine the current compliance

requirements and modify the audit

procedures accordingly. For those

Federal programs not covered in the

compliance supplement, the auditor

should use the types of compliance

requirements contained in the

compliance supplement as guidance for

identifying the types of compliance

requirements to test, and determine the

requirements governing the Federal

program by reviewing the provisions of

contracts and grant agreements and the

laws and regulations referred to in such

contracts and grant agreements.

(4) The compliance testing shall

include tests of transactions and such

other auditing procedures necessary to

provide the auditor sufficient evidence

to support an opinion on compliance.

(e) Audit follow-up. The auditor shall

follow-up on prior audit findings,

perform procedures to assess the

reasonableness of the summary

schedule of prior audit findings

prepared by the auditee in accordance

with § 3052.315(b), and report, as a

current year audit finding, when the

auditor concludes that the summary

schedule of prior audit findings

materially misrepresents the status of

any prior audit finding. The auditor

shall perform audit follow-up

procedures regardless of whether a prior

audit finding relates to a major program

in the current year.

(f) Data Collection Form. As required

in § 3052.320(b)(3), the auditor shall

complete and sign specified sections of

the data collection form.

§ 3052.505 Audit reporting.

The auditor’s report(s) may be in the

form of either combined or separate

reports and may be organized differently

from the manner presented in this

section. The auditor’s report(s) shall

state that the audit was conducted in

accordance with this part and include

the following:

(a) An opinion (or disclaimer of

opinion) as to whether the financial

statements are presented fairly in all

material respects in conformity with

generally accepted accounting

principles and an opinion (or disclaimer

of opinion) as to whether the schedule

of expenditures of Federal awards is

presented fairly in all material respects

in relation to the financial statements

taken as a whole.

(b) A report on internal control related

to the financial statements and major

programs. This report shall describe the

scope of testing of internal control and

the results of the tests, and, where

applicable, refer to the separate

schedule of findings and questioned

costs described in paragraph (d) of this

section.

(c) A report on compliance with laws,

regulations, and the provisions of

contracts or grant agreements,

noncompliance with which could have

a material effect on the financial

statements. This report shall also

include an opinion (or disclaimer of

opinion) as to whether the auditee

complied with laws, regulations, and

the provisions of contracts or grant

agreements which could have a direct

and material effect on each major

program, and, where applicable, refer to

the separate schedule of findings and

questioned costs described in paragraph

(d) of this section.

(d) A schedule of findings and

questioned costs which shall include

the following three components:

(1) A summary of the auditor’s results

which shall include:

(i) The type of report the auditor

issued on the financial statements of the

auditee (i.e., unqualified opinion,

qualified opinion, adverse opinion, or

disclaimer of opinion);

(ii) Where applicable, a statement that

reportable conditions in internal control

were disclosed by the audit of the

financial statements and whether any

such conditions were material

weaknesses;

(iii) A statement as to whether the

audit disclosed any noncompliance

which is material to the financial

statements of the auditee;

(iv) Where applicable, a statement

that reportable conditions in internal

control over major programs were

disclosed by the audit and whether any

such conditions were material

weaknesses;

(v) The type of report the auditor

issued on compliance for major

programs (i.e., unqualified opinion,

qualified opinion, adverse opinion, or

disclaimer of opinion);

(vi) A statement as to whether the

audit disclosed any audit findings

which the auditor is required to report

under § 3052.510(a);

(vii) An identification of major

programs;

(viii) The dollar threshold used to

distinguish between Type A and Type B
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations 45959

programs, as described in § 3052.520(b);

and

(ix) A statement as to whether the

auditee qualified as a low-risk auditee

under § 3052.530.

(2) Findings relating to the financial

statements which are required to be

reported in accordance with GAGAS.

(3) Findings and questioned costs for

Federal awards which shall include

audit findings as defined in

§ 3052.510(a).

(i) Audit findings (e.g., internal

control findings, compliance findings,

questioned costs, or fraud) which relate

to the same issue should be presented

as a single audit finding. Where

practical, audit findings should be

organized by Federal agency or passthrough entity.

(ii) Audit findings which relate to

both the financial statements and

Federal awards, as reported under

paragraphs (d)(2) and (d)(3) of this

section, respectively, should be reported

in both sections of the schedule.

However, the reporting in one section of

the schedule may be in summary form

with a reference to a detailed reporting

in the other section of the schedule.

§ 3052.510 Audit findings.

(a) Audit findings reported. The

auditor shall report the following as

audit findings in a schedule of findings

and questioned costs:

(1) Reportable conditions in internal

control over major programs. The

auditor’s determination of whether a

deficiency in internal control is a

reportable condition for the purpose of

reporting an audit finding is in relation

to a type of compliance requirement for

a major program or an audit objective

identified in the compliance

supplement. The auditor shall identify

reportable conditions which are

individually or cumulatively material

weaknesses.

(2) Material noncompliance with the

provisions of laws, regulations,

contracts, or grant agreements related to

a major program. The auditor’s

determination of whether a

noncompliance with the provisions of

laws, regulations, contracts, or grant

agreements is material for the purpose

of reporting an audit finding is in

relation to a type of compliance

requirement for a major program or an

audit objective identified in the

compliance supplement.

(3) Known questioned costs which are

greater than $10,000 for a type of

compliance requirement for a major

program. Known questioned costs are

those specifically identified by the

auditor. In evaluating the effect of

questioned costs on the opinion on

compliance, the auditor considers the

best estimate of total costs questioned

(likely questioned costs), not just the

questioned costs specifically identified

(known questioned costs). The auditor

shall also report known questioned

costs when likely questioned costs are

greater than $10,000 for a type of

compliance requirement for a major

program. In reporting questioned costs,

the auditor shall include information to

provide proper perspective for judging

the prevalence and consequences of the

questioned costs.

(4) Known questioned costs which are

greater than $10,000 for a Federal

program which is not audited as a major

program. Except for audit follow-up, the

auditor is not required under this part

to perform audit procedures for such a

Federal program; therefore, the auditor

will normally not find questioned costs

for a program which is not audited as

a major program. However, if the

auditor does become aware of

questioned costs for a Federal program

which is not audited as a major program

(e.g., as part of audit follow-up or other

audit procedures) and the known

questioned costs are greater than

$10,000, then the auditor shall report

this as an audit finding.

(5) The circumstances concerning

why the auditor’s report on compliance

for major programs is other than an

unqualified opinion, unless such

circumstances are otherwise reported as

audit findings in the schedule of

findings and questioned costs for

Federal awards.

(6) Known fraud affecting a Federal

award, unless such fraud is otherwise

reported as an audit finding in the

schedule of findings and questioned

costs for Federal awards. This paragraph

does not require the auditor to make an

additional reporting when the auditor

confirms that the fraud was reported

outside of the auditor’s reports under

the direct reporting requirements of

GAGAS.

(7) Instances where the results of

audit follow-up procedures disclosed

that the summary schedule of prior

audit findings prepared by the auditee

in accordance with § 3052.315(b)

materially misrepresents the status of

any prior audit finding.

(b) Audit finding detail. Audit

findings shall be presented in sufficient

detail for the auditee to prepare a

corrective action plan and take

corrective action and for Federal

agencies and pass-through entities to

arrive at a management decision. The

following specific information shall be

included, as applicable, in audit

findings:

(1) Federal program and specific

Federal award identification including

the CFDA title and number, Federal

award number and year, name of

Federal agency, and name of the

applicable pass-through entity. When

information, such as the CFDA title and

number or Federal award number, is not

available, the auditor shall provide the

best information available to describe

the Federal award.

(2) The criteria or specific

requirement upon which the audit

finding is based, including statutory,

regulatory, or other citation.

(3) The condition found, including

facts that support the deficiency

identified in the audit finding.

(4) Identification of questioned costs

and how they were computed.

(5) Information to provide proper

perspective for judging the prevalence

and consequences of the audit findings,

such as whether the audit findings

represent an isolated instance or a

systemic problem. Where appropriate,

instances identified shall be related to

the universe and the number of cases

examined and be quantified in terms of

dollar value.

(6) The possible asserted effect to

provide sufficient information to the

auditee and Federal agency, or passthrough entity in the case of a

subrecipient, to permit them to

determine the cause and effect to

facilitate prompt and proper corrective

action.

(7) Recommendations to prevent

future occurrences of the deficiency

identified in the audit finding.

(8) Views of responsible officials of

the auditee when there is disagreement

with the audit findings, to the extent

practical.

(c) Reference numbers. Each audit

finding in the schedule of findings and

questioned costs shall include a

reference number to allow for easy

referencing of the audit findings during

follow-up.

§ 3052.515 Audit working papers.

(a) Retention of working papers. The

auditor shall retain working papers and

reports for a minimum of three years

after the date of issuance of the auditor’s

report(s) to the auditee, unless the

auditor is notified in writing by the

cognizant agency for audit, oversight

agency for audit, or pass-through entity

to extend the retention period. When

the auditor is aware that the Federal

awarding agency, pass-through entity, or

auditee is contesting an audit finding,

the auditor shall contact the parties

contesting the audit finding for

guidance prior to destruction of the

working papers and reports.
45960 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations

(b) Access to working papers. Audit

working papers shall be made available

upon request to the cognizant or

oversight agency for audit or its

designee, a Federal agency providing

direct or indirect funding, or GAO at the

completion of the audit, as part of a

quality review, to resolve audit findings,

or to carry out oversight responsibilities

consistent with the purposes of this

part. Access to working papers includes

the right of Federal agencies to obtain

copies of working papers, as is

reasonable and necessary.

§ 3052.520 Major program determination.

(a) General. The auditor shall use a

risk-based approach to determine which

Federal programs are major programs.

This risk-based approach shall include

consideration of: Current and prior

audit experience, oversight by Federal

agencies and pass-through entities, and

the inherent risk of the Federal program.

The process in paragraphs (b) through

(I) of this section shall be followed.

(b) Step 1. (1) The auditor shall

identify the larger Federal programs,

which shall be labeled Type A

programs. Type A programs are defined

as Federal programs with Federal

awards expended during the audit

period exceeding the larger of:

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

total Federal awards expended in the

case of an auditee for which total

Federal awards expended equal or

exceed $300,000 but are less than or

equal to $100 million.

(ii) $3 million or three-tenths of one

percent (.003) of total Federal awards

expended in the case of an auditee for

which total Federal awards expended

exceed $100 million but are less than or

equal to $10 billion.

(iii) $30 million or 15 hundredths of

one percent (.0015) of total Federal

awards expended in the case of an

auditee for which total Federal awards

expended exceed $10 billion.

(2) Federal programs not labeled Type

A under paragraph (b)(1) of this section

shall be labeled Type B programs.

(3) The inclusion of large loan and

loan guarantees (loans) should not result

in the exclusion of other programs as

Type A programs. When a Federal

program providing loans significantly

affects the number or size of Type A

programs, the auditor shall consider this

Federal program as a Type A program

and exclude its values in determining

other Type A programs.

(4) For biennial audits permitted

under § 3052.220, the determination of

Type A and Type B programs shall be

based upon the Federal awards

expended during the two-year period.

(c) Step 2. (1) The auditor shall

identify Type A programs which are

low-risk. For a Type A program to be

considered low-risk, it shall have been

audited as a major program in at least

one of the two most recent audit periods

(in the most recent audit period in the

case of a biennial audit), and, in the

most recent audit period, it shall have

had no audit findings under

§ 3052.510(a). However, the auditor may

use judgment and consider that audit

findings from questioned costs under

§ 3052.510(a)(3) and § 3052.510(a)(4),

fraud under § 3052.510(a)(6), and audit

follow-up for the summary schedule of

prior audit findings under

§ 3052.510(a)(7) do not preclude the

Type A program from being low-risk.

The auditor shall consider: the criteria

in § 3052.525(c), § 3052.525(d)(1),

§ 3052.525(d)(2), and § 3052.525(d)(3);

the results of audit follow-up; whether

any changes in personnel or systems

affecting a Type A program have

significantly increased risk; and apply

professional judgment in determining

whether a Type A program is low-risk.

(2) Notwithstanding paragraph (c)(1)

of this section, OMB may approve a

Federal awarding agency’s request that

a Type A program at certain recipients

may not be considered low-risk. For

example, it may be necessary for a large

Type A program to be audited as major

each year at particular recipients to

allow the Federal agency to comply

with the Government Management

Reform Act of 1994 (31 U.S.C. 3515).

The Federal agency shall notify the

recipient and, if known, the auditor at

least 180 days prior to the end of the

fiscal year to be audited of OMB’s

approval.

(d) Step 3. (1) The auditor shall

identify Type B programs which are

high-risk using professional judgment

and the criteria in § 3052.525. However,

should the auditor select Option 2

under Step 4 (paragraph (e)(2)(i)(B) of

this section), the auditor is not required

to identify more high-risk Type B

programs than the number of low-risk

Type A programs. Except for known

reportable conditions in internal control

or compliance problems as discussed in

§ 3052.525(b)(1), § 3052.525(b)(2), and

§ 3052.525(c)(1), a single criteria in

§ 3052.525 would seldom cause a Type

B program to be considered high-risk.

(2) The auditor is not expected to

perform risk assessments on relatively

small Federal programs. Therefore, the

auditor is only required to perform risk

assessments on Type B programs that

exceed the larger of:

(i) $100,000 or three-tenths of one

percent (.003) of total Federal awards

expended when the auditee has less

than or equal to $100 million in total

Federal awards expended.

(ii) $300,000 or three-hundredths of

one percent (.0003) of total Federal

awards expended when the auditee has

more than $100 million in total Federal

awards expended.

(e) Step 4. At a minimum, the auditor

shall audit all of the following as major

programs:

(1) All Type A programs, except the

auditor may exclude any Type A

programs identified as low-risk under

Step 2 (paragraph (c)(1) of this section).

(2) (i) High-risk Type B programs as

identified under either of the following

two options:

(A) Option 1. At least one half of the

Type B programs identified as high-risk

under Step 3 (paragraph (d) of this

section), except this paragraph

(e)(2)(i)(A) does not require the auditor

to audit more high-risk Type B programs

than the number of low-risk Type A

programs identified as low-risk under

Step 2.

(B) Option 2. One high-risk Type B

program for each Type A program

identified as low-risk under Step 2.

(ii) When identifying which high-risk

Type B programs to audit as major

under either Option 1 or 2 in paragraph

(e)(2)(i) (A) or (B), the auditor is

encouraged to use an approach which

provides an opportunity for different

high-risk Type B programs to be audited

as major over a period of time.

(3) Such additional programs as may

be necessary to comply with the

percentage of coverage rule discussed in

paragraph (f) of this section. This

paragraph (e)(3) may require the auditor

to audit more programs as major than

the number of Type A programs.

(f) Percentage of coverage rule. The

auditor shall audit as major programs

Federal programs with Federal awards

expended that, in the aggregate,

encompass at least 50 percent of total

Federal awards expended. If the auditee

meets the criteria in § 3052.530 for a

low-risk auditee, the auditor need only

audit as major programs Federal

programs with Federal awards

expended that, in the aggregate,

encompass at least 25 percent of total

Federal awards expended.

(g) Documentation of risk. The auditor

shall document in the working papers

the risk analysis process used in

determining major programs.

(h) Auditor’s judgment. When the

major program determination was

performed and documented in

accordance with this part, the auditor’s

judgment in applying the risk-based

approach to determine major programs

shall be presumed correct. Challenges

by Federal agencies and pass-through
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Rules and Regulations 45961

entities shall only be for clearly

improper use of the guidance in this

part. However, Federal agencies and

pass-through entities may provide

auditors guidance about the risk of a

particular Federal program and the

auditor shall consider this guidance in

determining major programs in audits

not yet completed.

(i) Deviation from use of risk criteria.

For first-year audits, the auditor may

elect to determine major programs as all

Type A programs plus any Type B

programs as necessary to meet the

percentage of coverage rule discussed in

paragraph (f) of this section. Under this

option, the auditor would not be

required to perform the procedures

discussed in paragraphs (c), (d), and (e)

of this section.

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

the entity is audited under this part or

the first year of a change of auditors.

(2) To ensure that a frequent change

of auditors would not preclude audit of

high-risk Type B programs, this election

for first-year audits may not be used by

an auditee more than once in every

three years.

§ 3052.525 Criteria for Federal program

risk.

(a) General. The auditor’s

determination should be based on an

overall evaluation of the risk of

noncompliance occurring which could

be material to the Federal program. The

auditor shall use auditor judgment and

consider criteria, such as described in

paragraphs (b), (c), and (d) of this

section, to identify risk in Federal

programs. Also, as part of the risk

analysis, the auditor may wish to

discuss a particular Federal program

with auditee management and the

Federal agency or pass-through entity.

(b) Current and prior audit

experience. (1) Weaknesses in internal

control over Federal programs would

indicate higher risk. Consideration

should be given to the control

environment over Federal programs and

such factors as the expectation of

management’s adherence to applicable

laws and regulations and the provisions

of contracts and grant agreements and

the competence and experience of

personnel who administer the Federal

programs.

(i) A Federal program administered

under multiple internal control

structures may have higher risk. When

assessing risk in a large single audit, the

auditor shall consider whether

weaknesses are isolated in a single

operating unit (e.g., one college campus)

or pervasive throughout the entity.

(ii) When significant parts of a Federal

program are passed through to

subrecipients, a weak system for

monitoring subrecipients would

indicate higher risk.

(iii) The extent to which computer

processing is used to administer Federal

programs, as well as the complexity of

that processing, should be considered

by the auditor in assessing risk. New

and recently modified computer

systems may also indicate risk.

(2) Prior audit findings would

indicate higher risk, particularly when

the situations identified in the audit

findings could have a significant impact

on a Federal program or have not been

corrected.

(3) Federal programs not recently

audited as major programs may be of

higher risk than Federal programs

recently audited as major programs

without audit findings.

(c) Oversight exercised by Federal

agencies and pass-through entities. (1)

Oversight exercised by Federal agencies

or pass-through entities could indicate

risk. For example, recent monitoring or

other reviews performed by an oversight

entity which disclosed no significant

problems would indicate lower risk.

However, monitoring which disclosed

significant problems would indicate

higher risk.

(2) Federal agencies, with the

concurrence of OMB, may identify

Federal programs which are higher risk.

OMB plans to provide this identification

in the compliance supplement.

(d) Inherent risk of the Federal

program. (1) The nature of a Federal

program may indicate risk.

Consideration should be given to the

complexity of the program and the

extent to which the Federal program

contracts for goods and services. For

example, Federal programs that disburse

funds through third party contracts or

have eligibility criteria may be of higher

risk. Federal programs primarily

involving staff payroll costs may have a

high-risk for time and effort reporting,

but otherwise be at low-risk.

(2) The phase of a Federal program in

its life cycle at the Federal agency may

indicate risk. For example, a new

Federal program with new or interim

regulations may have higher risk than

an established program with time-tested

regulations. Also, significant changes in

Federal programs, laws, regulations, or

the provisions of contracts or grant

agreements may increase risk.

(3) The phase of a Federal program in

its life cycle at the auditee may indicate

risk. For example, during the first and

last years that an auditee participates in

a Federal program, the risk may be

higher due to start-up or closeout of

program activities and staff.

(4) Type B programs with larger

Federal awards expended would be of

higher risk than programs with

substantially smaller Federal awards

expended.

§ 3052.530 Criteria for a low-risk auditee.

An auditee which meets all of the

following conditions for each of the

preceding two years (or, in the case of

biennial audits, preceding two audit

periods) shall qualify as a low-risk

auditee and be eligible for reduced audit

coverage in accordance with § 3052.520:

(a) Single audits were performed on

an annual basis in accordance with the

provisions of this part. A non-Federal

entity that has biennial audits does not

qualify as a low-risk auditee, unless

agreed to in advance by the cognizant or

oversight agency for audit.

(b) The auditor’s opinions on the

financial statements and the schedule of

expenditures of Federal awards were

unqualified. However, the cognizant or

oversight agency for audit may judge

that an opinion qualification does not

affect the management of Federal

awards and provide a waiver.

(c) There were no deficiencies in

internal control which were identified

as material weaknesses under the

requirements of GAGAS. However, the

cognizant or oversight agency for audit

may judge that any identified material

weaknesses do not affect the

management of Federal awards and

provide a waiver.

(d) None of the Federal programs had

audit findings from any of the following

in either of the preceding two years (or,

in the case of biennial audits, preceding

two audit periods) in which they were

classified as Type A programs:

(1) Internal control deficiencies which

were identified as material weaknesses;

(2) Noncompliance with the

provisions of laws, regulations,

contracts, or grant agreements which

have a material effect on the Type A

program; or

(3) Known or likely questioned costs

that exceed five percent of the total

Federal awards expended for a Type A

program during the year.

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

BILLING CODE 3410–KS–P