19134 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

OFFICE OF MANAGEMENT AND

BUDGET

Audits of Institutions of Higher

Education and Other Non-Profit

Institutions

AGENCY: Office of Management and

Budget.

ACTION: Final Revision of OMB Circular

A–133, ‘‘Audits of Institutions of Higher

Education and Other Non-Profit

Institutions.’’

SUMMARY: This revision of Office of

Management and Budget (OMB)

Circular A–133 establishes a uniform

system of auditing for institutions of

higher education and other non-profit

organizations. One of the more

significant revisions is that the

threshold for when an entity is required

to have an audit is raised from $25,000

to $300,000. This will significantly

reduce audit costs for many small nonprofit organizations. Other significant

changes are: additional guidance for

program-specific audits (§lll.235),

audit findings (§lll.510), and audit

findings follow-up (§lll.315); a

report submission due date which is

shortened from 13 to 9 months and a

report submission process that includes

a certification form and streamlined

filing requirements (§lll.320); and,

a new risk-based approach for major

program determination (§lll.520).

DATES: The standards set forth in

§ lll.400 of the Attachment to this

Circular, which apply directly to

Federal agencies, shall be effective July

1, 1996, and shall apply to audits of

fiscal years ending on or after June 30,

1997. The standards set forth in this

Circular that Federal agencies are to

apply to non-profit organizations shall

be adopted by Federal agencies in

codified regulations not later than

November 30, 1996, so that they will

apply to audits of fiscal years ending on

or after June 30, 1997, with the

exception that §lll.305(b) of the

Attachment applies to audits of fiscal

years ending on or after June 30, 1999.

ADDRESSES: A copy of the Circular may

be obtained from the OMB fax

information line, 202–395–9068,

document number 1133; OMB home

page on the internet which is currently

located at http://www.whitehouse.gov/

WH/EOP/omb; or by writing or calling

the Office of Administration,

Publications Office, room 2200, New

Executive Office Building, Washington,

DC 20503, telephone (202) 395–7332.

FOR FURTHER INFORMATION CONTACT:

Recipients should contact their

cognizant or oversight agency for audit,

or Federal awarding agency, as may be

appropriate in the circumstances.

Subrecipients should contact their passthrough entity. Federal agencies should

contact Sheila O. Conley, Office of

Management and Budget, Office of

Federal Financial Management,

Financial Standards and Reporting

Branch, telephone (202) 395–3993, fax

(202) 395–4915.

SUPPLEMENTARY INFORMATION:

A. Background

The Office of Management and Budget

(OMB) received approximately 150

letters providing approximately 1600

individual comments in response to the

Federal Register proposal of March 17,

1995 (60 FR 14594–14606). Letters came

from Federal agencies (including Offices

of Inspectors General), State

governments (including State auditors),

certified public accountants (CPAs),

internal auditors, non-profit

organizations (including colleges and

universities), professional organizations,

and others. All comments were

considered in developing this final

revision.

Section B presents a summary of the

major public comments grouped by

subject and a response to each

comment. Other changes were made to

increase clarity and readability.

B. Public Comments and Responses

Common Rule Format

Comment: Several commenters

suggested that the implementation of

the Circular be done using the ‘‘common

rule’’ format so that all affected Federal

agencies could codify the provisions of

the Circular without change and prior to

the effective date.

Response: Circular A–133 was

reformatted to facilitate codification by

Federal agencies.

Uniform Audit Requirements

Comment: In the preamble of the

proposed revision, OMB stated a plan to

seek modifications to the Single Audit

Act of 1984 (31 U.S.C. Chapter 75) and

OMB Circular No. A–128, ‘‘Audits of

State and Local Governments,’’ such

that one law and one circular could

cover both State and local governments

and non-profit organizations.

Commenters strongly supported this

change.

Responses: Even though Circular A–

133 does not apply to State and local

governments, provisions were made to

easily adapt Circular A–133 to include

State and local governments if the

Single Audit Act is amended. For

example, changes were made to the riskbased approach to determine major

programs for circumstances that most

likely will only occur in large Statewide

single audits.

Increased Threshold for Audit

Comment: Commenters

overwhelmingly supported raising the

threshold for audit, with the majority

supporting the proposed threshold of

$300,000. A common statement in favor

of this change was that it would reduce

audit costs, while still providing

adequate audit coverage of Federal

programs.

Response: This final revision raises

the audit threshold to $300,000. Passthrough entities should make

appropriate changes in their agreements

with subrecipients to reflect that

Circular A–133 no longer requires an

audit for entities expending less than

the $300,000 threshold. Also, passthrough entities will need to consider

this change, review their overall

subrecipient monitoring process, and

decide what, if any, additional

monitoring procedures may be

necessary to ensure subrecipient

compliance for the subrecipients not

required to have a Circular A–133 audit.

It is expected these monitoring

procedures could be more targeted and

less costly than the full Circular A–133

audit.

Special Provision for Certain Small

Subrecipients

Comment: Most commenters opposed

the provision to allow Federal agencies

to require pass-through entities to

arrange for audits of subrecipients

receiving less than the $300,000. A

reason often cited was that this

provision defeats the purpose of raising

the audit threshold.

Response: This provision was

included in the proposed revision to

provide audit coverage of Federal

programs, such as the Job Training

Partnership Act (JTPA) programs, which

are structured such that substantial

service delivery and expenditure of

Federal funds are made by subrecipients

that expend less than $300,000 in

Federal awards.

The provision has not been added to

the Circular. However, it is important to

note that both the pass-through entity

and the pass-through entity’s auditor

have responsibilities for these funds

even when an audit of the subrecipient

is not required. The pass-through entity

is still responsible to monitor the

activities of the subrecipient and ensure

that Federal awards are only used for

authorized purposes. Additional

monitoring procedures may be

necessary when a material amount of

program funds is passed through to

subrecipients which are not audited.
Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices 19135

The pass-through entity’s auditor is

responsible for performing sufficient

tests to support an opinion on

compliance for each major program.

When subrecipients which are not

audited expend a material amount of

funds from a major program, the auditor

will need to consider obtaining

compliance assurances by reviewing the

pass-through entity’s records and

monitoring procedures, performing

additional procedures to determine

compliance, such as testing the

subrecipient’s records, or a combination

of procedures. In addition, the passthrough entity’s auditor is responsible

for determining whether the passthrough entity’s system for monitoring

subrecipients is adequate and whether

subrecipient noncompliance

necessitates adjustment of the passthrough entity’s records.

Consideration of Triennial Audit

Comment: In the preamble of the

proposed revision, OMB stated it was

considering a triennial audit approach

and requested comments on its

feasibility. Commenters from non-profit

organizations supported a triennial

audit approach. Reasons cited were

relief of audit burden and a reduction in

the number of audits required to be

reviewed as part of subrecipient

monitoring.

However, Federal agency commenters

were opposed to a triennial audit

approach and cited problems, such as it

would alert the non-profit organization

in advance of which years should be

audited, significantly complicate the

risk-based approach for selecting major

programs (e.g., under the risk-based

approach a large program is only

required to be audited once every three

years and with triennial audits this

could be once in every nine years), and

result in only limited cost savings (e.g.,

under the triennial audit approach a

financial statement audit and testing of

internal control would still be required).

Response: The triennial audit

approach was not added to the Circular.

However, the Circular does provide

significant audit relief to non-profit

organizations by raising the audit

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

allowing a risk-based approach to

selecting major programs, and

streamlining the report distribution

process by use of a certification form.

The risk-based approach will permit

low-risk non-profit organizations to

reduce the percentage of Federal

expenditures required to be covered as

major programs. The certification form,

as discussed later in this supplementary

information, will simplify the passthrough entity’s review of subrecipient

reports which have no audit findings.

Risk-Based Approach To Determine

Major Programs

Comment: Except for comments from

CPAs, the commenters supported the

risk-based approach as presented. CPA

commenters opposed the risk-based

approach and cited as reasons that it

was inappropriate for the auditor to

determine major programs, there could

be problems in submitting a proposal to

conduct a Circular A–133 audit when it

is not known in advance which

programs will be audited, and there

would possibly be cost increases for the

auditor to perform risk assessments.

While State auditor commenters

supported the risk-based approach,

those from the larger States cited

implementation problems in performing

risk assessments on a large number of

Type B programs.

Response: The auditor is best suited

to determine major programs for

reasons, such as independence and the

understanding of risk to Federal

programs obtained as part of the audit.

Therefore, the proposal has been

adopted, with no changes made to the

requirement for the auditor to determine

major programs. However, in

recognition of the concerns expressed

relative to larger audits, Appendix 1

(§ lll.520), Major Program

Determination, was modified as follows:

Step 1 (§lll.520(b)(1)) was

modified to provide a sliding scale in

determining Type A programs. This

change only affects auditees with

Federal expenditures over $100 million.

Step 2 (§lll.520(c)(2)) was

modified to permit a Federal agency,

with OMB approval, to designate that a

low-risk Type A program could not be

considered low-risk. This designation

could be for reasons, such as to help the

Federal agency comply with Section 405

of the Government Management Reform

Act (P.L. 103–356).

Step 3 (§lll.520(d)(2)) was

modified to add a sliding scale which

defines relatively small Federal

programs in terms of a percentage of

total Federal expenditures. This benefits

very large audits by reducing the

number of Type B programs for which

the auditor must perform risk

assessments. The decrease in the total

amount of Federal expenditures subject

to audit will be relatively small because

of the wide difference in size between

the largest and smallest Federal

programs.

Step 4 (§lll.520(e)) was modified

to only require one-half of the high-risk

Type B programs to be audited as major

and provide a limit that the number of

these Type B programs audited as major

need not exceed the number of low-risk

Type A programs.

However, should the auditor choose

not to exclude a low-risk Type A

program, this would not affect the limit.

The limit is on the number of low-risk

Type A programs, not the number

excluded. Also, even though larger

dollar Type A programs may be

excluded as low-risk, they may still

need to be audited to meet the 50

percent rule.

To mitigate any implementation

problems with the risk-based approach,

the provision for deviation from use of

risk criteria provided in §lll.520(i)

applies to the first year this Circular is

applicable and permits auditors to defer

implementation of the risk-based

approach for one year.

Implementation of the Risk-Based

Approach To Determining Major

Programs

Comment: A commenter inquired

whether a Type A program may be

considered low-risk when it was

audited as a major program in

accordance with the prior Circular A–

133, issued March 8, 1990, and

otherwise met the criteria in Appendix

1, step 2 to be classified as low-risk.

Response: The reference in Appendix

1, step 2 (§lll.520(c)(1)) to the two

most recent audit periods means audit

periods in which the audit was

performed either under the prior

Circular A–133 or this revision.

Therefore, a Type A program which

meets the Appendix 1, step 2

(§ lll.520(c)(1)) criteria for low-risk

based on the results of an audit

performed in accordance with the prior

Circular A–133 may be considered lowrisk. Similarly, the reference in the

criteria for a low-risk auditee in

Appendix 3 (§lll.530) to the

preceding two years applies to audits

performed either under the prior

Circular A–133 or this revision.

Request for a Program To Be Audited as

a Major Program

Comment: Several commenters

expressed concern that the provision for

a Federal agency or pass-through entity

to request a program to be audited as a

major program would significantly

increase the work required for single

audits and requested that it be removed.

A few commenters also expressed

concern that these programs would not

count towards meeting the 50 percent

rule.

Response: This provision has been

adopted; however, a change was made

to allow programs audited as major

under this process to count towards
19136 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

meeting the 50 percent rule. This

process does not significantly change

the authority Federal agencies and passthrough entities now have to perform

additional audits as long as they pay for

them. The addition is that these audits

may be incorporated within the

framework of the single audit and

thereby eliminate duplicative audit

planning and reporting. Since the

Federal agency or pass-through entity

must still pay the full incremental audit

cost, OMB does not expect a significant

increase in major programs from this

provision.

It should be pointed out that any Type

A program selected to be audited under

this provision must be low-risk. If it

were not low-risk, it would have been

audited as a major program under the

risk-based approach. Therefore, this

provision will not reduce the number of

high-risk Type B programs audited as

major.

Required Level of Internal Control

Testing

Comment: All CPA commenters and

over half of the State auditor

commenters opposed the proposed

requirement for the auditor to plan the

testing of internal control over Federal

programs to achieve a low assessed level

of control risk. Concerns included that

it increases the amount of audit work,

limits auditor’s judgment, and is

arbitrary. By contrast, one commenter

stated support for the proposed

requirement because it would force the

auditor to look at internal control over

Federal programs and to note reportable

conditions when internal control is not

adequate.

Response: The proposal has been

adopted, with no changes. Some

commenters appeared to understand

this provision to mean that, when

control exceptions are found, the

auditor is required to continue testing

until a low level of risk is achieved.

This is not the case. The auditor is not

required to expand testing to try to

achieve a low level of risk. The auditor

is only required to plan the audit for a

low level of assessed risk and report the

results of this testing.

It has been a longstanding Federal

policy that the recipient of Federal

funds is required to establish internal

control systems to provide reasonable

assurance that it is managing Federal

funds in compliance with applicable

laws and regulations. Also, the Single

Audit Act (31 U.S.C. Chapter 75)

requires the auditor to test internal

control over Federal funds subject to

that Act. Therefore, it is reasonable to

require the auditor to plan the audit

consistent with the level of internal

control the recipient of Federal funds is

required to maintain. Also, the Circular

permits the auditor to not test internal

controls which are inadequate and

instead disclose a reportable condition

or material weakness and perform

additional tests of compliance as

necessary in the auditor’s judgment.

Schedule of Expenditures of Federal

Awards

Comment: Most commenters

supported the level of detail included in

the proposal for the schedule of

expenditures of Federal awards. One

commenter suggested that it would be

beneficial for pass-through entities to

identify in the schedule the amount

passed-through to subrecipients. This

disclosure would tell program managers

the amount of program expenditures

that was subject to audit at the passthrough entity level.

Response: A provision has been

added to encourage, but not require,

pass-through entities to disclose in the

schedule the total amount provided to

subrecipients from each Type A

program and from each Type B program

which is audited as a major program. In

most cases this information should be

readily available and would improve the

usefulness of the schedule.

Attestation on Internal Control and

Compliance

Comment: The preamble to the

proposed revision requested comments

as to whether a requirement should be

added for the audits to include a

management assertion and auditor

attestation for internal control or

compliance. The majority of

commenters were opposed to this

change because it would impose

additional requirements on entity

management and increase audit cost.

Response: In light of the concerns

raised, this proposed revision has not

been added to the Circular.

Criteria for Reporting Questioned Costs

Comment: Commenters’ views on the

proposed $10,000 threshold for

reporting known or likely questioned

costs varied from describing it as too

high, too low, or just right. Commenters

expressed concern that the concept of

likely questioned costs needed further

clarification.

Response: OMB believes that the

$10,000 threshold for reporting

questioned costs provides the

appropriate balance between reporting

all questioned costs and only reporting

large questioned costs. Also, audit

findings which do not result in

questioned costs but are material to the

types of compliance requirements or an

audit objective in the compliance

supplements will still be reported as

reportable conditions under

§ lll.510(a)(1) or material

noncompliance under

§ lll.510(a)(2).

Generally accepted auditing standards

require the auditor to project the

amount of known questioned costs

identified in the sample to the items in

the major program and to consider the

best estimate of total questioned costs

(both known and likely) in determining

an opinion on compliance. The Circular

does not require the auditor to report an

exact amount or statistical projection of

likely questioned costs, but rather to

include an audit finding when the

auditor’s extrapolation of these likely

questioned costs is greater than $10,000.

Since the requirement for the auditor

to consider likely questioned costs is

not new, and since likely questioned

costs which are greater than $10,000

may be significant to a Federal program,

OMB believes they should be included

in audit findings. In reporting likely

questioned costs, it is important that the

auditor follows the requirements of

§ lll.510(b) and provides

appropriate information for judging the

prevalence and consequences of the

audit finding.

Requirement To Follow Up on Prior

Audit Findings

Comment: One commenter expressed

concern that the requirement for the

summary schedule of prior audit

findings to include audit findings from

before the prior year may result in many

old audit findings being reported year

after year.

Response: As a practical matter,

unless an audit finding is repeated in a

subsequent year, there is limited value

in continuing to follow up on an audit

finding when the Federal agency or

pass-through entity chooses to take no

action. Therefore, a provision has been

added stating that a valid reason for

considering an audit finding as not

warranting further action is that: (a) two

years have passed since the audit report

was filed with the central clearinghouse

designated by OMB, (b) the Federal

agency or pass-through entity is not

currently following up on the audit

finding, and (c) a management decision

was not issued.

Also, for the first year the entity is

audited under this Circular, the prior

year report may not have included the

equivalent of a summary schedule of

prior audit findings. In these cases, the

auditee may exercise judgment and only

include, to the extent practical, audit

findings before the prior year.
Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices 19137

Corrective Action Plan

Comment: Some college and

university commenters expressed

concern that the requirement to list the

name of the contact person responsible

for corrective action precluded a nonprofit organization from naming one

person responsible for all audit findings.

Response: The proposal has been

adopted, with no changes. Some

commenters appeared to misunderstand

this provision. It is important that a

non-profit organization name a contact

person or persons to be responsible for

corrective action. However, contrary to

the commenters’ understanding, the

non-profit organization has discretion to

determine whether one person should

be responsible for all or a group of audit

findings or whether a separate person

should be responsible for each audit

finding.

Pass-Through Entity’s Responsibility for

Subrecipient Audit

Comment: A few commenters

expressed concern that, unless the passthrough entity gave the subrecipient

$300,000, it would be difficult to

determine whether the subrecipient was

required to have an audit under the

Circular. Specifically, the commenters

asked for guidance on how the passthrough entity could determine if the

subrecipient received other Federal

awards which cumulatively added up to

the $300,000 threshold for audit.

Response: This provision has been

adopted, with no changes. There was no

intention that this provision require the

passthrough entity to perform extensive

verification procedures to determine the

total Federal expenditures of a

subrecipient. OMB expects that, in

many cases, the pass-through entity will

have knowledge of the subrecipient

sufficient to estimate the subrecipient’s

total Federal expenditures. Another

technique would be for the pass-through

entity to clearly explain the audit

requirements to the subrecipient and

then ask the subrecipient the amount of

its total Federal expenditures.

Audit Cognizance

Comment: Some college and

university commenters expressed

concern that the cognizant agency

determination was not consistent with

the proposed revision to OMB Circular

A–21, ‘‘Cost Principles for Educational

Institutions’’ (60 FR 7105; February 6,

1995), and could result in an entity

having one cognizant agency for audit

purposes and another for indirect cost

rate negotiation.

Response: The responsibilities for

audit cognizance and indirect cost

negotiation are different and, therefore,

the same Federal agency does not need

to be cognizant for both. The name for

the cognizant agency has been changed

to the cognizant agency for audit to

clearly distinguish it from the cognizant

agency for indirect cost rate negotiation.

Provision for Small and Minority Audit

Firms

Comment: One commenter expressed

concern that the provision for small and

minority audit firms was proposed for

deletion.

Response: As explained in the

preamble to the proposed revision, this

provision was proposed to be deleted

because the requirements related to

small and minority audit firms are more

fully covered in §lll.44(b)(4) of

OMB Circular A–110, ‘‘Uniform

Requirements for Grants and

Agreements With Institutions of Higher

Education, Hospitals and Other NonProfit Organizations’’ (58 FR 62992;

November 29, 1993). There was no

intention to change or diminish the

requirements for using small and

minority audit firms. To ensure that

these requirements continue to receive

consideration, a provision has been

added to the auditor selection paragraph

that, whenever possible in procuring

audit services, non-profit organizations

shall make positive efforts to utilize

small businesses, minority-owned firms,

and women’s business enterprises, as

stated in OMB Circular A–110.

Restriction on Auditor Also Preparing

Indirect Cost Proposal

Comment: The preamble to the

proposed revision requested comments

on whether the auditor should also be

permitted to prepare the indirect cost

proposal (including similar documents,

such as the cost allocation plan, or the

disclosure statement required by OMB

Circular A–21). All Federal agency

commenters and most State auditor

commenters cited at least an appearance

of lack of independence when the same

auditor both performed the audit and

prepared the indirect cost proposal. One

Federal agency commenter stated, ‘‘In

preparing the indirect cost proposal, the

auditor is an advocate for the client

before the Federal Government. We

believe it stretches the bounds of

standards for the auditor to be

considered independent to audit this

same indirect cost proposal for the

purpose of providing assurances to the

Federal Government.’’ In contrast, CPAs

and non-profit organizations did not see

an independence problem and stated

there were significant efficiency

advantages for the same firm to both

perform the audit and prepare the

indirect cost proposal.

Response: A provision

(§ lll.305(b)) has been added to

preclude the same auditor from

preparing the indirect cost proposal or

cost allocation plan when indirect costs

exceeded $1 million in the prior year.

This threshold was chosen to limit this

restriction to a relatively small number

of entities, while still protecting the

Federal interest. The prior year was

chosen because non-profit organizations

often engage the auditor before the end

of the year and at this time it may be

unknown whether the current year’s

indirect costs will exceed the $1 million

threshold. Based on available data, OMB

estimates that entities with indirect

costs exceeding $1 million cumulatively

receive approximately 90 percent of the

total indirect costs charged by nonprofit organizations.

This restriction applies to the base

year from which financial data is used

to compute the rates even though the

audit of the base year financial

statements is often completed before the

indirect cost proposal or cost allocation

plan is prepared. The base year was

included to enhance the appearance of

independence to the Federal agencies

which rely upon the auditor’s testing of

information used in both the calculation

and application of indirect cost rates.

The disclosure statements required by

OMB Circular A–21 have been excluded

from this restriction because the

disclosure statement is new, many of

the statements will be submitted before

the effective date of this Circular A–133

revision, and the disclosure statements

are expected to have a long life. Under

these circumstances, it does not seem

appropriate public policy to restrict

auditors who prepared the original

disclosure statements from performing

the audit for a long period of time.

Therefore, the disclosure statements

required by OMB Circular A–21 have

been excluded from this restriction on

auditor selection. OMB will monitor

these disclosure statements and may

revisit this issue again at a later date.

The implementation date for this

provision is delayed two years until

audits of fiscal years ending on or after

June 30, 1999, to minimize any effect

this provision could have on existing

contracts for audit services. For

example, an auditor that prepared an

indirect cost proposal or cost allocation

which is used as the basis for charging

indirect costs in the fiscal year ending

June 30, 1999, is not permitted to

perform the 1999 audit.
19138 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

Report Due Date

Comment: Most State auditor and

college and university commenters

expressed opposition to shortening the

due date for reports from 13 to 9

months. However, most State manager

and non-profit organization commenters

supported the change. The view

appeared to be that those receiving and

relying on the reports and those

currently completing the audit in 9

months liked the change. By contrast, it

appears that those who were not

currently completing the audit in 9

months opposed the change.

Response: This proposal has been

adopted, with a change. The provision

retains the requirement in the Circular

that, when the audit is completed earlier

than the due date, the reporting package

must be submitted within 30 days of

audit report issuance.

Certification

Comment: Comments were mixed on

the certification form. Most State

auditor and CPA commenters opposed

the certification form, citing it as an

increased burden on them to prepare

and duplicative of information in the

audit reports. Most college and

university commenters supported the

use of the certification form as a method

of reducing the volume of paper in

single audits.

On a related issue, some State auditor

and CPA commenters cited a possible

logistical problem that the auditor

would not be able to complete the audit

report until the certification form was

prepared (because the auditor must read

the certification form and report as an

audit finding material inconsistencies

with the audit) and the certification

form could not be prepared until the

audit is completed.

Response: The requirements for the

auditor to read the certification form

and report as an audit finding any

material inconsistencies has not been

adopted. As a preventive control to

ensure proper distribution of audit

reports, a requirement (§lll.500(f))

has been added for the auditor to

identify to the auditee those Federal

awarding agencies and pass-through

entities which are required to receive a

copy of the reporting package. Also, a

requirement (§lll.505(b)) was added

for the schedule of findings and

questioned costs prepared by the

auditor to include a summary of the

auditor’s results. This summary will

facilitate preparation of the certification

form by the auditee.

Management Letter

Comment: Most commenters

expressed concern that routinely

including management letters as part of

a public filing of the auditor’s reports

could reduce the effectiveness of

management letters.

Response: OMB agrees that it is not

necessary to routinely include auditor’s

management letters as part of the report

submission. Therefore, this provision

has not been adopted. However, because

management letters may contain

information relevant to the needs of

Federal agencies and pass-through

entities to monitor Federal awards, a

provision has been added that Federal

agencies and pass-through entities can

request a copy of management letters.

Coordinated Audit Approach

Comment: A few commenters

expressed concern that the term

coordinated audit approach was not

used in the proposed revision and

whether the removal of this term

precluded Federal auditors from

participating in audits required by this

Circular.

Response: The proposed revision does

not prohibit the participation of Federal

auditors in audits required by the

Circular, a concept referred to as the

coordinated audit approach. This term

was not included in the proposed

revision because the definition of

auditor clearly includes Federal audit

organizations and further reference to

the term coordinated audit approach

was not considered necessary. A

provision (§lll.305(c)) has been

added to clarify that Federal auditors

may perform all or part of the work

required under the Circular if they fully

comply with the requirements of the

Circular.

GOCOs and FFRDCs

Comment: A few Federal agency and

non-profit organization commenters

expressed concern that the proposed

revision did not specifically address

Federal Government owned, contractor

operated facilities (GOCOs) or Federally

Funded Research and Development

Centers (FFRDCs).

Response: A provision has been

added to the definition of the term

Federal award that contracts to operate

GOCOs are excluded from the

requirements of this Circular. Also,

paragraph §lll.200(e) has been

added to allow management of an

auditee that owns or operates a FFRDC

to elect to treat the FFRDC as a separate

entity for purposes of this Circular. If

the FFRDC is treated as a separate

entity, the determination of cognizant

agency for audit would be based upon

this separate entity.

Questions and Answers on OMB

Circular A–133

Comment: In May 1992, the Standards

Subcommittee of the President’s

Council on Integrity and Efficiency

(PCIE) issued PCIE Position Statement

No. 6, titled ‘‘Questions and Answers on

OMB Circular A–133’’ (A–133 Q&A). A

commenter inquired whether this

document could be used as guidance in

performing audits under the revised

Circular A–133.

Response: Since this revision makes

significant changes in OMB Circular A–

133, the May 1992 A–133 Q&A should

not be used as a primary source of

guidance for audits performed under

this revision. However, many items in

the A–133 Q&A were incorporated in

this revision and the A–133 Q&A may

be a useful historical reference of the

single audit process. If there are

significant questions concerning the

revised Circular A–133, OMB will

consider issuing a revised A–133 Q&A.

Compliance Supplements

Comment: Some CPA and State

auditor commenters expressed concern

that Federal agencies should keep the

compliance supplements current.

Response: OMB recognizes the need

for updated compliance supplements

and is working with Federal agencies

and the PCIE to complete this task.

OMB’s current plans are to issue a

revised compliance supplement by the

end of 1996.

Public Information Collection

The revision includes an information

collection requirement for reports from

auditors concerning their audit findings

to auditees (§lll.235(b)(4),

§ lll.505, and §lll.510) and

reports from auditees to the Federal

Government concerning these report

(§ lll.235(c) and §lll.320). OMB

requested comments on the proposed

information collection described in the

Circular in a April 1, 1996 Federal

Register notice (61 FR 14338) in

accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C.

Chapter 35 et seq). The proposed

information collection requirement will

not be effective until another notice is

published in the Federal Register. The

subsequent notice will provide the

effective date and the OMB control

number.

Alice M. Rivlin,

Director.

April 22, 1996.

Circular No. A–133, Revised

TO THE HEADS OF EXECUTIVE

DEPARTMENTS AND

ESTABLISHMENTS
Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices 19139

SUBJECT: Audits of Institutions of

Higher Education and Other NonProfit Institutions

1. Purpose. This Circular sets forth

standards for obtaining consistency and

uniformity among Federal agencies for

the audit of non-profit organizations

expending 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 expending

Federal awards received directly from

Federal awarding agencies, or are

subrecipients expending Federal awards

received from a pass-through entity (a

recipient or another subrecipient).

Therefore, whereas this Circular does

not apply to grants, contracts, or other

agreements between the Federal

Government and State or local

governments (which are covered by

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 public

institutions of higher education and

hospitals which are audited under

Office of Management and Budget

(OMB) Circular A–128.

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

awards received either directly as a

recipient or indirectly as a subrecipient.

5. Definitions. The definitions of key

terms used in this Circular are

contained in §lll.105 in the

Attachment to this Circular.

6. Required Action. The specific

requirements and responsibilities of

Federal agencies and non-profit

organizations are set forth in the

Attachment 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 not

later than November 30, 1996, unless

different provisions are required by

Federal statute or are approved by OMB.

7. OMB Responsibilities. OMB will

review Federal 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.

9. Termination Review Date. This

Circular will have a policy review three

years from the date of issuance.

10. Effective Dates. The standards set

forth in §lll.400 of the Attachment

to this Circular, which apply directly to

Federal agencies, shall be effective July

1, 1996, and shall apply to audits of

fiscal years ending on or after June 30,

1997.

The standards set forth in this

Circular that Federal agencies are to

apply to non-profit organizations shall

be adopted by Federal agencies in

codified regulations not later than

November 30, 1996, so that they will

apply to audits of fiscal years ending on

or after June 30, 1997, with the

exception that §lll.305(b) of the

Attachment applies to audits of fiscal

years ending on or after June 30, 1999.

In the interim period, until the

standards in this Circular are adopted

and become applicable, the audit

provisions of Circular A–133, issued

March 8, 1990, shall continue in effect.

Alice M. Rivlin,

Director.

Attachment

PARTll—AUDITS OF INSTITUTIONS

OF HIGHER EDUCATION AND OTHER

NON-PROFIT INSTITUTIONS

Subpart A—General

Sec.

ll.100 Purpose.

ll.105 Definitions.

Subpart B—Audits

ll.200 Audit requirements.

ll.205 Basis for determining Federal

awards expended.

ll.210 Subrecipient and vendor

determinations.

ll.215 Relation to other audit

requirements.

ll.220 Frequency of audits.

ll.225 Sanctions.

ll.230 Audit costs.

ll.235 Program-specific audits.

Subpart C—Auditees

ll.300 Auditee responsibilities.

ll.305 Auditor selection.

ll.310 Financial statements.

ll.315 Audit findings follow-up.

ll.320 Report submission.

Subpart D—Federal Agencies and PassThrough Entities

ll.400 Responsibilities.

ll.405 Management decision.

Subpart E—Auditors

ll.500 Scope of audit.

ll.505 Audit reporting.

ll.510 Audit findings.

ll.515 Audit working papers.

ll.520 Major program determination.

ll.525 Criteria for Federal program risk.

ll.530 Criteria for a low-risk auditee.

Authority: [Each Federal agency should

insert its own rule making authority using

appropriate United States Code citations.]

Subpart A—General

§lll.100 Purpose.

This part sets forth standards for

obtaining consistency and uniformity

among Federal agencies for the audit of

non-profit organizations expending

Federal awards.

§lll.105 Definitions.

Auditee means any organization that

expends Federal awards which must be

audited under this part.

Auditor means an auditor, that is a

public accountant or a Federal, State or

local government audit organization,

which meets the general standards

specified in generally accepted

government auditing standards

(GAGAS). The term auditor does not

include internal auditors of non-profit

organizations.

Audit finding means deficiencies

which the auditor is required by

§ lll.510(a) to report in the schedule

of findings and questioned costs.

CFDA number means the number

assigned to a Federal program in the

Catalog of Federal Domestic Assistance

(CFDA).

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 §lll.520, and whether

a program-specific audit may be elected

under §lll.200(c).

Cognizant agency for audit means the

Federal agency designated to carry out

the responsibilities described in

§ lll.400(a).

Compliance supplements refers to the

Compliance Supplement for Audits of

Institutions of Higher Learning and

Other Non-Profit Institutions and the

Compliance Supplement for Single
19140 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

Audits of State and Local Governments

or such documents as the Office of

Management and Budget (OMB) or its

designee may issue to replace them.

These documents are available from the

Government Printing Office,

Superintendent of Documents, P.O. Box

371954, Pittsburgh, PA 15250–7954,

telephone (202) 512–1800.

Corrective action means action taken

by the auditee that:

(1) Corrects identified deficiencies;

(2) Produces recommended

improvements; or

(3) Demonstrates that audit findings

are either invalid or do not warrant

auditee action.

Federal agency has the same meaning

as the term agency in Section 551(1) of

title 5, United States Code.

Federal award means Federal

financial assistance and Federal costreimbursement contracts. It includes

Federal awards made directly by

Federal awarding agencies or indirectly

by recipients of Federal awards or

subrecipients. It does not include

procurement contracts, under grants or

contracts, used to buy goods or services

from vendors. Any audits of such

vendors shall be covered by the terms

and conditions of the contract. Contracts

to operate Federal Government owned,

contractor operated facilities (GOCOs)

are excluded from the requirements of

this part.

Federal awarding agency means the

Federal agency that provides an award

directly to the recipient.

Federal financial assistance means

assistance received or administered 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.

Federal program means:

(1) All Federal awards under the same

CFDA number. When no CFDA number

is assigned, all Federal awards from the

same agency made for the same purpose

should be combined and considered one

program. State governments may

combine funding from different Federal

awards in providing assistance 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 Federal awards as a single

program.

(2) A category of Federal awards

which is a group of awards in the

categories of:

(i) Research and development;

(ii) Student financial aid; or

(iii) Cluster of programs.

GAGAS means generally accepted

government auditing standards issued

by the Comptroller General of the

United States, which are applicable to

financial audits.

Generally accepted accounting

principles has the meaning specified in

generally accepted auditing standards

issued by the American Institute of

Certified Public Accountants (AICPA).

Internal control has the meaning

specified in generally accepted auditing

standards issued by the AICPA.

Internal control over Federal

programs means a process—effected by

an entity’s management and other

personnel—designed to provide

reasonable assurance regarding the

achievement of the following objectives

for Federal programs:

(1) Transactions are properly recorded

and accounted for to:

(i) Permit the preparation of reliable

financial statements and Federal

reports;

(ii) Maintain accountability over

assets; and

(iii) Demonstrate compliance with

laws, regulations, and other compliance

requirements;

(2) Transactions are executed in

compliance with:

(i) Laws, regulations, and the

provisions of contracts or grant

agreements that could have a direct and

material effect on a Federal program;

and

(ii) Any other laws and regulations

that are identified in the compliance

supplements; and

(3) Funds, property, and other assets

are safeguarded against loss from

unauthorized use or disposition.

Loan means a Federal loan or loan

guarantee received or administered by a

non-profit organization.

Major program means a Federal

program determined by the auditor to be

a major program in accordance with

§ lll.520 or a program identified as

a major program by a Federal agency or

pass-through entity in accordance with

§ lll.215(c).

Management decision means the

evaluation by the Federal awarding

agency or pass-through entity of the

audit findings and corrective action

plan and the issuance of a written

decision as to what corrective action is

necessary.

Non-profit organization means: (1)

any corporation, trust, association,

cooperative, or other organization

which:

(i) Is operated primarily for scientific,

educational, service, charitable, or

similar purposes in the public interest;

(ii) Is not organized primarily for

profit; and

(iii) Uses its net proceeds to maintain,

improve, or expand its operations; and

(2) The term non-profit organization

includes both non-profit institutions of

higher education and hospitals, and

public institutions of higher education

and hospitals that are not audited in

accordance with Circular A–128,

‘‘Audits of State and Local

Governments’’ (Available from Office of

Administration, Publications Office,

room 2200, New Executive Office

Building, Washington, DC 20503;

telephone (202) 395–7332).

OMB means the Executive Office of

the President, Office of Management

and Budget.

Oversight agency for audit means the

Federal awarding agency that provides

the predominant amount of direct

funding to a recipient not assigned a

cognizant agency for audit. When there

is no direct funding, the Federal agency

with the predominant indirect funding

shall assume the oversight

responsibilities. The duties of the

oversight agency for audit are described

in §lll.400(b).

Pass-through entity means a nonprofit organization or other entity that

provides a Federal award to a

subrecipient.

Program-specific audit means an

audit of one Federal program as

provided for in §lll.200(c) and

§ lll.235.

Questioned cost means a cost that is

questioned by the auditor because of an

audit finding:

(1) Which resulted from a possible

violation of a provision of a law,

regulation, contract, grant, cooperative

agreement, or other agreement or

document governing the use of Federal

funds, including funds used to match

Federal funds;

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

audit, are not supported by adequate

documentation; or

(3) Where the costs incurred appear

unreasonable and do not reflect the

actions a prudent person would take in

the circumstances.

Recipient means a non-profit

organization that expends Federal

awards received directly from a Federal

awarding agency to carry out a Federal

program.

Research and development (R&D)

means all research activities, both basic

and applied, and all development

activities that are performed by a 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
Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices 19141

where such activities utilize the same

facilities as other research and

development activities and where such

activities are not included in the

instruction function. Development is the

systematic use of knowledge and

understanding gained from research

directed toward the production of useful

materials, devices, systems, or methods,

including design and development of

prototypes and processes.

Single audit means an audit which

includes both the entity’s financial

statements and the Federal awards as

described in §lll.500.

Student Financial Aid (SFA) includes

those programs of general student

assistance, such as those authorized by

Title IV of the Higher Education Act of

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

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

Department of Education, and similar

programs provided by other Federal

agencies. It does not include programs

which provide fellowships or similar

Federal awards to students on a

competitive basis, or for specified

studies or research.

Subrecipient means the entity that

expends Federal awards received from a

pass-through entity to carry out a

Federal program, but does not include

an individual that is a beneficiary of

such a program. A subrecipient may

also be a recipient of other Federal

awards directly from a Federal awarding

agency. Guidance on distinguishing

between a subrecipient and a vendor is

provided in §lll.210.

Types of compliance requirements

refers to the types of compliance

requirements 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.

Vendor means a dealer, distributor,

merchant, or other seller providing

goods or services that are required for

the conduct of a Federal program. These

goods or services may be for an

organization’s own use or for the use of

beneficiaries of the Federal program.

Additional guidance on distinguishing

between a subrecipient and a vendor is

provided in §lll.210.

Subpart B—Audits

§lll.200 Audit requirements.

(a) Audit required. Non-profit

organizations that expend $300,000 or

more in a year in Federal awards shall

have a single or program-specific audit

conducted for that year in accordance

with the provisions of this part.

Guidance on determining Federal

awards expended is provided in

§ lll.205.

(b) Single audit. Non-profit

organizations that expend $300,000 or

more in a year in Federal awards shall

have a single audit conducted in

accordance with §lll.500 except

when they elect to have a programspecific audit conducted in accordance

with paragraph (c) of this section.

(c) Program-specific audit election.

When an auditee expends Federal

awards under only one Federal program

(excluding R&D) and the Federal

program’s laws, regulations, or grant

agreements do not require a financial

statement audit of the auditee, the

auditee may elect to have a programspecific audit conducted in accordance

with §lll.235. A program-specific

audit may not be elected for R&D unless

all expenditures are for Federal awards

received from the same Federal agency,

or the same Federal agency and the

same pass-through entity, and that

Federal agency, or pass-through entity

in the case of a subrecipient, approves

in advance a program-specific audit.

(d) Exemption when expenditures are

less than $300,000. Non-profit

organizations that expend less than

$300,000 a year in Federal awards are

exempt from Federal audit requirements

for that year, except as noted in

§ lll.215(a), but records must be

available for review or audit by

appropriate officials of the Federal

agency, pass-through entity, and

General Accounting Office (GAO).

(e) Federally Funded Research and

Development Centers (FFRDC).

Management of an auditee that owns or

operates a FFRDC may elect to treat the

FFRDC as a separate entity for purposes

of this part.

§lll.205 Basis for determining Federal

awards expended.

(a) Determining Federal awards

expended. The determination of when

an award is expended should be based

on when the activity related to the

award occurs. Generally, the activity

pertains to events that require the nonprofit organization to comply with laws,

regulations, and the provisions of

contracts or grant agreements, such as:

expenditure/expense transactions

associated with grants, costreimbursement contracts, cooperative

agreements, and direct appropriations;

the disbursement of funds passed

through to subrecipients; the use of loan

proceeds under loan and loan guarantee

programs; the receipt of property; the

receipt of surplus property; the receipt

or use of program income; the

distribution or consumption of food

commodities; the disbursement of

amounts entitling the non-profit

organization to an interest subsidy; and,

the period when insurance is in force.

(b) Loan and loan guarantees (loans).

Since the Federal Government is at risk

for loans until the debt is repaid, the

following guidelines shall be used to

calculate the value of Federal awards

expended under loan programs, except

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

section:

(1) Value of new loans made or

received during the fiscal year; plus

(2) Balance of loans from previous

years for which the Federal Government

imposes continuing compliance

requirements; plus

(3) Any interest subsidy, cash, or

administrative cost allowance received.

(c) Loan and loan guarantees (loans)

at institutions of higher education.

When loans are made to students of an

institution of higher education but the

institution does not make the loans,

then only the value of loans made

during the year shall be considered

Federal awards expended in that year.

The balance of loans for previous years

is not included as Federal awards

expended because the lender accounts

for the prior balances.

(d) Prior loan and loan guarantees

(loans). Loans, the proceeds of which

were received and expended in prioryears, are not considered Federal

awards expended under this part when

the laws, regulations, and the provisions

of contracts or grant agreements

pertaining to such loans impose no

continuing compliance requirements

other than to repay the loans.

(e) Endowment funds. The cumulative

balance of Federal awards for

endowment funds which are federally

restricted are considered awards

expended in each year in which the

funds are still restricted.

(f) Free rent. Free rent received by

itself is not considered an award

expended under this part. However, free

rent received as part of an award to

carry out a Federal program shall be

included in determining Federal awards

expended and subject to audit under

this part.

(g) Valuing non-cash assistance.

Federal non-cash assistance, such as

free rent, food stamps, food

commodities, donated property, or

donated surplus property, shall be

valued at fair market value at the time

of receipt or the assessed value provided

by the Federal agency.

(h) Medicare. Medicare payments to a

non-profit organization for providing

patient care services to Medicare

eligible individuals are not considered

Federal awards expended under this

part.
19142 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

(i) Medicaid. Medicaid payments to a

non-profit organization for providing

patient care services to Medicaid

eligible individuals are not considered

Federal awards expended under this

part unless a State requires the funds to

be treated as Federal awards expended

because reimbursement is on a costreimbursement basis.

§lll.210 Subrecipient and vendor

determinations.

(a) General. An auditee may be a

recipient, a subrecipient, and a vendor.

Federal awards expended as a recipient

or a subrecipient would be subject to

audit under this part. The payments

received for goods or services provided

as a vendor would not be considered

Federal awards. The guidance in

paragraphs (b) and (c) of this section

should be considered in determining

whether payments constitute a Federal

award or a payment for goods and

services.

(b) Federal award. Characteristics

indicative of a Federal award received

by a subrecipient are when the

organization:

(1) Determines who is eligible to

receive what Federal financial

assistance;

(2) Has its performance measured

against whether the objectives of the

Federal program are met;

(3) Has responsibility for

programmatic decision making;

(4) Has responsibility for adherence to

applicable Federal program compliance

requirements; and

(5) Uses the Federal funds to carry out

a program of the organization as

compared to providing goods or services

for a program of the pass-through entity.

(c) Payment for goods and services.

Characteristics indicative of a payment

for goods and services received by a

vendor are when the organization:

(1) Provides the goods and services

within normal business operations;

(2) Provides similar goods or services

to many different purchasers;

(3) Operates in a competitive

environment;

(4) Provides goods or services that are

ancillary to the operation of the Federal

program; and

(5) Is not subject to compliance

requirements of the Federal program.

(d) Use of judgment in making

determination. There may be unusual

circumstances or exceptions to the

listed characteristics. In making the

determination of whether a subrecipient

or vendor relationship exists, the

substance of the relationship is more

important than the form of the

agreement. It is not expected that all of

the characteristics will be present and

judgment should be used in determining

whether an entity is a subrecipient or

vendor.

(e) For-profit subrecipient. Since this

part does not apply to for-profit

subrecipients, the pass-through entity is

responsible for establishing

requirements, as necessary, to ensure

compliance by for-profit subrecipients.

The contract with the for-profit

subrecipient should describe applicable

compliance requirements and the forprofit subrecipient’s compliance

responsibility. Methods to ensure

compliance for Federal awards made to

for-profit subrecipients may include

pre-award audits, monitoring during the

contract, and post-award audits.

(f) Compliance responsibility for

vendors. In most cases, the auditee’s

compliance responsibility for vendors is

only to ensure that the procurement,

receipt, and payment for goods and

services comply with laws, regulations,

and the provisions of contracts or grant

agreements. Program compliance

requirements normally do not pass

through to vendors. However, the

auditee is responsible for ensuring

compliance for vendor transactions

which are structured such that the

vendor is responsible for program

compliance or the vendor’s records

must be reviewed to determine program

compliance. Also, when these vendor

transactions relate to a major program,

the scope of the audit shall include

determining whether these transactions

are in compliance with laws,

regulations, and the provisions of

contracts or grant agreements.

§lll.215 Relation to other audit

requirements.

(a) Audit under this part in lieu of

other audits. An audit made in

accordance with this part shall be in

lieu of any financial audit required

under individual Federal awards. To the

extent this audit meets a Federal

agency’s needs, it shall rely upon and

use such audits. The provisions of this

part neither limit the authority of

Federal agencies, including their

Inspectors General, or GAO to conduct

or arrange for additional audits (e.g.,

financial audits, performance audits,

evaluations, inspections, or reviews) nor

authorize any auditee to constrain

Federal agencies from carrying out

additional audits. Any additional audits

shall be planned and performed in such

a way as to build upon work performed

by other auditors.

(b) Federal agency to pay for

additional audits. A Federal agency that

conducts or contracts for additional

audits shall, consistent with other

applicable laws and regulations, arrange

for funding the cost of such additional

audits.

(c) Request for a program to be

audited as a major program. A Federal

agency may request an auditee to have

a particular Federal program audited as

a major program in lieu of the Federal

agency conducting or arranging for the

additional audits. To allow for planning,

such requests should be made at least

180 days prior to the end of the fiscal

year to be audited. The auditee, after

consultation with its auditor, should

promptly respond to such request by

informing the Federal agency whether

the program would otherwise be audited

as a major program using the risk-based

audit approach described in

§ lll.520 and, if not, the estimated

incremental cost. The Federal agency

shall then promptly confirm to the

auditee whether it wants the program

audited as a major program. If the

program is to be audited as a major

program based upon this Federal agency

request, and the Federal agency agrees

to pay the full incremental costs, then

the auditee shall have the program

audited as a major program. A passthrough entity may use the provisions of

this paragraph for a subrecipient.

§lll.220 Frequency of audits.

Audits required by this part shall be

performed annually. However, a Federal

agency or pass-through entity may allow

an auditee that elects a program-specific

audit under §lll.200(c) to perform

the audit every two years. Two-year

audits must cover both years.

§lll.225 Sanctions.

No audit costs may be charged to

Federal awards when audits required by

this part have not been made or have

been made but not in accordance with

this part. In cases of continued inability

or unwillingness to have an audit

conducted in accordance with this part,

Federal agencies and pass-through

entities shall take appropriate action

using sanctions such as:

(a) Withholding a percentage of

Federal awards until the audit is

completed satisfactorily;

(b) Withholding or disallowing

overhead costs;

(c) Suspending Federal awards until

the audit is conducted; or

(d) Terminating the Federal award.

§lll.230 Audit costs.

Unless prohibited by law, the cost of

audits made in accordance with the

provisions of this part are allowable

charges to Federal awards. The charges

may be considered a direct cost or an

allocated indirect cost, as determined in

accordance with the provisions of
Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices 19143

applicable OMB cost principles

circulars, Federal Acquisition

Regulation (48 CFR part 31), or other

applicable cost principles or

regulations.

§lll.235 Program-specific audits.

(a) Program-specific audit guide

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

provide specific guidance to the auditor

with respect to internal control,

compliance requirements, suggested

audit procedures, and audit reporting

requirements. The auditor should

contact the Office of Inspector General

of the Federal agency to determine

whether such a guide is available. When

a current program-specific audit guide is

available, the auditor shall follow

GAGAS and the guide when performing

a program-specific audit.

(b) Program-specific audit guide not

available. (1) When a program-specific

audit guide is not available, the auditee

and auditor shall have basically the

same responsibilities for the Federal

program as they would have for an audit

of a major program in a single audit.

(2) The auditee shall prepare the

financial statement(s) for the Federal

program that includes, at a minimum, a

schedule of the Federal program’s

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

§ lll.315(b), and a corrective action

plan consistent with the requirements of

§ lll.315(c).

(3) The auditor shall:

(i) Perform an audit of the financial

statement(s) for the Federal program in

accordance with GAGAS;

(ii) Obtain an understanding of

internal control and perform tests of

internal control over the Federal

program consistent with the

requirements of §lll.500(c) for a

major program;

(iii) Perform procedures to determine

whether the auditee has complied with

laws, regulations, and the provisions of

contracts or grant agreements that could

have a direct and material effect on the

Federal program consistent with the

requirements of §lll.500(d) for a

major program; and

(iv) Follow up on prior audit findings,

perform procedures to assess the

reasonableness of the summary

schedule of prior audit findings

prepared by the auditee, and report, as

a current year audit finding, when the

auditor concludes that the summary

schedule of prior audit findings

materially misrepresents the status of

any prior audit finding in accordance

with the requirements of

§ lll.500(e).

(4) The auditor’s report(s) may be in

the form of either combined or separate

reports and may be organized differently

from the manner presented in this

section. The auditor’s report(s) shall

state that the audit was conducted in

accordance with this part and include

the following:

(i) An opinion (or disclaimer of

opinion) as to whether the financial

statement(s) of the Federal program is

presented fairly in all material respects

in accordance with the stated

accounting policies;

(ii) A report on internal control

related to the Federal program, which

shall describe the scope of testing of

internal control and the results of the

tests;

(iii) A report on compliance which

includes an opinion (or disclaimer of

opinion) as to whether the auditee

complied with laws, regulations, and

the provisions of contracts or grant

agreements which could have a direct

and material effect on the Federal

program; and

(iv) A schedule of findings and

questioned costs for the Federal

program that is consistent with the

requirements of §lll.505(a)(4) and

includes a summary of the auditor’s

results applicable to the audit of the

Federal program and in a format

consistent with §lll.505(b).

(c) Report submission for programspecific audits. (1) The audit shall be

completed and the reporting required by

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

submitted within nine months after the

end of the audit period, unless a longer

period is agreed to in advance by the

Federal agency that provided the

funding or a different period is specified

in a program-specific audit guide. Also,

this required reporting shall be

submitted within 30 days after the

issuance of the auditor’s report(s) to the

auditee. Unless restricted by law or

regulation, the auditee shall make report

copies available for public inspection.

(2) When a program-specific audit

guide is available, the auditee shall

submit to the central clearinghouse

designated by OMB one copy of the

certification prepared in accordance

with §lll.320(b), as applicable to a

program-specific audit, and the

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

archival copy. Also, the auditee shall

submit to the Federal awarding agency

or pass-through entity the reporting

required by the program-specific audit

guide.

(3) When a program-specific audit

guide is not available, the reporting

package for a program-specific audit

shall consist of the certification

prepared in accordance with

§ lll.320(b), as applicable to a

program-specific audit, the financial

statement(s) of the Federal program, a

summary schedule of prior audit

findings, and a corrective action plan as

described in paragraph (b)(2) of this

section, and the auditor’s report(s)

described in paragraph (b)(4) of this

section. One copy of this reporting

package shall be submitted to the

central clearinghouse designated by

OMB to be retained as an archival copy.

Also, when the schedule of findings and

questioned costs disclosed audit

findings or the summary schedule of

prior audit findings reported the status

of any audit findings, the auditee shall

submit one copy of the reporting

package to the central clearinghouse on

behalf of the Federal awarding agency,

or directly to the pass-through entity in

the case of a subrecipient.

(d) Other sections of this part may

apply. Program-specific audits are

subject to §lll.100 through

§ lll.215(b), §lll.220 through

§ lll.230, §lll.300 through

§ lll.305, §lll.315,

§ lll.320(f) through §lll.320(j),

§ lll.400 through §lll.405,

§ lll.510 through §lll.515, and

other referenced provisions of this part

unless contrary to the provisions of this

section, a program-specific audit guide,

or program laws and regulations.

Subpart C—Auditees

§lll.300 Auditee responsibilities.

The auditee shall:

(a) Identify, in its accounts, all

Federal awards received and expended

and the Federal programs under which

they were received. Federal program

and award identification shall include,

as applicable, the CFDA title and

number, award number and year, name

of the Federal agency, and name of the

pass-through entity.

(b) Maintain internal control over

Federal programs that provides

reasonable assurance that the auditee is

managing Federal awards in compliance

with laws, regulations, and the

provisions of contracts or grant

agreements that could have a material

effect on each of its Federal programs.

(c) Comply with laws, regulations,

and the provisions of contracts or grant

agreements related to each of its Federal

programs.

(d) Prepare appropriate financial

statements, including the schedule of

expenditures of Federal awards in

accordance with §lll.310.
19144 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

(e) Ensure that the audits required by

this part are properly performed and

submitted when due. When extensions

to the report submission due date

required by §lll.320(a) are granted

by the cognizant or oversight agency for

audit, promptly notify the central

clearinghouse designated by OMB and

each pass-through entity providing

Federal awards of the extension.

(f) Follow up and take corrective

action on audit findings, including

preparation of a summary schedule of

prior audit findings and a corrective

action plan in accordance with

§ lll.315(b) and §lll.315(c),

respectively.

§lll.305 Auditor selection.

(a) Auditor procurement. 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 NonProfit Organizations,’’ or the Federal

Acquisition Regulation (48 CFR part 42),

as applicable. (Circular available from

Office of Administration, Publications

Office, room 2200, New Executive

Office Building, Washington, DC 20503;

telephone (202) 395–7332.) Whenever

possible, auditees shall make positive

efforts to utilize small businesses,

minority-owned firms, and women’s

business enterprises, in procuring audit

services as stated in OMB Circular A–

110 or the Federal Acquisition

Regulation (48 CFR part 42), as

applicable. In requesting proposals for

audit services, the objectives and scope

of the audit should be made clear.

Factors to be considered in evaluating

each proposal for audit services include

the responsiveness to the request for

proposal, relevant experience,

availability of staff with professional

qualifications and technical abilities,

the results of external quality control

reviews, and price.

(b) Restriction on auditor preparing

indirect cost proposals. An auditor who

prepares the indirect cost proposal or

cost allocation plan may not also be

selected to perform the audit required

by this part when the indirect costs

recovered by the auditee during the

prior year exceeded $1 million. This

restriction applies to the base year used

in the preparation of the indirect cost

proposal or cost allocation plan and any

subsequent years in which the resulting

indirect cost agreement or cost

allocation plan is used to recover costs.

To minimize any disruption in existing

contracts for audit services, this

paragraph applies to audits of fiscal

years ending on or after June 30, 1999.

(c) Use of Federal auditors. Federal

auditors may perform all or part of the

work required under this part if they

comply fully with the requirements of

this part.

§lll.310 Financial statements.

(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

same organizational unit and fiscal year

that is chosen to meet the requirements

of this part.

(b) Schedule of expenditures of

Federal awards. The auditee shall also

prepare a schedule of expenditures of

Federal awards for the period covered

by the auditee’s financial statements.

While not required, it is appropriate for

the auditee to provide information

requested to make the schedule easier to

use by Federal awarding agencies and

pass-through entities. For example,

when a Federal program has multiple

award years, the auditee may list the

amount of each award year separately.

At a minimum, the schedule shall:

(1) List individual Federal programs

by Federal agency and major

subdivision within a Federal agency.

For Federal awards received as a

subrecipient, the name of the passthrough entity and identifying number

assigned by the pass-through entity

shall be included.

(2) Provide total expenditures for each

individual Federal program and the

CFDA number or other identifying

number when the CFDA information is

not available.

(3) Identify major programs.

(4) Include notes that describe the

significant accounting policies used in

preparing the schedule and identify in

the notes the dollar threshold used to

distinguish between Type A and Type B

programs, as described in

§ lll.520(b).

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

schedule the total amount provided to

subrecipients from each Type A

program and from each Type B program

which is audited as a major program.

(6) List individual Federal awards

within a category of Federal awards.

However, when it is not practical to list

each individual Federal 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.

(7) Include, in either the schedule or

a note to the schedule, the value of noncash assistance expended, insurance in

effect during the year, and loans or loan

guarantees outstanding at year end.

§lll.315 Audit findings follow-up.

(a) General. The auditee is responsible

for follow-up and corrective action on

all audit findings. As part of this

responsibility, the auditee shall prepare

a summary schedule of prior audit

findings. The auditee shall also prepare

a corrective action plan for current year

audit findings. The summary schedule

of prior audit findings and the

corrective action plan shall include the

reference numbers the auditor assigns to

audit findings under §lll.510(c).

Since the summary schedule may

include audit findings from multiple

years, it shall include the fiscal year in

which the finding initially occurred.

(b) Summary schedule of prior audit

findings. The summary schedule of

prior audit findings shall report the

status of all audit findings included in

the prior audit’s schedule of findings

and questioned costs. The summary

schedule shall also include audit

findings reported in the prior audit’s

summary schedule of prior audit

findings except audit findings listed as

corrected in accordance with paragraph

(b)(1), or no longer valid or not

warranting further action in accordance

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

(1) When audit findings were fully

corrected, the summary schedule need

only list the audit findings and state that

corrective action was taken.

(2) When audit findings were not

corrected or were only partially

corrected, the summary schedule shall

describe the planned corrective action

as well as any partial corrective action

taken.

(3) When corrective action taken is

significantly different from corrective

action previously reported in a

corrective action plan or in the Federal

agency’s or pass-through entity’s

management decision, the summary

schedule shall provide an explanation.

(4) When the auditee believes the

audit findings are no longer valid or do

not warrant further action, the reasons

for this position shall be described in

the summary schedule. A valid reason

for considering an audit finding as not

warranting further action is that all of

the following have occurred:

(i) Two years have passed since the

audit report in which the finding

occurred was submitted to the central

clearinghouse;

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

up with the auditee on the audit

finding; and
Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices 19145

(iii) A management decision was not

issued.

(c) Corrective action plan. At the

completion of the audit, the auditee

shall prepare a corrective action plan to

address each audit finding included in

the current year auditor’s reports. The

corrective action plan shall provide the

name(s) of the contact person(s)

responsible for corrective action, the

corrective action planned, and the

anticipated completion date. If the

auditee does not agree with the audit

findings or believes corrective action is

not required, then the corrective action

plan shall include an explanation and

specific reasons.

§lll.320 Report submission.

(a) General. The audit shall be

completed and the reporting package

described in paragraph (c) of this

section submitted 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 for

audit. Also, the reporting package shall

be submitted within 30 days after

issuance of the auditor’s report(s) to the

auditee. 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 part and

provides information about the auditee,

its Federal programs, and the results of

the audit. The form shall be approved

by OMB, available from the central

clearinghouse designated by OMB,

include data elements similar to those

presented in this paragraph, and use a

machine-readable format. The auditee’s

chief executive officer or chief financial

officer shall sign a statement that the

information on the form is accurate and

complete as follows:

Certificate of Audit

This is to certify that, to the best of my

knowledge and belief, the [specify name of

the auditee] 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 to Certificate

Information Accompanying Certificate of

Audit

1. The type of report the auditor issued on

the financial statements of the auditee (i.e.,

unqualified opinion, qualified opinion,

adverse opinion, or disclaimer of opinion).

2. A yes or no statement as to whether the

auditor’s report on the financial statements

indicated that the auditor has substantial

doubt about the auditee’s ability to continue

as a going concern.

3. The type of report the auditor issued on

compliance for major programs (i.e.,

unqualified opinion, qualified opinion,

adverse opinion, or disclaimer of opinion).

4. A list of the Federal awarding agencies

and pass-through entities which will receive

a copy of the reporting package pursuant to

§lll.320(d)(2) and §lll.320(e)(2) of

OMB Circular A–133. An explanation should

be provided if this list is different from the

communication the auditor provides to the

auditee under §lll.500(f) of OMB

Circular A–133.

5. A yes or no statement as to whether the

auditee qualified as a low-risk auditee under

§lll.530 of OMB Circular A–133.

6. The dollar threshold used to distinguish

between Type A and Type B programs as

defined in §lll.520(b) of OMB Circular

A–133.

7. The Catalog of Federal Domestic

Assistance (CFDA) number for each Federal

program, as applicable.

8. The name of each Federal program and

identification of each major program.

Individual awards within a category of

awards should be listed in the same level of

detail as they are listed in the schedule of

expenditures of Federal awards.

9. The amount of expenditures in the

schedule of expenditures of Federal awards

associated with each Federal program.

10. A yes or no statement as to whether

there are audit findings and the amount of

any questioned costs related to the following

for each Federal program:

a. Types of services allowed or unallowed.

b. Eligibility.

c. Matching, maintenance of level of effort,

or earmarking.

d. Federal financial reporting.

e. Program income.

f. Procurement.

g. Subrecipient monitoring.

h. Allowable costs/cost principles.

i. Other.

11. Auditee Name:

lllllllllllllllllllll

Employer Identification Number:

lllllllllllllllllllll

Name and Title of Responsible Official:

lllllllllllllllllllll

Telephone Number:

lllllllllllllllllllll

Signature:

lllllllllllllllllllll

Date:

lllllllllllllllllllll

12. Auditor Name:

lllllllllllllllllllll

Name and Title of Contact Person:

lllllllllllllllllllll

Auditor Address:

lllllllllllllllllllll

Auditor Telephone Number:

lllllllllllllllllllll

(c) Reporting Package. The reporting

package shall include the:

(1) Certification discussed in

paragraph (b) of this section;

(2) Financial statements and schedule

of expenditures of Federal awards

discussed in §lll.310(a) and

§ lll.310(b), respectively;

(3) Summary schedule of prior audit

findings discussed in §lll.315(b);

(4) Auditor’s report(s) discussed in

§ lll.505; and

(5) Corrective action plan discussed in

§ lll.315(c).

(d) Submission to clearinghouse. All

auditees shall submit to the central

clearinghouse designated by OMB one

copy of the reporting package described

in paragraph (c) of this section for:

(1) The central clearinghouse to retain

as an archival copy; and

(2) Each Federal awarding agency

when the schedule of findings and

questioned costs disclosed audit

findings relating to Federal awards that

the Federal awarding agency provided

directly or the summary schedule of

prior audit findings reported the status

of any audit findings relating to Federal

awards that the Federal awarding

agency provided directly.

(e) Additional submission by

subrecipients. In addition to the

requirements discussed in paragraph (d)

of this section, subrecipients shall

submit to each pass-through entity one

copy of the:

(1) Certification discussed in

paragraph (b) of this section; and

(2) Reporting package described in

paragraph (c) of this section for each

pass-through entity when the schedule

of findings and questioned costs

disclosed audit findings relating to

Federal awards that the pass-through

entity provided or the summary

schedule of prior audit findings

reported the status of any audit findings

relating to Federal awards that the

passthrough entity provided.

(f) Requests for report copies. In

response to requests by a Federal agency

or pass-through entity, auditees shall

submit the appropriate copies of the

reporting package described in

paragraph (c) of this section and, if

requested, a copy of any management

letters issued by the auditor.

(g) Report retention requirements.

Auditees shall keep one copy of the

reporting package described in

paragraph (c) of this section on file for

three years from the date of submission

to the central clearinghouse designated

by OMB. Pass-through 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

packages received in accordance with
19146 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

paragraph (d)(2) of this section and

§ lll.235(c)(3) to applicable Federal

awarding agencies, maintain a data base

of completed audits, provide

appropriate information to Federal

agencies, and follow up with known

auditees which have not submitted the

required 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.

(j) Electronic filing. Nothing in this

part 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.

Subpart D—Federal Agencies and

Pass-Through Entities

§lll.400 Responsibilities.

(a) Cognizant agency for audit

responsibilities. Recipients expending

more than $25 million a year in Federal

awards shall have a cognizant agency

for audit. The designated cognizant

agency for audit shall be the Federal

awarding agency that provides the

predominant amount of direct funding

to a recipient unless OMB makes a

specific cognizant agency for audit

assignment 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 expended in

the recipient’s fiscal years ending in

1995, 2000, 2005, and every fifth year

thereafter. For example, audit

cognizance for periods ending in 1996

through 2000 will be determined based

on Federal awards expended in 1995. A

Federal awarding agency with

cognizance for an auditee may reassign

cognizance to another Federal awarding

agency which provides substantial

direct funding and agrees to be the

cognizant agency for audit. Within 30

days after any reassignment, both the

old and the new cognizant agency for

audit shall notify the auditee, and, if

known, the auditor of the reassignment.

The cognizant agency for audit shall:

(1) Provide technical audit advice and

liaison to auditees and auditors.

(2) Consider auditee requests for

extensions to the report submission due

date required by §lll.320(a). The

cognizant agency for audit may grant

extensions for good cause.

(3) Obtain or conduct quality control

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

results, when appropriate, to other

interested organizations.

(4) Promptly inform other affected

Federal agencies and appropriate

Federal law enforcement officials of any

direct reporting by the auditee or its

auditor of irregularities or illegal acts, as

required by GAGAS or laws and

regulations, when such reporting is not

included in the reporting package

described in §lll.320(c).

(5) Advise the auditor and, where

appropriate, the auditee of any

deficiencies found in the audits when

the deficiencies require corrective

action by the auditor. When advised of

deficiencies, the auditee shall work with

the auditor to take corrective action. If

corrective action is not taken, the

cognizant agency for audit shall notify

the auditor, the auditee, and applicable

Federal awarding agencies and passthrough entities of the facts and make

recommendations for follow-up action.

Major inadequacies or repetitive

substandard performance by auditors

shall be referred to appropriate State

licensing agencies and professional

bodies for disciplinary action.

(6) Coordinate, to the extent practical,

audits or reviews made by or for Federal

agencies that are in addition to the

audits made pursuant to this part, so

that the additional audits or reviews

build upon audits performed in

accordance with this part.

(7) Coordinate a management decision

for audit findings that affect the Federal

programs of more than one agency.

(8) Coordinate the audit work and

reporting responsibilities among

auditors to achieve the most

costeffective audit.

(b) Oversight agency for audit

responsibilities. An auditee which does

not have a designated cognizant agency

for audit will be under the general

oversight of the Federal agency

determined in accordance with

§ lll.105 (Oversight agency for

audit). The oversight agency for audit:

(1) Shall provide technical advice to

auditees and auditors as requested.

(2) May assume all or some of the

responsibilities normally performed by

a cognizant agency for audit.

(c) Federal awarding agency

responsibilities. The Federal awarding

agency shall perform the following for

the Federal awards it makes:

(1) Identify Federal awards made by

informing each recipient of the CFDA

title and number, award name and

number, award year, and if the award is

for R&D. When some of this information

is not available, the Federal agency shall

provide information necessary to clearly

describe the Federal award.

(2) Ensure that audits are completed

and reports are received in a timely

manner and in accordance with the

requirements of this part.

(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-through entity

responsibilities. A non-profit passthrough entity shall perform the

following for the Federal awards it

makes:

(1) Identify Federal awards made by

informing each subrecipient of CFDA

title and number, award name and

number, award year, if the award is

R&D, and name of Federal agency.

When some of this information is not

available, the pass-through entity shall

provide the best information available to

describe the Federal award.

(2) Advise subrecipients of

requirements imposed on them by

Federal laws, regulations, and the

provisions of contracts or grant

agreements as well as any supplemental

requirements imposed by the passthrough entity.

(3) Monitor the activities of

subrecipients as necessary to ensure that

Federal awards are used for authorized

purposes in compliance with laws,

regulations, and the provisions of

contracts or grant agreements and that

performance goals are achieved.

(4) Ensure that non-profit

subrecipients expending $300,000 or

more in Federal awards during the

subrecipient’s fiscal year have met the

audit requirements of this part for that

fiscal year, and that subrecipients

subject to Circular A–128 have met the

requirements of Circular A–128.

(5) Issue a management decision on

audit findings within six months after

receipt of the subrecipient’s audit report

and ensure that the subrecipient takes

appropriate and timely corrective

action.

(6) Consider whether subrecipient

audits necessitate adjustment of the

pass-through entity’s own records.

(7) Require each subrecipient to

permit the pass-through entity and

auditors to have access to the records

and financial statements as necessary

for the pass-through entity to comply

with this part.
Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices 19147

§lll.405 Management decision.

(a) General. The management decision

shall clearly state whether or not the

audit finding is sustained, the reasons

for the decision, and the expected

auditee action to repay disallowed costs,

make financial adjustments, or take

other action. If the auditee has not

completed corrective action, a timetable

for follow-up should be given. Prior to

issuing the management decision, the

Federal agency or pass-through entity

may request additional information or

documentation from the auditee,

including a request 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

§ lll.400(a)(7), the cognizant agency

for audit shall be responsible for

coordinating a management decision for

audit findings that affect the programs

of more than one Federal agency. As

provided in §lll.400(c)(4), a Federal

awarding agency is responsible for

issuing a management decision for

findings that relate to Federal awards it

makes to recipients. Alternate

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

Federal agencies concerned.

(c) Pass-through entity. As provided

in §lll.400(d)(5), the pass-through

entity shall be responsible for making

the management decision for audit

findings that relate to Federal awards it

makes to subrecipients.

(d) Time requirements. The entity

responsible for making the management

decision shall do so within six months

of receipt of the audit report. Corrective

action should be initiated within six

months and proceed as rapidly as

possible.

(e) Reference numbers. Management

decisions shall include the reference

numbers the auditor assigned to each

audit finding in accordance with

§ lll.510(c).

Subpart E—Auditors

§lll.500 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 are presented

fairly in all material respects in

conformity with generally accepted

accounting principles. The auditor shall

also determine whether the schedule of

expenditures of Federal awards is

presented fairly in all material respects

in relation to the auditee’s financial

statements taken as a whole.

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

the requirements of GAGAS, the auditor

shall perform procedures to obtain an

understanding of internal control over

Federal programs sufficient to plan the

audit to achieve a low assessed level of

control risk for major programs.

(2) Except as provided in paragraph

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

(i) Plan the testing of internal control

over major programs to achieve a low

assessed level of control risk for the

assertions relevant to the compliance

requirements for each major program;

and

(ii) Perform testing of internal control

over major programs as planned in

paragraph (c)(2)(i) of this section.

(3) When internal control over some

or all of the compliance requirements

for a major program are likely to be

ineffective in preventing or detecting

noncompliance, the planning and

performing of testing described in

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

required for those compliance

requirements. However, the auditor

shall report a reportable condition or a

material weakness in accordance with

§ lll.510, assess the related control

risk at the maximum, and consider

whether additional compliance tests are

required because of ineffective internal

control over the major program.

(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 part. 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 supplements, the auditor

should use the types of compliance

requirements (e.g., cash management,

Federal financial reporting, allowable

costs/cost principles, types of services

allowed or unallowed, eligibility, and

matching) contained in the compliance

supplements as guidance for identifying

the types of compliance requirements to

test, and determine the requirements

governing the Federal program by

reviewing the provisions of contracts

and grant agreements and the laws and

regulations referred to in such contracts

and grant agreements. The auditor

should consult with the applicable

Federal agency to determine the

availability of agency-prepared

supplements or audit guides.

(e) Audit follow-up. The auditor shall

follow-up on prior audit findings,

perform procedures to assess the

reasonableness of the summary

schedule of prior audit findings

prepared by the auditee in accordance

with §lll.315(b), and report, as a

current year audit finding, when the

auditor concludes that the summary

schedule of prior audit findings

materially misrepresents the status of

any prior audit finding. The auditor

shall perform audit follow-up

procedures regardless of whether a prior

audit finding relates to a major program

in the current year.

(f) Communication. The auditor shall

communicate, preferably in writing, to

the auditee which Federal awarding

agencies and pass-through entities are

required to receive a copy of the

reporting package pursuant to

§ lll.320(d)(2) and

§ lll.320(e)(2), respectively. The

auditor shall retain a record of this

communication in the auditor’s working

papers.

§lll.505 Audit reporting.

(a) Auditor’s reports. The auditor’s

report(s) may be in the form of either

combined or separate reports and may

be organized differently from the

manner presented in this section. The

auditor’s report(s) shall state that the

audit was conducted in accordance with

this part and include the following:

(1) An opinion (or disclaimer of

opinion) as to whether the financial

statements are presented fairly in all

material respects in conformity with

generally accepted accounting

principles and an opinion (or disclaimer

of opinion) as to whether the schedule

of expenditures of Federal awards is

presented fairly in all material respects

in relation to the financial statements

taken as a whole.

(2) A report on internal control related

to the financial statements and major

programs. This report shall describe the

scope of testing of internal control and

the results of the tests, and, where

applicable, refer to the separate
19148 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

schedule of findings and questioned

costs described in paragraph (a)(4) of

this section.

(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. This report shall also

include an opinion (or disclaimer of

opinion) as to whether the auditee

complied with laws, regulations, and

the provisions of contracts or grant

agreements which could have a direct

and material effect on each major

program, and, where applicable, refer to

the separate schedule of findings and

questioned costs described in paragraph

(a)(4) of this section.

(4) A schedule of findings and

questioned costs which includes a

summary of the auditor’s results as

described in paragraph (b) of this

section and all audit findings as defined

in §lll.510(a). Any findings (e.g.,

internal control findings, compliance

findings, questioned costs, or fraud)

which relate to the same issue should be

presented as a single finding. Where

practical, audit findings should be

organized by Federal agency or passthrough entity.

(b) Summary of the auditor’s results.

The summary of the auditor’s results

shall include:

(1) The type of report the auditor

issued on the financial statements of the

auditee (i.e., unqualified opinion,

qualified opinion, adverse opinion, or

disclaimer of opinion);

(2) Where applicable, a statement that

the auditor’s report on the financial

statements indicated that the auditor

has substantial doubt about the

auditee’s ability to continue as a going

concern;

(3) The type of report the auditor

issued on compliance for major

programs (i.e., unqualified opinion,

qualified opinion, adverse opinion, or

disclaimer of opinion);

(4) Where applicable, a statement that

reportable conditions in internal control

over major programs were disclosed by

the audit and whether any such

conditions were material weaknesses, as

described in §lll.510(a)(1);

(5) A statement as to whether the

audit disclosed any material

noncompliance in major programs, as

described in §lll.510(a)(2);

(6) A statement as to whether the

audit disclosed any questioned costs, as

described in §lll.510(a)(3);

(7) Where applicable, a statement that

the schedule of findings and questioned

costs contains instances of known fraud,

as described in §lll.510(a)(5); and

(8) Where applicable, a statement that

the audit follow-up procedures

disclosed that the summary schedule of

prior audit findings materially

misrepresents the status of any prior

audit finding, as described in

§ lll.510(a)(6).

§lll.510 Audit findings.

(a) Audit findings reported. The

auditor shall report the following as

audit findings in a schedule of findings

and questioned costs:

(1) Reportable conditions in internal

control over major programs. The

auditor’s determination of whether to

report a deficiency in internal control as

a reportable condition is in relation to

a type of compliance requirement for a

major program or an audit objective

identified in the compliance

supplements. The auditor shall identify

reportable conditions which are

individually or cumulatively material

weaknesses.

(2) Material noncompliance with the

provisions of laws, regulations,

contracts, or grant agreements which the

auditor concludes, based on evidence

obtained, has occurred or is likely to

have occurred. The auditor’s

determination of whether a

noncompliance with the provisions of

laws, regulations, contracts, or grant

agreements is material for the purpose

of reporting an audit finding is in

relation to a type of compliance

requirement for a major program or an

audit objective identified in the

compliance supplements.

(3) Known questioned costs which are

greater than $10,000 for a type of

compliance requirement for a major

program. Known questioned costs are

those specifically identified by the

auditor. In evaluating the effect of

questioned costs on the opinion on

compliance 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 a type of compliance

requirement for a major program. In

reporting questioned costs, the auditor

shall include information to provide

proper perspective for judging the

prevalence and consequences of the

questioned costs.

(4) The circumstances concerning

why the auditor’s report on compliance

for major programs is other than an

unqualified opinion, unless such

circumstances are otherwise reported as

audit findings in the schedule of

findings and questioned costs.

(5) Known fraud affecting a Federal

award, unless such fraud is otherwise

reported as an audit finding in the

schedule of findings and questioned

costs. 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 that the

fraud was reported outside of the

auditor’s reports under the direct

reporting requirements of GAGAS.

(6) Instances where the results of

audit follow-up procedures disclosed

that the summary schedule of prior

audit findings prepared by the auditee

in accordance with §lll.315(b)

materially misrepresents the status of

any prior audit finding.

(b) Audit finding detail. Audit

findings shall be presented in sufficient

detail for the auditee to prepare a

corrective action plan and take

corrective action and for Federal

agencies and pass-through entities to

arrive at a management decision. The

following specific information shall be

included, as applicable, in audit

findings:

(1) Federal program and specific

Federal award identification including

the CFDA title and number, Federal

award number and year, name of

Federal agency, and name of the

applicable pass-through entity. When

information, such as the CFDA title and

number or Federal award number, is not

available, the auditor shall provide the

best information available to describe

the Federal award.

(2) The criteria or specific

requirement upon which the audit

finding is based, including statutory,

regulatory, or other citation.

(3) The condition found, including

facts that support the deficiency

identified in the audit finding.

(4) Identification of questioned costs

and how they were computed.

(5) Information to provide proper

perspective for judging the prevalence

and consequences of the audit findings,

such as whether the audit findings

represent an isolated instance or a

systemic problem. Where appropriate,

instances identified shall be related to

the universe and the number of cases

examined and be quantified in terms of

dollar value.

(6) The possible asserted effect to

provide sufficient information to the

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

subrecipient, to permit them to

determine the cause and effect to

facilitate prompt and proper corrective

action.
Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices 19149

(7) Recommendations to prevent

future occurrences of the deficiency

identified in the audit finding.

(8) Views of responsible officials of

the auditee when there is disagreement

with the audit findings, to the extent

practical.

(c) Reference numbers. Each audit

finding in the schedule of findings and

questioned costs shall include a

reference number to allow for easy

referencing of the audit findings during

follow-up.

§lll.515 Audit working papers.

(a) Retention of working papers. The

auditor shall retain working papers and

reports for a minimum of three years

after the date of issuance of the auditor’s

report(s) to the auditee, unless the

auditor is notified in writing by the

cognizant agency for audit, oversight

agency for audit, or pass-through entity

to extend the retention period. When

the auditor is aware that the Federal

awarding agency, pass-through entity, or

auditee is contesting an audit finding,

the auditor shall contact the parties

contesting the audit finding for

guidance prior to destruction of the

working papers and reports.

(b) Access to working papers. Audit

working papers shall be made available

upon request to the cognizant or

oversight agency for audit or its

designee, a Federal agency providing

direct or indirect funding, or GAO at the

completion of the audit. Access to

working papers includes the right of

Federal agencies to obtain copies of

working papers, as is reasonable and

necessary.

§lll.520 Major program determination.

(a) General. The auditor shall use a

risk-based approach to determine which

Federal programs are major programs.

This risk-based approach shall include

consideration of: Current and prior

audit experience, oversight by Federal

agencies and passthrough entities, and

the inherent risk of the Federal program.

The process in paragraphs (b) through

(i) of this section shall be followed.

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

identify the larger Federal programs,

which shall be labeled Type A

programs. Type A programs are defined

as Federal programs with Federal

expenditures during the audit period

exceeding the larger of:

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

total Federal expenditures in the case of

an auditee for which total Federal

expenditures equal or exceed $300,000

but are less than or equal to $100

million.

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

percent (.003) of total Federal

expenditures in the case of an auditee

for which total Federal expenditures

exceed $100 million but are less than or

equal to $10 billion.

(iii) $30 million or 15 hundredths of

one percent (.0015) of total Federal

expenditures in the case of an auditee

for which total Federal expenditures

exceed $10 billion.

(2) Federal programs not labeled Type

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

shall be labeled Type B programs.

(3) The inclusion of large insurance

programs or loan and loan guarantees

(loans) should not result in the

exclusion of other programs as Type A

programs. When a Federal program

providing 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.

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

identify Type A programs which are

low-risk. For a Type A program to be

considered low-risk, it shall have been

audited as a major program in at least

one of the two most recent audit

periods, and, in the most recent audit

period, it shall have had no audit

findings under §lll.510(a).

However, the auditor may use judgment

and consider that audit findings from

questioned costs under

§ lll.510(a)(3), fraud under

§ lll.510(a)(5), and audit follow-up

for the summary schedule of prior audit

findings under §lll.510(a)(6) do not

preclude the Type A program from

being lowrisk. The auditor shall

consider: the criteria in §lll.525(c),

§ lll.525(d)(1), §lll.525(d)(2),

and §lll.525(d)(3); the results of

audit follow-up; whether any changes in

personnel or systems affecting a Type A

program have significantly increased

risk; and apply professional judgment in

determining whether a Type A program

is low-risk.

(2) Notwithstanding paragraph (c)(1)

of this section, OMB may approve a

Federal awarding agency’s request that

a Type A program at certain recipients

may not be considered low-risk. For

example, it may be necessary for a large

Type A program to be audited as major

each year at particular recipients to

allow the Federal agency to comply

with the Government Management

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

The Federal agency shall notify the

recipient and, if known, the auditor at

least 120 days prior to the end of the

fiscal year to be audited of OMB’s

approval.

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

identify Type B programs which are

high-risk using professional judgment

and the criteria in §lll.525. Except

for known reportable conditions in

internal control or compliance problems

as discussed in §lll.525(b)(1),

§ lll.525(b)(2), and

§ lll.525(c)(1), a single criteria in

§ lll.525 would seldom cause a

Type B program to be considered highrisk.

(2) An audit under this part is not

expected to test relatively small Federal

programs. Therefore, except to meet the

50 percent rule discussed in paragraph

(f) of this section, the auditor is only

required to perform risk assessments on

Type B programs that exceed the larger

of:

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

percent (.003) of total Federal

expenditures when the auditee has less

than or equal to $100 million in total

Federal expenditures.

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

one percent (.0003) of total Federal

expenditures when the auditee has more

than $100 million in total Federal

expenditures.

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

shall audit all of the following as major

programs:

(1) All Type A programs, except the

auditor may exclude any Type A

programs identified as low-risk under

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

(2) At least one half of the Type B

programs identified as high-risk under

Step 3 (paragraph (d) of this section),

except this paragraph (e)(2) does not

require the auditor to audit more highrisk Type B programs than the number

of low-risk Type A programs identified

as low-risk under Step 2; and

(3) Such additional programs as may

be necessary to comply with the 50

percent rule discussed in paragraph (f)

of this section. This paragraph (e)(3)

may require the auditor to audit more

programs as major than the number of

Type A programs.

(f) 50 percent rule. The auditor shall

audit as major programs Federal

programs with expenditures that, in the

aggregate, encompass at least 50 percent

of total Federal expenditures. If the

auditee meets the criteria in

§ lll.530 for a low-risk auditee, the

auditor need only audit as major

programs Federal programs with

expenditures that, in the aggregate,

encompass at least 25 percent of total

Federal expenditures.

(g) Documentation of risk. The auditor

shall document in the working papers

the risk analysis process used in

determining major programs.

(h) Auditor’s judgment. When the

major program determination was

performed and documented in

accordance with this part, the auditor’s
19150 Federal Register / Vol. 61, No. 84 / Tuesday, April 30, 1996 / Notices

judgment in applying the risk-based

approach to determine major programs

shall be presumed correct. Challenges

by Federal agencies and pass-through

entities shall only be for clearly

improper use of the guidance in this

part. However, Federal agencies and

pass-through entities may provide

auditors guidance about the risk of a

particular Federal program and the

auditor shall consider this guidance in

determining major programs in audits

not yet completed.

(i) Deviation from use of risk criteria.

For first-year audits, the auditor may

elect to determine major programs as all

Type A programs plus any Type B

programs as necessary to meet the 50

percent rule discussed in paragraph (f)

of this section. Under this option, the

auditor would not be required to

perform the procedures discussed in

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

section.

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

the entity is audited under this part or

the first year of a change of auditors.

(2) To ensure that a frequent change

of auditors would not preclude audit of

high risk Type B programs, this election

for first-year audits may not be used by

an auditee more than once in every

three years.

§lll.525 Criteria for Federal program

risk.

(a) General. The auditor’s

determination should be based on an

overall evaluation of the risk of

noncompliance occurring which could

be material to the Federal program. The

auditor shall use auditor judgment and

consider criteria, such as described in

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

section, to identify risk in Federal

programs. Also, as part of the risk

analysis, the auditor may wish to

discuss a particular Federal program

with auditee management and the

Federal agency or passthrough entity.

(b) Current and prior audit

experience. (1) Weaknesses in internal

control over Federal programs would

indicate higher risk. Consideration

should be given to the control

environment over Federal programs and

such factors as the expectation of

management’s adherence to applicable

laws and regulations and the provisions

of contracts and grant agreements and

the competence and experience of

personnel who administer the Federal

programs.

(i) A Federal program administered

under multiple internal control

structures may have higher risk. When

assessing risk in a large single audit, the

auditor shall consider whether

weaknesses are isolated in a single

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

or pervasive throughout the entity.

(ii) When significant parts of a Federal

program are passed through to

subrecipients, a weak system for

monitoring subrecipients would

indicate higher risk.

(iii) The extent to which computer

processing is used to administer Federal

programs, as well as the complexity of

that processing, should be considered

by the auditor in assessing risk. New

and recently modified computer

systems may also indicate risk.

(2) Prior audit findings would

indicate higher risk, particularly when

the situations identified in the audit

findings could have a significant impact

on a Federal program or have not been

corrected.

(3) Federal programs not recently

audited as major programs may be of

higher risk than Federal programs

recently audited as major programs

without audit findings.

(c) Oversight exercised by Federal

agencies and pass-through entities. (1)

Oversight exercised by Federal agencies

or pass-through entities could indicate

risk. For example, recent monitoring or

other reviews performed by an oversight

entity which disclosed no significant

problems would indicate lower risk.

However, monitoring which disclosed

significant problems would indicate

higher risk.

(2) Federal agencies, with the

concurrence of OMB, may identify

Federal programs which are higher risk.

OMB plans to provide this identification

in the compliance supplements.

(d) Inherent risk of the Federal

program. (1) The nature of a Federal

program may indicate risk.

Consideration should be given to the

complexity of the program and the

extent to which the Federal program

contracts for goods and services. For

example, Federal programs that disburse

funds through third party contracts or

have eligibility criteria may be of higher

risk. Federal programs primarily

involving staff payroll costs may have a

high-risk for time and effort reporting,

but otherwise be at low-risk.

(2) The phase of a Federal program in

its life cycle at the Federal agency may

indicate risk. For example, a new

Federal program with new or interim

regulations may have higher risk than

an established program with time-tested

regulations. Also, significant changes in

Federal programs, laws, regulations, or

the provisions of contracts or grant

agreements may increase risk.

(3) The phase of a Federal program in

its life cycle at the auditee may indicate

risk. For example, during the first and

last years that an auditee participates in

a Federal program, the risk may be

higher due to start-up or closeout of

program activities and staff.

(4) Type B programs with larger

expenditures would be of higher risk

than programs with substantially

smaller expenditures.

§lll.530 Criteria for a low-risk auditee.

An auditee which meets all of the

following conditions for each of the

preceding two years shall qualify as a

low-risk auditee and be eligible for

reduced audit coverage in accordance

with §lll.520(f):

(a) The audits were performed in

accordance with the provisions of this

part.

(b) The auditor’s opinions on the

financial statements and the schedule of

expenditures of Federal awards were

unqualified. However, the cognizant or

oversight agency for audit may judge

that an opinion qualification does not

affect the management of Federal

awards and provide a waiver.

(c) There were no deficiencies in

internal control which were identified

as material weaknesses under the

requirements of GAGAS. However, the

cognizant or oversight agency for audit

may judge that the material weaknesses

do not affect the management of Federal

awards and provide a waiver.

(d) None of the Type A programs, as

defined in §lll.520(b), had audit

findings from any of the following:

(1) Internal control deficiencies which

were identified as material weaknesses;

(2) Noncompliance with the

provisions of laws, regulations,

contracts, or grant agreements which

have a material effect on the Type A

program; or

(3) Known or likely questioned costs

that exceed five percent of the total

expenditures for a Type A program

during the year.

[FR Doc. 96–10330 Filed 4–29–96; 8:45 am]

BILLING CODE 3110–01–P