14594 Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices

OFFICE OF MANAGEMENT AND

BUDGET

Audits of Institutions of Higher

Education and Other Non-Profit

Institutions

AGENCY: Office of Management and

Budget.

ACTION: Proposed revisions to OMB

Circular No. A–133.

SUMMARY: This Notice offers interested

parties an opportunity to comment on

proposed revisions to Office of

Management and Budget (OMB)

Circular No. A–133, ‘‘Audits of

Institutions of Higher Education and

Other Non-Profit Institutions.’’

Also, this action provides notice of

OMB’s intent, after considering

comments to this proposal, to seek

modifications to the Single Audit Act of

1984 (Act) and OMB Circular No. A–

128, ‘‘Audits of State and Local

Governments,’’ consistent with this

proposed revision. OMB’s intent is to

obtain consistency between audits of

State and local governments and nonprofit organizations such that one law

and one circular can cover both. This

intent includes Indian tribal

governments which are currently

covered under the Act and OMB

Circular No. A–128. Interested parties

are encouraged to comment on this

stated intent of OMB.

The National State Auditors

Association issued a position paper on

the single audit process in February

1993; the president’s Council on

Integrity and Efficiency Standards

Subcommittee issued a study titled

‘‘Study on Improving the Single Audit

Process’’ in September 1993; the

General Accounting Office (GAO) issued

a report titled ‘‘Single Audit:

Refinements Can Improve Usefulness’’

in June 1994. The recommendations in

these studies were considered in

developing this proposed revision.

DATES: All comments on this proposal

should be in writing, and must be

received by May 16, 1995. Late

comments will be considered to the

extent practicable. Where possible,

comments should reference applicable

paragraph numbers in the proposed

revision. To facilitate conversion of the

comments into a computer format for

analysis, respondents are asked to send

a copy of comments on either a 3.5 or

5.25 inch diskette in either WordPerfect

5.1, WordPerfect for Windows, or ASCII

format. When a diskette cannot be

provided, it would be helpful if the

comments were printed in pica or an

equivalent 10 characters per inch type

on white paper so the document can be

easily scanned into a computer format.

When comments are sent in by

facsimile, they should be followed up

with a diskette or printed copy, as

indicated above.

ADDRESSES: Office of Management and

Budget, Office of Federal Financial

Management, Financial Standards and

Reporting Branch, Room 6025, New

Executive Office Building, Washington,

DC 20503. For a copy of the current

Circular, contact Office of

Administration, Publications Office,

room 2200, New Executive Office

Building, Washington, DC 20503, or

telephone (202) 395–7332.

FOR FURTHER INFORMATION CONTACT:

Sheila O. Conley, Office of Federal

Financial Management, Financial

Standards and Reporting Branch,

telephone (202) 395–3993 and fax (202)

395–4915. A redline/strikeout version

showing the detailed changes between

the current Circular and the proposed

revision is available by written request

to the Office of Federal Financial

Management.

SUPPLEMENTARY INFORMATION: The

proposed revision requires non-profit

organizations receiving $300,000 or

more in a year in Federal awards to have

an annual audit, sets forth requirements

for both the performance and reporting

of this audit, and provides for follow up

on audit findings. Each non-profit

organization is responsible for having its

audit conducted and for reviewing

audits of its subrecipients.

Significant Proposed Revisions

The substantive differences between

the current Circular and the proposed

revision are indicated in the following:

A. Increased Threshold for Audit

The threshold for when a non-profit

organization is required to have an audit

is proposed to be raised from $25,000 to

$300,000 in paragraph 2, ‘‘Audit

Requirements.’’ This change is

consistent with the findings and

recommendations of the General

Accounting Office’s (GAO) single audit

study that a threshold of $300,000

would cover 95 percent of all direct

Federal financial assistance to local

governments. When the total Federal

awards received are small, the cost of

audits required by this Circular have

often been high in proportion to the

awards received. This change will

remove the requirement for non-profit

organizations to obtain an audit when

the total Federal awards received are

small. However, non-profit

organizations will continue to be

required to properly account for their

Federal awards, comply with applicable

laws and regulations, and cooperate

with any audits of Federal awards that

the Federal Government may choose to

perform. Respondents are encouraged to

comment whether the proposed

threshold for audit of $300,000 is

appropriate or whether the threshold for

audit should be different and, if so,

what threshold you recommend (e.g.,

$500,000 or $1 million).

To mitigate risk to a Federal program

which is structured such that

substantial service delivery and

expenditure of Federal funds are made

by subrecipients receiving less than

$300,000, paragraph 2 includes a

provision to allow Federal agencies,

with the approval of the Office of

Management and Budget (OMB), to set

appropriate audit requirements for these

Federal programs awarded to

subrecipients receiving less than

$300,000.

The primary objective of revising the

Circular is to reduce regulatory burden

on recipients of Federal awards, while

maintaining an appropriate level of

accountability over Federal awards. The

proposed revision seeks to achieve this

objective by raising the threshold for

audit to $300,000. However, OMB is

also considering an additional approach

to reduce audit burden whereby nonprofit organizations meeting the criteria

for low-risk auditees presented in

Appendix 3 would be allowed, with the

approval of the cognizant or oversight

agency, to conduct a full-scope audit in

accordance with this Circular on a

triennial basis, which covers only the

last year of the triennial period.

In the ‘‘off-years,’’ or years in which

a full-scope audit in accordance with

this Circular is not required, a nonprofit organization receiving $300,000

or more in Federal awards would be

required to have a financial statement

audit conducted in accordance with

generally accepted government auditing

standards (GAGAS). In addition, the offyear audit would include such

additional procedures necessary to

comply with the scope of work

described in subparagraph 12.c,

‘‘Internal Controls,’’ of the proposed

revision. If the results of audit work

conducted in an off-year identify

conditions that prevent the non-profit

organization from meeting the criteria

for a low-risk auditee, then a full-scope

audit in accordance with this Circular

would be required for the year in which

the deficiencies occurred and

subsequent years until the non-profit

organization met the criteria in

Appendix 3.

Respondents are encouraged to

comment whether the triennial audit

approach would achieve its intended
Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices 14595

objective and could be feasibly

implemented, particularly with respect

to the application of a risk-based audit

approach to determine major programs,

described in the following section.

Respondents are also encouraged to

comment whether the triennial audit

approach should be: (1) Implemented

with the revised Circular, (2) phased in

using pilot projects, or (3) applicable to

non-profit organizations receiving more

or less than a specified amount of

Federal awards and, if so, what level of

Federal awards you recommend (e.g.,

$10,000,000).

B. New Risk-Based Approach To

Determine Major Programs

A revised process for determining

major programs is proposed in

Appendices 1 and 2. Currently the

determination of major programs, the

programs which receive primary audit

coverage under the Circular, is based

solely on the dollar amount of a Federal

program’s expenditures. Under this

proposal, major programs are

determined based on a risk assessment

considering prior audit experience,

oversight performed by Federal agencies

and others, and the inherent risk of the

Federal program. Also, a provision is

made to require Federal programs that

in aggregate have expenditures that total

at least 50 percent of total Federal

program expenditures to be covered as

major programs. This 50 percent

minimum is reduced to 25 percent for

non-profit organizations meeting the

criteria in Appendix 3 and classified as

low-risk auditees. Respondents are

encouraged to comment whether the

Circular should be revised to permit

organizations that qualify as low-risk

auditees to reduce the scope of audit

below the 50 percent minimum and, if

so, whether the proposed 25 percent

minimum is appropriate for low-risk

auditees.

The proposed risk-based approach

requires the use of judgment by auditors

in determining major programs.

However, several controls are included

in the revised Circular to mitigate the

risk of insufficient audit coverage of

Federal programs including:

(1) The requirement that Federal

programs with aggregate expenditures of

at least 50 percent of total Federal

program expenditures be covered as

major programs (25 percent for low-risk

auditees);

(2) The provision that allows Federal

agencies and pass-thru entities to

require an auditee to have a particular

Federal program audited as a major

program in lieu of conducting or

contracting for additional audits,

provided that the requesting agency

agrees to pay the full incremental cost;

(3) The requirement that Federal

programs with Federal expenditures

exceeding three percent of total Federal

expenditures or $300,000, whichever is

greater, (Type A programs) shall be

covered as major programs at least once

every three years; and

(4) The inclusion of a model or

process for auditors to use to determine

major programs is provided in

Appendices 1 and 2.

The objective of this change to a riskbased approach is to focus the audit

effort on areas of greatest risk of

noncompliance, provide audit coverage

to high-risk programs previously below

the dollar threshold of major programs,

and permit reduction of audit effort

when previous audits have not shown

problems. An alternative to this riskbased approach would be to continue

using the current approach of

determining major programs based

solely on dollar amount of a Federal

program’s expenditures and implement

voluntary pilot projects to test the riskbased approach. Respondents are

encouraged to comment whether the

risk-based approach should be

implemented with the revised Circular

or phased in using pilot projects.

C. Required Level of Internal Control

Testing

Clarification is provided in paragraph

12, ‘‘Scope of Audit,’’ that the level of

testing the auditor is required to

perform on the internal control structure

over major programs is based upon the

auditor’s planning for a low assessed

level of control risk. Respondents who

are auditors are encouraged to comment

and provide examples of how many

transactions they are currently testing

for major programs and how many

transactions they would expect to test

based upon the proposed revision.

D. Guidance on the Schedule of Federal

Awards

Guidance is added in paragraph 13,

‘‘Financial Statements and Auditor’s

Reporting,’’ on the minimum

requirements for the Schedule of

Federal Awards. Since GAO’s single

audit study recommended that OMB

prescribe the form and content of the

schedule, respondents are encouraged to

comment whether the revised Circular

should prescribe additional

requirements for the schedule and a

description of such additional

requirements.

E. Attestation on Internal Controls and

Compliance

GAO’s single audit study

recommended that, for entities receiving

in excess of $50 million a year in

Federal awards, the entity should

publicly report the extent to which the

entity has in place internal controls over

Federal awards and that the auditor

should attest to the fairness of such a

representation. Similarly, others have

suggested to OMB that the work on

compliance for Federal awards be an

engagement under the American

Institute of Certified Public

Accountants’ (AICPA) Statement on

Standards for Attestation Engagements

(SSAE) No. 3, ‘‘Compliance

Attestation.’’ Under a SSAE No. 3

engagement, management must perform

an evaluation of the entity’s compliance

with the specified requirements and

make an assertion about compliance.

Respondents are encouraged to

comment as to whether organizationwide and program-specific audits

should require a management assertion

and auditor attestation for internal

controls and/or compliance. The

proposed revision does not require a

management assertion or auditor

attestation on internal controls or

compliance.

F. Modified Requirements Related to

Audit Findings

The proposed revisions in paragraph

13, ‘‘Financial Statements and Auditor’s

Reporting,’’ provide for reporting of

audit findings related to Federal awards

in a single schedule of findings and

questioned costs, set thresholds for

which audit findings will be included in

the audit report, describe what

information the auditor should include

in an audit finding, and provide for

audit follow-up on audit findings.

Paragraph 14, ‘‘Audit Findings Followup,’’ clarifies the non-profit

organization’s responsibility for followup on audit findings which includes

preparing a corrective action plan for

current audit findings and a summary

schedule of prior audit findings.

Paragraph 15, ‘‘Management Decision,’’

provides guidance to improve the audit

resolution process.

G. Other Modified Requirements and

Guidance

The definition of non-profit

organization in paragraph 1 is changed

to include non-profit hospitals.

However, under paragraph 3, ‘‘Basis for

Determining Awards Received,’’

Medicaid and Medicare are normally

excluded from awards received.

Paragraph 3 also provides guidance on
14596 Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices

determining awards received for other

types of Federal programs.

New guidance is added in paragraph

4, ‘‘Subrecipient and Vendor

Determination,’’ paragraph 5, ‘‘Auditee

Responsibilities,’’ paragraph 6, ‘‘Federal

Agency and Pass-Thru Entity

Responsibilities,’’ and paragraph 18,

‘‘Program-Specific Audit.’’

Paragraph 6 makes provision for

assignment of cognizant agencies based

on dollar thresholds of awards received.

Under this proposal, entities receiving

more than $25 million a year in Federal

awards shall be assigned a cognizant

agency based on which Federal agency

provides the predominant amount of

direct funding to the recipient.

Currently OMB is responsible for

assigning cognizant agencies and it has

been unable to make the assignments in

a timely manner.

The importance of the compliance

supplement is enhanced in paragraph 6,

‘‘Federal Agency and Pass-Thru Entity

Responsibilities,’’ by requiring Federal

agencies to designate a person

responsible for annually informing OMB

of updates needed, and in paragraph 12,

‘‘Scope of Audit,’’ by clarifying the

purpose and authority of the

compliance supplement. Also, in

paragraph 1, ‘‘Definitions,’’ a provision

is included for the compliance

supplement to designate clusters of

Federal programs which would be

treated as one program.

In paragraph 11, ‘‘Auditor Selection,’’

OMB is considering adding a restriction

on auditor selection whereby an auditor

who also prepares the indirect cost

proposal, cost allocation plan, or the

disclosure statement required by OMB

Circular A–21, ‘‘Cost Principles for

Educational Institutions,’’ or the Cost

Accounting Standards Board, as

appropriate, may not be selected when

the indirect costs charged are greater

than five percent of expenditures of any

one Type A program, as defined in

Appendix 1, or greater than five percent

of expenditures for all Federal

programs. Respondents are encouraged

to comment whether the auditor

restriction should be included in the

revised Circular. Also, current Circular

paragraph 11, ‘‘Small and Minority

Audit Firms,’’ is deleted because these

requirements are more fully covered in

OMB Circular A–110, ‘‘Uniform

Requirements for Grants and

Agreements with Institutions of Higher

Education, Hospitals and Other NonProfit Organizations.’’

In paragraph 16, ‘‘Report

Submission,’’ the due date is shortened

for submitting reports required by this

Circular from 13 months to 9 months.

However, the provision for a cognizant

or oversight agency to grant an

extension is retained. Also, the report

submission process was streamlined by

providing for a certification form to be

submitted in lieu of the full audit report

when there are no audit findings,

expanding the role of the central

clearinghouse, and providing for the

clearinghouse to pilot test electronic

filing of reports. Under this expanded

clearinghouse role, recipients will send

all copies of reports to the clearinghouse

which will subsequently distribute them

to Federal agencies whose awards have

audit findings.

Public Information Collection

The proposed revision includes a

provision that will require the central

clearinghouse designated by OMB to

collect certain information about

Federal awards and the audits of such

awards. OMB is requesting comments

on the proposed information collection

described in paragraph 16, ‘‘Report

Submission.’’ The final collection

requirement will be submitted to OMB

for clearance in accordance with the

Paperwork Reduction Act (44 U.S.C.

Chapter 35).

John B. Arthur,

Associate Director for Administration.

Circular No. A–133—Revised

To the Heads of Executive Departments

and Establishments

Subject: Audits of Non-Profit

Organizations Receiving Federal

Awards

1. Purpose. This Circular sets forth

standards for obtaining consistency and

uniformity among Federal agencies for

the audit of non-profit organizations

receiving Federal awards.

2. Authority. Circular A–133 is issued

under the authority of sections 503 and

1111 of title 31, United States Code, and

Executive Orders 8248 and 11541.

3. Supersession. This Circular

supersedes the prior Circular A–133,

issued March 8, 1990. For effective

dates, see paragraph 10.

4. Policy. Except as provided herein,

the standards set forth in this Circular

shall be applied by all Federal agencies.

If any statute specifically prescribes

policies or specific requirements that

differ from the standards provided

herein, the provisions of the statute

shall govern.

Federal agencies shall apply the

provisions of the sections of this

Circular to non-profit organizations,

whether they are recipients receiving

awards directly from Federal awarding

agencies, or are subrecipients receiving

awards from a pass-thru entity (a

recipient or another subrecipient).

Therefore, whereas this Circular does

not apply to grants, contracts, or other

agreements between the Federal

Government and units of State or local

governments (which are covered by

OMB Circular A–128, ‘‘Audits of State

and Local Governments’’), this Circular

does apply to awards that State and

local governments make to non-profit

organizations covered by this Circular.

This Circular does not apply to nonU.S. based entities receiving Federal

awards either directly as a recipient or

indirectly as a subrecipient.

5. Definitions. Definitions of key

terms used in this Circular are

contained in paragraph 1 in the

Attachment.

6. Required Action. The specific

requirements and responsibilities of

Federal agencies and non-profit

organizations are set forth in the

Attachment and Appendices to this

Circular. Federal agencies making

awards to non-profit organizations,

either directly or indirectly, shall adopt

the language in the Circular in codified

regulations, unless different provisions

are required by Federal statute or are

approved by OMB.

7. OMB Responsibilities. OMB will

review agency regulations and

implementation of this Circular, and

will provide interpretations of policy

requirements and assistance to ensure

effective and efficient implementation.

8. Information Contact. Further

information concerning Circular A–133

may be obtained by contacting the

Financial Standards and Reporting

Branch, Office of Federal Financial

Management, Office of Management and

Budget, Washington, DC 20503,

telephone (202) 395–3993. Individual

copies of this Circular may be obtained

by contacting the Executive Office of the

President, Publications Office,

telephone (202) 395–7332.

9. Termination Review Date. This

Circular will have a policy review three

years from the date of issuance.

10. Effective Dates. (a) The standards

set forth in this Circular that apply

directly to Federal agencies will be

effective 30 days after publication of the

final revision in the Federal Register.

(b) The standards set forth in this

Circular that Federal agencies are to

apply to non-profit organizations will be

adopted by Federal agencies in codified

regulations within six months after

publication of the final revision in the

Federal Register, so that they will apply

to audits of non-profit organizations for

fiscal years that begin on or after

January 1, 1996.

(c) In the interim period, until the

standards in this Circular are adopted

and become applicable, the audit
Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices 14597

provisions of Circular A–133 issued

March 8, 1990, shall continue in effect.

However, if a non-profit organization

receives awards of more than one

Federal agency, and not all such

agencies have adopted the standards in

this Circular in a timely fashion, then

Federal agencies should permit the nonprofit organization to comply with the

standards in this Circular for all of its

awards.

Alice M. Rivlin,

Director.

Attachment

Appendix 1

Appendix 2

Appendix 3

OMB Circular A–133—Audits of NonProfit Organizations Receiving Federal

Awards

Attachment

Table of Contents

1. Definitions

2. Audit Requirements

3. Basis for Determining Awards Received

4. Subrecipient and Vendor Determination

5. Auditee Responsibilities

6. Federal Agency and Pass-Thru Entity

Responsibilities

7. Relation to Other Audit Requirements

8. Frequency of Audit

9. Sanctions

10. Audit Costs

11. Auditor Selection

12. Scope of Audit

13. Financial Statements and Auditor’s

Reporting

14. Audit Findings Follow-up

15. Management Decision

16. Report Submission

17. Audit Working Papers and Reports

18. Program-Specific Audit

Appendix 1—Major Program Determination

Appendix 2—Criteria for Risk

Appendix 3—Criteria for a Low-Risk Auditee

1. Definitions. For the purposes of this

Circular, the following definitions

apply:

a. Auditee means any non-profit

organization receiving awards which

must be audited under this Circular.

This term includes both organizations

which receive awards directly as a

recipient or indirectly as a subrecipient.

b. Auditor means an auditor, that is a

public accountant or a Federal, State or

local government audit organization,

which meets the general standards

specified in generally accepted

government auditing standards

(GAGAS). The term ‘‘auditor’’ does not

include internal auditors of non-profit

organizations because they do not meet

the GAGAS independence standards to

report as external auditors.

c. Audit finding means deficiencies

which the auditor is required by

paragraph 13.d(1) to include in the

schedule of findings and questioned

costs.

d. Award means Federal financial

assistance and Federal cost-type

contracts. It includes awards received

directly from Federal awarding agencies

or indirectly from recipients of Federal

awards or subrecipients. It does not

include procurement contracts, under

grants or contracts, used to buy goods or

services from vendors. Audits of such

vendors shall be covered by the terms

and conditions of the contract.

e. CFDA number means the number

assigned to a Federal program in the

Catalog of Federal Domestic Assistance

(CFDA).

f. Cluster of programs means Federal

programs with different CFDA numbers

that are defined as a cluster of programs

in the compliance supplements because

they are closely related programs and

share common compliance

requirements. A cluster of programs

shall be considered as one program for

determining major programs as

described in Appendix 1 and whether a

program-specific audit may be elected

under paragraph 2.c.

g. Cognizant agency means the

Federal agency assigned by the Office of

Management and Budget (OMB) to carry

out the responsibilities described in

paragraph 6.a.

h. Compliance supplements refers to

the Compliance Supplement for Audits

of Institutions of Higher Learning and

Other Non-Profit Organizations and the

Compliance Supplement for Single

Audits of State and Local Governments

or such documents as OMB may issue

to replace them. These documents are

available from the Government Printing

Office, telephone (202) 783–3238.

i. 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.

j. Federal agency has the same

meaning as the term ‘‘agency’’ in

Section 551(1) of title 5, United States

Code.

k. Federal awarding agency means the

Federal agency that provides an award

directly to the recipient.

l. Federal financial assistance means

assistance provided by a Federal agency

to a recipient or by a pass-thru entity to

a subrecipient to carry out a program.

Such assistance may be in the form of:

Grants, cooperative agreements, donated

surplus property, food commodities,

loans, loan guarantees, property, interest

subsidies, insurance, direct

appropriations, and other assistance.

Such assistance does not include direct

Federal cash assistance to individuals.

m. Federal program means:

(1) All Federal programs or awards

under the same CFDA number. When no

CFDA number is assigned, all awards

from the same agency made for the same

purpose may be combined. State

governments may combine different

awards to their subrecipients when the

awards are closely related programs and

share common compliance

requirements. In this case, the State

government may require the

subrecipient to treat the combined

awards as a single program.

A category of awards which is a group

of awards in the categories of (a)

research and development, (b) student

financial aid, or (c) cluster of programs.

n. GAGAS means generally accepted

government auditing standards issued

by the Comptroller General of the

United States, which are applicable to

financial audits.

o. Generally accepted accounting

principles has the meaning specified in

generally accepted auditing standards

issued by the American Institute of

Certified Public Accountants.

p. Individual compliance

requirements refers to the types of

compliance requirements as listed in the

compliance supplements. Examples

include cash management, Federal

financial reporting, allowable costs/cost

principles, types of services allowed or

unallowed, eligibility, and matching.

q. Internal control structure over

Federal programs means the policies

and procedures established to provide

reasonable assurance that the following

objectives will be achieved:

(1) Transactions are executed in

compliance with: (a) Laws, regulations,

and the provisions of contracts or grant

agreements that could have a direct and

material effect on a Federal program,

and (b) any other laws and regulations

that OMB has identified in the

compliance supplements;

(2) Transactions are properly recorded

and accounted for to: (a) Permit the

preparation of reliable financial

statements and Federal reports, (b)

maintain accountability over assets, and

(c) demonstrate compliance with laws,

regulations, and other compliance

requirements; and

(3) Funds, property, and other assets

are safeguarded against loss from

unauthorized use or disposition.

r. Loans means Federal loans or loan

guarantees received or administered by

an auditee.

s. Major program means a Federal

program determined by the auditor to be

a major program in accordance with

Appendix 1 or a program identified as
14598 Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices

a major program by a Federal agency or

pass-thru entity in accordance with

paragraph 7.c.

t. Management decision means the

evaluation by the Federal awarding

agency or pass-thru entity of the audit

findings and corrective action plan and

the issuance of a written decision as to

what corrective action is necessary.

u. Non-profit organization means any

corporation, trust, association,

cooperative, or other organization

which: (1) Is operated primarily for

scientific, educational, service,

charitable, or similar purposes in the

public interest; (2) is not organized

primarily for profit; and, (3) uses its net

proceeds to maintain, improve, and/or

expand its operations. The term ‘‘nonprofit organization’’ includes non-profit

institutions of higher education and

hospitals, except those that are audited

as part of single audits in accordance

with Circular A–128, ‘‘Audits of State

and Local Governments.’’

v.OMB means the Executive Office of

the President, Office of Management

and Budget.

w. Organization-wide audit means an

audit of a non-profit organization which

includes both the organization-wide

financial statements and the Federal

awards as described in paragraph 12.

x. Oversight agency means the Federal

awarding agency that provides the

predominant amount of direct funding

to a recipient not assigned a cognizant

agency. 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 are

described in paragraph 6.b.

y. Pass-thru entity means a non-profit

organization that provides a Federal

award to a subrecipient.

z. Program-specific audit means an

audit of one Federal program as

provided for in paragraphs 2.c and 18.

aa. Questioned cost means a cost that

is questioned by the auditor because of:

(1) An audit finding, which occurred

or is likely to have occurred, from a

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) An audit finding where the costs,

at the time of the audit, are not

supported by adequate documentation;

or

(3) An audit finding where the costs

incurred are unreasonable and do not

reflect the actions a prudent person

would take in the circumstances.

bb. Recipient means a non-profit

organization receiving awards directly

from a Federal awarding agency to carry

out a Federal program.

cc. Research and development (R&D)

means all research activities, both basic

and applied, and all development

activities that are performed by a nonprofit organization. ‘‘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.

dd. Student Financial Aid (SFA)

includes those programs of general

student assistance in which a non-profit

organization participates, such as those

authorized by Title IV of the Higher

Education Act of 1965, as amended,

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

awards to students on a competitive

basis, or for specified studies or

research.

ee. Subrecipient means the legal

entity that receives an award from a

pass-thru 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 awards directly from

a Federal awarding agency. Guidance on

distinguishing between a subrecipient

and a vendor is provided in paragraph

4.

ff. Vendor means a dealer, distributor,

merchant, or other seller providing

goods or services to an auditee that are

required for the conduct of a Federal

program. These goods or services may

be for a non-profit 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 paragraph 4.

2. Audit Requirements.

a. Audit Required. Non-profit

organizations that receive $300,000 or

more in a year in awards shall have an

organization-wide or program-specific

audit conducted for that year in

accordance with the provisions of this

Circular.

b. Organization-wide Audit. Nonprofit organizations that receive

$300,000 or more in a year in awards

shall have an organization-wide audit in

accordance with paragraph 12 except

when they elect to have a programspecific audit in accordance with

paragraph c.

c. Program-Specific Audit Election.

When a non-profit organization receives

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 non-profit

organization, the non-profit organization

may elect to have a program-specific

audit conducted in accordance with

paragraph 18. A program-specific audit

may not be elected for R&D unless all

awards are received from the same

Federal agency, or the same Federal

agency and the same pass-thru entity,

and that Federal agency or pass-thru

entity approves in advance a programspecific audit.

d. Exemption When Awards Are Less

Than $300,000. Non-profit

organizations that receive less than

$300,000 a year in awards are exempt

from Federal audit requirements for that

year except as noted in paragraphs e and

7.a, but records must be available for

review or audit by appropriate officials

of the Federal awarding agency, passthru entity, and/or General Accounting

Office (GAO).

e. Special Provision for Certain Small

Subrecipients. When a Federal program

is structured such that substantial

service delivery and expenditure of

Federal funds occur at subrecipients

which receive awards of less than the

$300,000 threshold for audit, the

Federal agency, with the approval of

OMB, may require pass-thru entities to

arrange for audits of such subrecipients

that would otherwise be exempt from

audit under paragraph d. Such audits

may be of lesser scope than audits

required by this Circular.

3. Basis for Determining Awards

Received.

a. Determining Awards Received. The

determination of when an award is

received should be based on when the

activity related to the award occurs.

Generally, the activity pertains to events

that require the non-profit organization

to comply with laws, regulations, and

the provisions of contracts or grant

agreements such as: Expenditure/

expense transactions associated with

grants, cost-type contracts, cooperative

agreements, and direct appropriations;

the use of loan proceeds under loan

programs; the receipt of property; the

receipt of surplus property; the

distribution or consumption of food
Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices 14599

commodities; the disbursement of

amounts entitling the non-profit

organization to an interest subsidy; and,

the period when insurance is in force.

b. Loans 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 awards

received under loan programs, except as

noted in paragraphs c and d:

(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 or

administrative costs allowance received.

c. Loans 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

awards received in that year. The

balance of loans for previous years is

not included as awards received

because the lender accounts for the

prior balances.

d. Prior Loans and Loan Guarantees

(Loans). Loans, the proceeds of which

were received and expended in prioryears, are not considered awards under

this Circular 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. Free Rent. Free rent received by

itself is not considered an award under

this Circular. However, free rent

received as part of an award to carry out

a Federal program shall be considered

an award and subject to audit under this

Circular.

f. 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.

g. Medicare. Medicare payments to a

non-profit organization for providing

patient care services to Medicare

eligible individuals are not considered

awards under this Circular.

h. Medicaid. Medicaid payments to a

non-profit organization for providing

patient care services to Medicaid

eligible individuals are not considered

awards under this Circular unless a

State requires the funds to be treated as

awards because reimbursement is on a

cost-type basis.

4. Subrecipient and Vendor

Determination.

a. General. An auditee may be a

recipient, a subrecipient, and a vendor.

The awards received as a recipient or a

subrecipient would be subject to audit

under this Circular. The payments

received for goods or services provided

by a vendor would not be considered

Federal awards. The guidance in

paragraphs b and c should be

considered in determining whether

payments constitute an award to a

subrecipient or a payment for goods and

services to a vendor.

b. Subrecipient. Characteristics

indicative of a subrecipient include:

(1) Determining who is eligible to

receive what Federal financial

assistance;

(2) Performance measured against

meeting the objectives of the Federal

program;

(3) Responsibility for programmatic

decision making;

(4) Responsibility for applicable

Federal program compliance

requirements; and

(5) Use of funds to carry out a

program of the subrecipient as

compared to providing goods or services

for a program of the pass-thru entity.

c. Vendor. Characteristics indicative

of a vendor include:

(1) Providing goods and services

within normal business operations;

(2) Providing similar goods or services

to many different purchasers;

(3) Operating in a competitive

environment;

(4) Having compliance requirements

that do not pertain to the goods or

services provided; and

(5) Providing goods or services that

are ancillary to the operation 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

Circular does not apply to for-profit

subrecipients, the pass-thru 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. 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 compliance or the

vendor’s records must be reviewed to

determine 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.

5. Auditee Responsibilities. The

auditee shall:

a. Identify, in its accounts, all awards

received and expended and the Federal

programs under which they were

received. Federal program and award

identification shall include the CFDA

title and number, award number and

year, name of the Federal agency, and

name of the pass-thru entity.

b. Maintain an internal control

structure over Federal programs that

provides reasonable assurance that the

auditee is managing awards in

compliance with laws, regulations, and

the provisions of contracts or grant

agreements that could have a material

affect 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

Federal awards.

e. Ensure that the audits required by

this Circular are properly performed and

submitted when due.

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

paragraphs 14.b and 14.c, respectively.

6. Federal Agency and Pass-Thru

Entity Responsibilities.

a. Cognizant Agency Responsibilities.

Recipients receiving more than $25

million a year in Federal awards shall

have a cognizant agency. The assigned

cognizant agency shall be the Federal

awarding agency that provides the
14600 Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices

predominant amount of direct funding

to a recipient unless OMB makes a

specific cognizant agency assignment

and provides notice in the Federal

Register. To provide for continuity of

cognizance, the determination of the

predominant amount of direct funding

shall be based upon direct Federal

awards received in the recipient’s fiscal

years ending in 1990, 1995, 2000, and

every fifth year thereafter. A Federal

awarding agency assigned cognizance

may reassign cognizance to another

Federal awarding agency which

provides substantial direct funding and

agrees to be the cognizant agency.

Within 30 days after any reassignment,

both the old and the new cognizant

agency shall notify the auditee, and, if

known, the auditor of the reassignment.

The cognizant agency shall:

(1) Provide technical audit advice and

liaison to auditees and auditors.

(2) Consider auditee requests for

extensions to the nine month due date

of the reporting package required by

paragraph 16a. The cognizant agency

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

auditor of irregularities or illegal acts, as

required by GAGAS or laws and

regulations, when such reporting is not

included in the reporting package

described in paragraph 16.c.

(5) Advise the auditor and 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 shall notify the

auditor, the auditee, Federal awarding

agencies, and the pass-thru entity 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

practicable, audits or reviews made by

or for Federal agencies that are in

addition to the audits made pursuant to

this Circular, so that the additional

audits or reviews build upon audits

performed in accordance with this

Circular.

(7) Coordinate a management decision

for audit findings that affect the Federal

programs of more than one agency.

(8) Help coordinate the audit work

and reporting responsibilities among

auditors to achieve the most costeffective audit.

b. Oversight Agency Responsibilities.

An auditee not assigned a cognizant

agency will be under the general

oversight of the Federal agency

providing it the predominant amount of

direct funding as discussed in paragraph

1.x. The oversight agency:

(1) Shall provide technical advice and

counsel to auditees and auditors as

requested.

(2) May assume all or some of the

responsibilities normally performed by

a cognizant agency.

c. Federal Awarding Agency

Responsibilities. The Federal awarding

agency shall perform the following for

the awards it makes:

(1) Identify awards made by informing

each recipient of the CFDA title and

number, award name and number, and

award year. When some of this

information is not available, the Federal

agency shall provide information

necessary to clearly describe the Federal

award.

(2) Ensure that audits are made and

reports are received in a timely manner

and in accordance with the

requirements of this Circular.

(3) Provide technical advice and

counsel to auditees and auditors as

requested.

(4) 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.

(5) Assign a person responsible to

inform OMB annually of any updates

needed to the compliance supplements.

d. Pass-Thru Entity Responsibilities. A

pass-thru entity that receives a Federal

award and passes all or part of it

through to subrecipients shall perform

the following for the awards it makes:

(1) Identify awards made by informing

each subrecipient of CFDA title and

number, award name and number,

award year, and name of Federal

agency. When some of this information

is not available, the pass-thru 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 pass-thru

entity.

(3) Monitor the activities of

subrecipients as necessary to ensure that

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 non-profit

subrecipients receiving $300,000 or

more in awards during the

subrecipient’s fiscal year have met the

audit requirements of this Circular for

that fiscal year, and that subrecipients

subject to Circular A–128 have met the

requirements of that Circular.

(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-thru entity’s own records.

(7) Require each subrecipient to

permit auditors to have access to the

records and financial statements as

necessary for the pass-thru entity to

comply with this Circular.

7. Relation to Other Audit

Requirements.

a. Audit Under This Circular in Lieu

of Other Audits. An audit made in

accordance with this Circular shall be in

lieu of any financial audit required

under individual awards. To the extent

this audit meets a Federal agency’s

needs, it shall rely upon and use such

audits. The provisions of this Circular

neither limit the authority of Federal

agencies, their inspectors general, or

GAO to conduct or contract 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 cost of such additional

audits.

c. Federal Agency Determination of

Major Programs. 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 contracting for the

additional audits. To allow for planning,

such requests should be made at least

180 days prior to the end of the

applicable audit period. The auditee

should promptly respond to such

request by informing the Federal agency

whether the program would otherwise
Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices 14601

be audited as a major program 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. Since the

Federal program audited as a result of

this request would not otherwise have

been audited as a major program, the

expenditures of this Federal program

shall not be included in the numerator

of the calculation to determine whether

the requirements of the 50 percent rule

described in Appendix 1 were met. A

pass-thru entity may use the provisions

of this paragraph for a subrecipient.

8. Frequency of Audit. Audits

required by this Circular shall be

performed annually. However, a Federal

agency or pass-thru entity may allow an

auditee who elects a program-specific

audit under paragraph 2.c to perform

the audit every two years. Two-year

audits must cover both years.

9. Sanctions. No audit costs may be

charged to Federal awards when audits

required by this Circular have not been

made or have been made but not in

accordance with this Circular. In cases

of continued inability or unwillingness

to have an audit conducted in

accordance with this Circular, Federal

agencies and pass-thru entities shall

take appropriate sanctions such as:

a. Withholding a percentage of awards

until the audit is completed

satisfactorily;

b. Withholding or disallowing

overhead costs;

c. Suspending awards until the audit

is conducted; or

d. Terminating the award.

10. Audit Costs. Unless prohibited by

law, the cost of audits made in

accordance with the provisions of this

Circular are allowable charges to

awards. The charges may be considered

a direct cost or an allocated indirect

cost, determined in accordance with the

provisions of Circular A–21, ‘‘Cost

Principles for Educational Institutions,’’

Circular A–122, ‘‘Cost Principles for

Non-Profit Organizations,’’ Federal

Acquisition Regulations subpart 31, or

other applicable cost principles or

regulations.

11. Auditor Selection. In arranging for

audit services, auditees shall follow the

procurement standards prescribed by

Circular A–110, ‘‘Uniform Requirements

for Grants and Agreements with

Institutions of Higher Education,

Hospitals and Other Non-Profit

Organizations.’’ 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.

12. Scope of Audit.

a. General. The audit shall be

conducted in accordance with GAGAS.

b. Financial Statements. The auditor

shall determine whether the financial

statements of the auditee present fairly

the auditee’s financial position, results

of operations, and, where appropriate,

the cash flows in conformity with

generally accepted accounting

principles. The auditor shall also

determine whether the schedule of

Federal awards is fairly presented in all

material respects in relation to the

auditee’s financial statements taken as a

whole.

c. Internal Controls.

(1) In addition to the requirements of

GAGAS, the auditor shall perform

procedures to obtain an understanding

of the internal control structure over

Federal programs sufficient to plan the

audit to achieve a low assessed level of

control risk for major programs.

(2) Except as provided in paragraph

(3), the auditor shall:

(a) Plan the testing of the internal

control structure over major programs to

achieve a low assessed level of control

risk for the assertions relevant to the

compliance requirements for each major

program.

(b) Perform testing of the internal

control structure over major programs as

planned in paragraph (a).

(3) When the internal control

structure over major programs is likely

to be ineffective in preventing or

detecting noncompliance, the planning

and performing of testing described in

paragraphs (2)(a) and (2)(b) are not

required. However, the auditor shall

report a reportable condition or a

material weakness in accordance with

paragraph 13.d, assess the related

control risk at the maximum, and

consider whether additional compliance

tests are required because of the

ineffective internal control structure

over major programs.

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 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 for

each major program.

(3) The principal compliance

requirements of the largest Federal

programs are included in the

compliance supplements.

(4) For Federal programs contained in

the compliance supplements, an audit

of the compliance requirements

contained in the compliance

supplements will meet the requirements

of this Circular. Where there have been

changes to the compliance requirements

and the changes are not reflected in the

compliance supplements, 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 elements of compliance

(e.g., allowability of cost, types of

services, eligibility) contained in the

compliance supplements as guidance

for identifying the individual

compliance requirements to test, and

determine the requirements governing

the Federal program by reviewing the

applicable laws, regulations, and the

provisions of contracts or grant

agreements. The auditor should consult

with the applicable Federal agency to

determine the availability of agencyprepared supplements or audit guides.

e. Audit Follow-up. The auditor shall

follow-up on prior audit findings,

review the summary schedule of prior

audit findings prepared by the auditee

in accordance with paragraph 14.b, and

report, as an audit finding, when the

results of the auditor’s follow-up are

different from those reported in the

summary schedule of prior audit

findings. The auditor shall perform

audit follow-up regardless of whether a

prior audit finding relates to a major

program in the current year.

f. Certification. The auditor shall read

the certification prepared by the auditee

in accordance with paragraph 16.b and

report as an audit finding when the

information in the certification is

materially inconsistent with the other

parts of the reporting package.

13. Financial Statements and

Auditor’s Reporting.

a. Financial Statements. The auditee

shall prepare financial statements that

reflect its financial position, results of

operations, and, where appropriate,

cash flows for the fiscal year audited.

The financial statements shall be for the

organizational unit chosen to meet the

requirements of this Circular.
14602 Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices

b. Schedule of Federal Awards. The

auditee shall also prepare a schedule of

Federal awards for the period covered

by the auditee’s financial statements.

While not required, it is appropriate for

the auditee to provide information

requested to make the schedule easier to

use by Federal awarding agencies and

pass-thru entities. At a minimum, the

schedule shall:

(1) List total expenditures for each

individual award and the CFDA number

or other identifying number when the

CFDA information is not available.

(2) Include notes that describe the

significant accounting policies used in

preparing the schedule.

(3) Identify major programs.

(4) List individual awards by Federal

agency and major subdivision within a

Federal agency. For awards received as

a subrecipient, the name of the passthru entity and identifying number

assigned by the pass-thru entity shall be

included.

(5) List individual awards within a

category of awards. However, when it is

not practical to list each individual

award for R&D, total expenditures shall

be shown 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.

(6) Include, in either the schedule or

a note to the schedule, the value of noncash assistance received, insurance

programs in effect during the year, and

loans or loan guarantees outstanding at

year end.

c. Auditor’s Reporting. The auditor’s

report(s) shall include the following:

(1) An opinion as to whether the

financial statements are fairly presented

in conformity with generally accepted

accounting principles or a disclaimer of

opinion and an opinion as to whether

the schedule of Federal awards is fairly

presented in all material respects in

relation to the financial statements

taken as a whole.

(2) A report on the auditee’s internal

control structure related to the financial

statements and major programs. This

report shall describe the scope of testing

of this internal control structure and the

results of those tests, and, where

applicable, refer to the separate

schedule of findings and questioned

costs described in paragraph (4).

(3) 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 and major programs. This

report shall include an 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 (4).

(4) A schedule of findings and

questioned costs which includes all

audit findings as defined in paragraph

d.(1). Any internal control findings,

compliance findings, and questioned

costs which relate to the same issue

should be presented as a single finding.

Where practical, audit findings should

be organized by Federal agency or passthru entity.

(5) A copy of any management letters

issued by the auditor.

d. Audit Findings.

(1) The auditor shall report the

following as audit findings in a

schedule of findings and questioned

costs:

(a) Reportable conditions in the

internal control structure over major

programs. The auditor’s determination

of a reportable condition for major

programs is in relation to an individual

compliance requirement for a major

program. Auditors shall identify

reportable conditions which are

individually or cumulatively material

weaknesses.

(b) Known fraud affecting an award.

Fraud is a type of illegal act involving

the obtaining of something of value

through willful misrepresentation. This

paragraph does not require the auditor

to make an additional reporting when

the auditor confirms the fraud has been

reported outside of the auditor’s reports

under the direct reporting requirements

of GAGAS.

(c) Material irregularities, illegal acts,

and noncompliance with the provisions

of contracts or grant agreements which

auditors conclude, based on evidence

obtained, have occurred or are likely to

have occurred. The auditor’s

determination of whether an

irregularity, an illegal act, or

noncompliance with the provisions of

contracts or grant agreements is material

is in relation to an individual

compliance requirement for a major

program. An irregularity, an illegal act,

or noncompliance with the provisions

of contracts or grant agreements which

could have a material effect on an audit

objective identified in the compliance

supplements shall also be considered as

material.

(d) Known questioned costs which are

greater than $10,000 for an individual

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 for each major program, 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 an individual 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.

(e) Instances where the audit followup procedures disclosed that the

summary schedule of prior audit

findings prepared by the auditee in

accordance with paragraph 14.b is other

than as reported by the auditee.

(f) Instances where the certification

prepared by the auditee in accordance

with paragraph 16.b is materially

inconsistent with the reporting package

described in paragraph 16.c.

(2) 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-thru entities to arrive

at a management decision. The

following specific information shall be

included, as applicable, in audit

findings:

(a) Federal program and specific

award identification including the

CFDA title and number, award number

and year, name of Federal agency, and

name of the pass-thru entity. When

information, such as the CFDA title and

number or award number, is not

available, the auditor shall provide the

best information available to describe

the Federal award.

(b) The criteria or specific

requirement upon which the audit

findings are based, including statutory,

regulatory, or other citation.

(c) The condition found, including

facts that indicate that the audit findings

occurred or are likely to have occurred.

(d) Identification of questioned costs

and how they were computed.

(e) 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. Instances identified

shall be related to the universe and the

number of cases examined and be

quantified in terms of dollar value, if

appropriate.

(f) The possible asserted effect to

provide sufficient information to

Federal, State, or local officials to

permit them to determine the effect and
Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices 14603

cause in order to take prompt and

proper corrective action.

(g) Recommendations to prevent

future occurrences of the audit finding.

(h) Explanations of responsible

officials of the auditee when there is

disagreement with the audit findings.

(3) 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.

14. 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 paragraph 13.d(3).

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. The summary

schedule shall also include audit

findings in the prior audit’s summary

schedule of prior audit findings except

audit findings listed as corrected in

accordance with paragraph (1) or no

longer valid in accordance with

paragraph (4).

(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-thru 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.

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

names 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.

15. 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-thru entity may

request additional information or

documentation from the auditee,

including a request that the

documentation be audited, as a way of

mitigating disallowed costs. The

management decision should describe

any appeal process available to the

auditee.

b. Federal Agency. As provided in

paragraph 6.a.(7), the cognizant agency

shall be responsible for coordinating a

management decision for audit findings

that affect the programs of more than

one Federal agency. As provided in

paragraph 6.c.(4), a Federal awarding

agency is responsible for issuing a

management decision for findings that

relate to awards it makes to recipients.

Alternate arrangements may be made on

a case-by-case basis by agreement

among the Federal agencies concerned.

c. Pass-Thru Entity. As provided in

paragraph 6.d.(5), the pass-thru entity

shall be responsible for making the

management decision for audit findings

that relate to 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 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

paragraph 13.d.(3).

16. Report Submission.

a. General. Within nine months after

the end of the audit period, unless a

longer period is agreed to in advance by

the cognizant or oversight agency, the

reporting package described in

paragraph c shall be submitted in

accordance with this Circular. Unless

restricted by law or regulation, the

auditee shall make copies available for

public inspection.

b. Certification. The auditee shall

complete a certification form which

states whether the audit was completed

in accordance with this Circular and

provides information about the auditee,

its Federal programs, and the results of

the audit. The form shall be available

from the central clearinghouse

designated by OMB. The auditee’s chief

executive officer or chief financial

officer shall sign a statement that the

information on the form is accurate and

complete.

Certificate of Audit

This is to certify that, to the best of

my knowledge and belief, the (specify

name of non-profit organization) has: (1)

Engaged an auditor to perform an audit

in accordance with the provisions of

OMB Circular A–133 for the (specify

number) months ended (specify date);

(2) the auditor has completed such audit

and presented a signed audit report

which states that the audit was

conducted in accordance with the

provisions of the Circular; and, (3) the

information on the attached form

accurately and completely reflects the

results of this audit, as presented in the

auditor’s report. I declare that the

foregoing is true and correct.

Attachment

Information Accompanying Certificate

of Audit

The following data elements will be

included in a machine-readable form to

accompany the Certificate of Audit:

(1) Catalog of Federal Domestic

Assistance (CFDA) number for each

covered Federal program

(2) name of each covered Federal

program

(3) amount of expenditures for the

current fiscal year associated with each

covered Federal program

(4) whether or not there are audit

findings in the current audit report

related to the following:

(a) Amount of questioned costs

(b) Types of services allowed or

unallowed

(c) Matching or cost sharing

(d) Maintenance of level of effort

(e) Earmarking

(f) Special reporting requirements

(g) Special tests and provisions

(h) Administrative requirements

(i) Cash management

(j) Federal financial reporting

(k) Program income

(l) Real property management

(m) Equipment management

(n) Procurement

(o) Subrecipient monitoring

(p) Uniform Relocation Assistance and

Real Property Acquisition Policies Act
14604 Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices

(q) Allowable costs/cost principles

(r) Davis-Bacon Act.

(5) Whether or not there is a summary

schedule of prior audit findings

(6) If applicable, the CFDA number(s)

for prior audit finding(s) reflected in the

summary schedule of prior audit

findings

(7) Non-Profit Organization Name:

lllllllllllllllllllll

Employer Identification Number:

lllllllllllllllllllll

Name and Title of Responsible Official:

lllllllllllllllllllll

Telephone:

lllllllllllllllllllll

Signature:

lllllllllllllllllllll

Date of Execution:

lllllllllllllllllllll

(8) Auditor Name:

lllllllllllllllllllll

Name and Title of Contact Person:

lllllllllllllllllllll

Auditor Address:

lllllllllllllllllllll

Auditor Telephone:

lllllllllllllllllllll

c. Reporting Package. The reporting

package shall include the following:

(1) Certification discussed in

paragraph b.

(2) Financial statements and schedule

of Federal awards discussed in

paragraphs 13.a and 13.b.

(3) Auditor’s reporting discussed in

paragraph 13.c.

(4) Summary schedule of prior audit

findings discussed in paragraph 14.b.

(5) Corrective action plan discussed in

paragraph 14.c.

d. Submission to Clearinghouse. All

auditees shall submit to the central

clearinghouse designated by OMB one

copy of the:

(1) Certification discussed in

paragraph b, and

(2) Reporting package described in

paragraph c for each Federal awarding

agency that provided direct awards

when the schedule of findings and

questioned costs disclosed audit

findings for those direct awards or the

summary schedule of prior audit

findings reported the status of any audit

findings for those direct awards.

e. Additional Submission by

Subrecipients. Subrecipients shall

submit to each pass-thru entity one copy

of the:

(1) Certification discussed in

paragraph b, and

(2) Reporting package described in

paragraph c for each pass-thru entity

when either the schedule of findings

and questioned costs disclosed audit

findings for awards that the pass-thru

entity provided or the summary

schedule of prior audit findings

reported the status of any audit findings

for awards that the pass-thru entity

provided.

f. Requests for Report Copies. In

response to requests by the Federal

agency or pass-thru entity, auditees

shall submit the appropriate copies of

the reporting package described in

paragraph c.

g. Report Retention Requirements.

Auditees shall keep one copy of the

reporting package described in

paragraph c on file for three years from

the date of submission to the central

clearinghouse. Pass-thru entities shall

keep subrecipients’ submissions on file

for three years from date of receipt.

h. Clearinghouse Responsibilities. The

central clearinghouse designated by

OMB shall distribute the reporting

package received in accordance with

paragraph d.(2) 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 certifications and reporting

packages.

i. Clearinghouse address. The address

of the central clearinghouse currently

designated by OMB is Federal Audit

Clearinghouse, Bureau of the Census,

1201 E. 10th Street, Jeffersonville, IN

47132. If the designated central

clearinghouse or its address should

change, OMB will publish this

information in the Federal Register.

j. Electronic Filing. Nothing in this

Circular shall preclude electronic

submissions to the central clearinghouse

in such manner as may be approved by

OMB. With OMB approval, the central

clearinghouse may pilot test methods of

electronic submissions.

17. Audit Working Papers and

Reports. The auditor shall retain

working papers and reports for a

minimum of three years from the date

of the audit report, unless the auditor is

notified in writing by the cognizant

agency, oversight agency, or pass-thru

entity to extend the retention period.

When auditors are aware that the

Federal awarding agency, pass-thru

entity, or auditee is contesting an audit

finding, the auditor shall contact the

parties contesting the audit finding prior

to destruction of the working papers and

reports. Audit working papers shall be

made available upon request to the

cognizant or oversight agency or their

designee, the Office of Inspector General

of a Federal agency providing direct or

indirect funding, or GAO at the

completion of the audit.

18. Program-Specific Audit.

a. Program Audit Guide Available. In

many cases a program-specific audit

guide will be available to provide

specific guidance to the auditor on

internal controls, 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 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

audited as they would have for a major

program audited under the requirements

of this Circular.

(2) The auditee shall prepare the

financial statement(s) for the Federal

program that includes, at a minimum, a

schedule of the Federal program

expenditures 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

paragraph 14.b, and a corrective action

plan consistent with the requirements of

paragraph 14.c.

(3) The auditor shall: (a) Perform an

audit of the financial statement(s) for

the Federal program in accordance with

GAGAS; (b) obtain an understanding of

the internal control structure policies

and procedures and perform tests of the

internal control structure for the Federal

program consistent with the guidance in

paragraph 12.c for a major program; (c)

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

guidance in paragraph 12.d for a major

program; (d) follow up on prior audit

findings, review the auditee’s summary

schedule of prior audit findings, and

report, as an audit finding, when the

results of the auditor’s follow-up are

different from those reported by the

auditee consistent with the

requirements of paragraph 12.e; and, (e)

read the certification prepared by the

auditee consistent with the

requirements of paragraph 12.f.

(4) The auditor shall: (a) Render an

opinion as to whether the financial

statement(s) of the Federal program is

fairly presented in accordance with the

stated accounting policies; (b) issue a

report on the internal control structure
Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices 14605

related to the Federal program, which

shall describe the scope of testing of that

internal control structure and the results

of those tests; (c) issue a report on

compliance with laws and regulations

which includes an 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, (d) issue

a schedule of findings and questioned

costs which includes audit findings for

the Federal program as described in

paragraph 13.d.

c. Reporting for Program-Specific

Audits. Within nine months after the

end of the audit period, unless a longer

period is approved in advance by the

Federal agency providing the funding,

the auditee shall submit to the central

clearinghouse designated by OMB a

certification prepared in accordance

with the requirements of paragraph

16.b. When a program-specific audit

guide is available, the financial

statement(s) and the audit report shall

be submitted in accordance with that

guide. When a program-specific audit

guide is not available and 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 to the Federal

awarding agency or pass-thru entity one

copy of the financial statement(s),

summary status of prior audit findings,

corrective action plan, and the auditor’s

reporting described in paragraph b.(4).

Unless restricted by law or regulation,

the auditee shall make report copies

available for public inspection.

d. Other Paragraphs of This Circular

May Apply. The provisions of

paragraphs 1 through 11, 15, 17 and

other referenced provisions of this

Attachment apply to program-specific

audits unless contrary to a programspecific audit guide or program laws

and regulations.

Appendix 1—Major Program

Determination

The auditor shall use a risk-based

approach to determine which Federal

programs are major programs. This riskbased approach shall include

consideration of: (a) Current and prior

audit experience, (b) oversight by

Federal agencies and pass-thru entities,

and (c) the inherent risk of the Federal

program. The following process shall be

followed:

Step 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 expenditures

exceeding three percent of total Federal

expenditures or $300,000, whichever is

greater. The remaining Federal programs

shall be labeled Type B programs.

The inclusion of large non-cash

assistance, insurance programs, or loans

and loan guarantees (loans), should not

result in the exclusion of other programs

as Type A programs. When a Federal

program providing non-cash assistance,

insurance, or 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.

Step 2—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, and, in

the most recent period audited, it shall

have had no audit findings from

reportable conditions, irregularities,

illegal acts, or noncompliance with the

provisions of contracts or grant

agreements as described in paragraphs

13.d.(1)(a) and 13.d.(1)(c) of the

Attachment. The auditor shall consider

the criteria in D, E, F, G, and H of

Appendix 2 and 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.

Step 3—The auditor shall identify

Type B programs which are high-risk

using professional judgment and the

criteria in Appendix 2. Except for

known reportable conditions in internal

controls or compliance problems as

discussed in criteria A, B, and D of

Appendix 2, a single criteria in

Appendix 2 would seldom cause a Type

B program to be considered high-risk.

An audit under this Circular is not

expected to test small Federal programs.

Therefore, programs with expenditures

of less than $100,000 would not be

considered high-risk unless it is

necessary to audit a program with

expenditures of less than $100,000 as a

major program to meet the 50 percent

rule discussed below.

Step 4—All Type A programs shall be

audited as major programs, except the

auditor may exclude any Type A

programs identified as low-risk under

step 2. All Type B programs identified

as high-risk under step 3 shall be

audited as major programs.

50 Percent

Rule—The audit of Federal programs

shall cover at least 50 percent of total

Federal expenditures unless the auditee

meets the criteria in Appendix 3 for a

low-risk auditee, in which case the

coverage shall be at least 25 percent of

total Federal expenditures.

Documentation of Risk

The auditor shall document in the

working papers the risk analysis process

used in determining major programs.

Auditor’s Judgment

When the major program

determination has been performed and

documented in accordance with this

Circular, the auditor’s judgment in

applying the risk-based approach to

determine major programs shall be

presumed correct. Challenges by Federal

agencies and pass-thru entities shall

only be for clearly improper use of the

guidance in this Circular. However,

Federal agencies and pass-thru 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.

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 higher risk

Type B programs as necessary to cover

at least 50 percent of total Federal

expenditures. Under this option, the

auditor would not be required to

perform the procedures discussed in

steps 2, 3, and 4 of this Appendix.

A first-year audit is the first year the

entity is audited under this Circular or

the first year of a change of auditors or

a bona fide procurement process which

could result in a change of auditors.

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

a non-profit organization more than

once in every three years.

Appendix 2—Criteria for Risk

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

the following to identify risk in Federal

programs:

Current and Prior Audit Experience

A. Weaknesses in the internal control

structure 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
14606 Federal Register / Vol. 60, No. 52 / Friday, March 17, 1995 / Notices

the competence and experience of

personnel who process transactions

affecting Federal programs.

1. A Federal program administered

under multiple internal control

structures may have a higher risk. When

identifying risk in a large organizationwide audit, the auditor shall consider

whether weaknesses are isolated in a

single operating unit (e.g., one college

campus) or pervasive throughout the

organization.

2. When significant parts of a Federal

program are passed through to

subrecipients, a weak system for

monitoring subrecipients would

indicate higher risk.

3. 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.

B. Prior audit findings would indicate

higher risk, particularly when the audit

findings could have a significant impact

on a Federal program or have not been

corrected.

C. Federal programs not recently

audited as major programs may be of

higher risk than Federal programs

recently audited as major programs

without audit findings.

Oversight Exercised by Federal Agencies

and Pass-Thru Entities

D. Oversight exercised by Federal

agencies or pass-thru 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.

E. Risk would be higher for Federal

programs identified by the Office of

Management and Budget (OMB) as highrisk at the auditee level. OMB plans to

provide this identification in its

compliance supplements or by issuing

an annual list of high-risk programs.

Inherent Risk of the Federal Program

F. 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.

G. 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.

H. The phase of a Federal program in

its life cycle at the auditee may indicate

risk. For example, during the first and

last years, an auditee participates in a

Federal program, the risk may be higher

due to start-up or closeout of program

activities and staff.

I. Type B programs with larger

expenditures would be of higher risk

than programs with substantially

smaller expenditures.

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-thru entity.

Appendix 3—Criteria for a Low-Risk

Auditee

An auditee which meets all of the

following conditions for the preceding

two years shall qualify as a low-risk

auditee under the 50 percent rule

described in Appendix 1, unless the

current year audit does not meet the

conditions described in paragraph 3

below:

1. The audits were performed in

accordance with the provisions of this

Circular.

2. The auditor’s opinions on the

financial statements and the schedule of

Federal awards were unqualified.

However, the cognizant or oversight

agency may judge that an opinion

qualification does not affect the

management of Federal awards and

provide a waiver.

3. There were no deficiencies in

internal controls which were identified

as material weaknesses under the

requirements of generally accepted

government auditing standards

(GAGAS). However, the cognizant or

oversight agency may judge that the

material weaknesses do not affect the

management of Federal awards and

provide a waiver.

4. For any one Type A program, as

defined in step 1 of Appendix 1, there

were no audit findings as described in

paragraph of the Attachment from:

a. Internal control deficiencies which

were identified as material weaknesses.

b. Irregularities, illegal acts, or

noncompliance with the provisions of

contracts or grant agreements which

either individually or cumulatively have

a material effect on the Type A program.

c. Known or likely questioned costs

that exceed five percent of the total

expenditures for a Type A program

during the year.

[FR Doc. 95–6662 Filed 3–16–95; 8:45 am]

BILLING CODE 3110–01–P