[Federal Register Volume 60, Number 100 (Wednesday, May 24, 1995)]
[Notices]
[Pages 27562-27567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12764]



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LEGAL SERVICES CORPORATION


Audit Guide for LSC Recipients and Auditors

AGENCY: Legal Services Corporation.

ACTION: Proposed guideline.

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SUMMARY: The Legal Services Corporation (LSC or Corporation) hereby 
publishes for comment by interested parties a proposed Audit Guide for 
Legal Services Corporation Recipients and Auditors (Audit Guide). The 
Audit Guide will replace the audit portions of both editions of the 
current Audit and Accounting Guide for Recipients and Auditors (Audit 
and [[Page 27563]] Accounting Guide). The Audit Guide will be 
maintained as a separate document, under the authority of the LSC 
Office of Inspector General. The accounting and financial reporting 
requirements of the Audit and Accounting Guide will remain in effect 
until amended in the future.
    The proposed Audit Guide prescribes the use of Government Auditing 
Standards (GAS or GAGAS), with guidance under Office of Management and 
Budget (OMB) Circular A-133. The Audit Guide establishes a uniform 
standard under which recipient audits will be conducted; it simplifies 
audit requirements by adopting standards that are widely recognized in 
the federal and nonprofit audit communities; it provides for the 
effective implementation of recommendations designed to streamline the 
monitoring of recipients for compliance; and it eliminates the 
obsolescence of LSC audit requirements that date from the 1980's.
    There will be five appendices to the new Audit Guide, which in 
themselves establish no new rules, regulations or guidelines for 
recipients.

DATES: Comments should be received in writing on or before June 23, 
1995. Late comments will be considered to the extent practicable. Where 
possible comments should reference applicable paragraph numbers in the 
proposed revision. To facilitate conversion of the comments in computer 
format for analysis, respondents are asked to send a copy of the 
comments on either a 3.5 or 5.25 inch diskette in ASCII format.

ADDRESSES: Comments should be submitted to the Office of Inspector 
General, Legal Services Corporation, 750 First St., NE., 10th Floor, 
Washington, DC 20002-4250.

FOR FURTHER INFORMATION CONTACT: Karen M. Voellm, Chief of Audits (202) 
336-8830.

SUPPLEMENTARY INFORMATION: The Legal Services Corporation Act, Sec. 
1009(c)(1) requires that the Corporation either directly ``conduct, or 
require each grantee, contractor, or person or entity receiving 
financial assistance'' from the Corporation to provide for an annual 
financial audit. Historically, the Corporation has chosen to require 
recipients to provide the audit pursuant to Corporation audit guidance 
provided in the Audit and Accounting Guide.
    On Tuesday, July 30, 1976, the Legal Services Corporation published 
in the Federal Register its Audit and Accounting Guide for Recipients 
and Auditors (41 FR 29951-29979). Pursuant to section 1008(e) of the 
Legal Services Corporation Act (42 U.S.C. 2996(g)(c)), the Corporation 
thereafter requested (41 FR 32794) and received comments from 
interested persons. The Audit and Accounting Guide became effective on 
October 4, 1976.
    On July 19, 1977, the Corporation published a notice instructing 
recipients to use the revised Audit and Accounting Guide that had been 
distributed in June of 1977. (42 FR 37077). The instruction was 
effective immediately upon publication. There were additional 
unpublished revisions in September 1979 and 1981 and a separate 
Fundamental Criteria of an Accounting and Financial Reporting System; 
each was issued directly to grant recipients.
    On February 20, 1985, the Corporation published a notice of 
availability of a revised Audit and Accounting Guide that had been 
distributed February 11, 1985. (50 FR 7150). The notice established a 
ninety-day period for the submission of comments. On November 29, 1985, 
after adoption by the Corporation's Board of Directors, the final 
publication of the revised Audit and Accounting Guide appeared in the 
Federal Register. (50 FR 49276). This version of the Audit and 
Accounting Guide became effective January 1, 1986. Shortly thereafter, 
however, the Corporation gave recipients the option of using either the 
September 1981 or the January 1986 version of the Audit and Accounting 
Guide. Today, recipients are still permitted to follow either Audit and 
Accounting Guide.
    The proposed Audit Guide makes one major change in current 
standards. All financial statement audits for periods ending on or 
after December 31, 1995, will be conducted pursuant to GAGAS rather 
than just the less comprehensive Generally Accepted Audit Standards 
(GAAS). As a result of the change to GAGAS, much of the detail of the 
audit portions of the current Audit and Accounting Guides is replaced 
by reference to the well-established and documented GAGAS.
    GAGAS requires auditors, in the conduct of an audit of an entity's 
financial statements, to plan and design audit procedures to assess 
compliance with laws and regulations that have a material effect on the 
financial statements, and to assess the related internal controls. 
GAGAS also contains requirements relating to the auditor's professional 
qualifications, the quality of the audit effort, and the contents of 
meaningful audit reports. GAGAS is widely recognized as audit 
requirements that provide audit coverage that is broad enough to help 
fulfill the reasonable needs of potential users of the audit report, 
and is more comprehensive than the current GAAS requirements of the 
Corporation's Audit and Accounting Guides. GAGAS standards are the ones 
that nonprofit organizations receiving federal assistance are required 
to follow pursuant to the requirements of OMB Circular A-133. 
Currently, LSC recipients receiving significant amounts of federal 
funds are already required to arrange for audits conducted under GAGAS, 
and at least 45% of LSC recipient audits for FY1993 were conducted 
under GAGAS.
    For LSC, for its grant recipients and for Congress, a switch to 
GAGAS produces a number of benefits.
    First, as already noted, the most obvious benefit of GAGAS audits 
is that a more thorough examination of the recipient's financial 
activities is made and a more comprehensive report on compliance with 
laws and regulations and on the maintenance of internal controls is 
provided to the Corporation and the public. In addition, auditors 
qualified to perform GAGAS audits are more likely to provide a high 
quality service than auditors not so qualified. As a result, the 
recipients' boards of directors and the Corporation will be provided 
higher quality and more extensive oversight information regarding the 
activities of local recipients and their staffs. For reasons such as 
these, GAGAS are the standards deemed by Congress to provide the 
appropriate level of accountability for audits involving taxpayer 
funds. Adopting GAGAS demonstrates the Corporation's and recipients' 
commitment to ensuring high levels of such accountability.
    Second, a requirement that recipient annual financial statement 
audits be done in accordance with GAGAS simplifies the content of the 
Audit Guide and reduces the resources needed to develop it and keep it 
up-to-date. With audit requirements defined by the American Institute 
of Certified Public Accountants (AICPA) (GAAS) and the Comptroller 
General of the United States (GAGAS), the Corporation needs only to 
identify for the auditor supplemental, Corporation-specific 
requirements imposed by the Corporation's Act, appropriations laws or 
regulations. Along with these savings to the Corporation, recipients 
will also benefit from simplification; the potential for conflicting 
audit requirements among varied grant sources will be reduced.
    Third, with the advent and development of the Corporation's Office 
of Inspector General and its special responsibility for and expertise 
in areas of audit policy, it has become advantageous and prudent to 
separate [[Page 27564]] the audit and accounting guidance into two 
separate Guides and to place authority over the Audit Guide in the OIG. 
Consistent with the Inspector General Act of 1978, as amended, and with 
practice throughout the federal government, the OIG will develop 
Corporation audit policy, establish audit requirements, maintain the 
Audit Guide and its appendices and review recipient audited financial 
statements to assure that they meet the standards of the Audit Guide. 
The Corporation, its recipients and the Congress will all benefit by 
having expert and centralized audit guidance to refer to.
    Fourth, it is arguable that the Corporation is required by the 
Inspector General Act of 1978, as amended, to adopt GAGAS. Under 
Section 4 of that Act, the Inspector General is to provide policy 
direction for Corporation audits and to assure that audits conducted by 
non-Federal auditors complies with standards established by the 
Comptroller General, of which GAGAS is a prime example. Moreover, GAGAS 
are now the standards for audits of substantial amounts of federal 
funds distributed to nonprofit service providers either directly by 
federal agencies, or through state and local government intermediaries. 
The Corporation's special status as a DC private nonprofit corporation 
distributing funds that are federal in origin may not be a sufficient 
practical or legal reason to distinguish Corporation audits from other 
federal audits.
    Fifth, the two current Audit and Accounting Guides have both become 
out of date. Both accounting principles and auditing standards have 
evolved significantly during the past decade. In addition, the 
persistence of two versions of the Audit and Accounting Guide, as the 
result of an unresolved controversy dating to 1986, causes continuing 
confusion regarding applicable standards and inconsistency in financial 
reporting by recipients. A new, single Audit Guide will bring the 
Corporation's audit guidance up to date and eliminate the confusion.
    Sixth, in May of 1994, the OIG published its Audit Report of 
Grantee Monitoring. The audit reviewed LSC's performance of its on-site 
monitoring function. It disclosed, in part, that the former monitoring 
system duplicated to a large degree the work of the independent public 
accountants. The audit disclosed that about half of the recommendations 
made as a result of LSC monitoring dealt with accounting, financial 
management systems, and internal controls--areas covered in annual 
audits by the grantees' independent public accountants (IPAs). This 
duplication was costly and unnecessary. In addition the report noted 
that monitoring activities were believed to be overly invasive by LSC 
grantees.
    The findings and recommendations of the Audit Report of Grantee 
Monitoring, as well as the obsolescence of LSC's audit guidance, 
signaled a need to adopt auditing standards that would permit the 
effective assessment of certain fiscal areas by the IPA as part of the 
annual audit, as well as promote uniformity in the audits of LSC 
recipients. Adoption of GAGAS facilitates the implementation of an 
expanded role in testing and reporting on compliance requirements by 
recipients' IPAs. For this reason, one of the major recommendations of 
the performance audit of monitoring--that the Corporation expand its 
use of IPAs in monitoring--is workable and efficient only if GAGAS are 
applied to the audits.
    There will be five appendices to the proposed Audit Guide. One of 
the appendices to the Audit Guide will be a new Compliance Supplement 
which will identify the financial-related regulations that auditors 
should examine in the course of the recipients' annual audit and will 
contain suggested audit procedures for the auditor to assess compliance 
with applicable laws and regulations. The other appendices will include 
a sample audit agreement, a model format for audited financial 
statements, the Corporation's pre-existing Fundamental Criteria for an 
Accounting and Financial Reporting System for LSC Recipients and a 
Guide for Procurement of Audit Services. Because the appendices 
themselves establish no new rules, regulations, or guidelines for 
recipients, they are not published for comment and will be promulgated 
without formal adoption by the Corporation's Board of Directors.
    For the reasons set forth above, LSC proposes the Audit Guide read 
as follows:

Legal Services Corporation Audit Guide for Recipients and Auditors

Foreword

    Under the Legal Services Corporation (LSC) Act, LSC provides 
financial support to organizations that furnish legal assistance to 
eligible clients. The Act requires that LSC either conduct or require 
each recipient of LSC funds to provide for an annual financial 
statement audit.
    In 1976, LSC adopted an Audit and Accounting Guide for Recipients 
and Auditors of LSC funds. The Audit and Accounting Guide was amended 
several times through 1981. Then, effective January 1, 1986, a fully 
revised Audit and Accounting Guide was published, but LSC subsequently 
declared the 1986 Audit and Accounting Guide to be just an alternative 
to rather than a binding replacement of the amended original Audit and 
Accounting Guide.
    In 1995, LSC promulgated the following Audit Guide to replace the 
audit portions of both the original and the 1986 Audit and Accounting 
Guide. In addition, LSC will attach five appendices to this Audit Guide 
for use by recipients and auditors.

Appendix A.  A Sample Audit Agreement which contains provisions LSC 
recommends recipients consider incorporating in their audit 
agreements.
Appendix B.  Model Format for Audited Financial Statements and 
Footnotes.
Appendix C.  The Compliance Supplement provides notice to both 
recipients and their auditors of the general federal requirements 
and the specific LSC regulations which are to be tested for 
compliance. The Compliance Supplement will change as LSC rules, 
regulations and guidelines are adopted, amended or revoked, but it 
establishes no new rules, regulations or guidelines itself.
Appendix D.  The Fundamental Criteria of an Accounting and Financial 
Reporting System, previously promulgated by LSC. It establishes 
minimum standards for the elements of an adequate accounting and 
financial reporting system.
Appendix E.  A Guide for Procurement of Audit Services, prepared by 
the LSC Office of Inspector General (OIG) in the spring of 1994 and 
revised in 1995. This Guide is intended to assist recipients in 
planning and procuring audit services.

    It is anticipated that the accounting portions of both the original 
and the 1986 Audit and Accounting Guide will also be replaced in the 
future.

Table of Contents

I. Introduction
    I-1  Purpose
    I-2  Required Standards and Guidance
    I-3  Authority
    I-4  Effective Date
    I-5  Revisions and Supplements to the Guide
    I-6  Cumulative Status of Revisions
    I-7  Financial Responsibilities of Recipients
II. Audit Performance Requirements
    II-1  Audit Requirements
    II-2  Review of Internal Controls
    II-3  Assessing Compliance with Laws and Regulations
    II-4  Audit Follow-up
III. Audit Reporting Requirements
    III-1  Audit Reports
    III-2  Management Response
    III-3  Report Distribution
IV. Reference Materials

Appendix
Appendix A  Sample Audit Agreement [[Page 27565]] 
Appendix B  Model Format for Audited Financial Statements and 
Footnotes
Appendix C  Compliance Supplement
Appendix D  Fundamental Criteria of an Accounting and Financial 
Reporting System for LSC Recipients
Appendix E  Guide for Procurement of Audit Services by Legal 
Services Corporation Recipients

    Authorities: The Legal Services Corporation Act of 1974, as 
amended, sec. 1008(a) and (b),(42 U.S.C.2996g(a) and (b)); sec. 
1009(c)(1),(42 U.S.C. 2996h(c)(1)); and sec. 1010(c),(42 
U.S.C.2996i(c)); The Inspector General Act of 1978, as amended, 5 
U.S.C. App. 3, sec. 4(a)(1); and sec. 4(b)(1).

Introduction

    The Office of Inspector General (OIG) of the Legal Services 
Corporation (LSC) is responsible for establishing and interpreting LSC 
audit policy pursuant to a resolution adopted by the LSC Board of 
Directors on May 13, 1995. The OIG will periodically revise the Audit 
Guide and related audit policies and will review audit reports to 
ensure compliance with appropriate auditing standards and the policies 
prescribed by the Audit Guide. The OIG will examine the audits to 
identify reported control deficiencies, questioned costs and financial-
related instances of noncompliance. Program-related findings and issues 
identified in the review of the audit reports will be forwarded to 
management for action.

I-1. Purpose

    This Audit Guide provides a uniform approach for audits of LSC 
recipients and describes recipients' financial responsibilities with 
respect to the audit. The Audit Guide is to be used in conjunction with 
the Compliance Supplement (Appendix C). The Audit Guide and the 
Compliance Supplement provide the auditor flexibility in planning and 
performing the audit, encourage professional judgement in determining 
the audit steps necessary to accomplish audit objectives, and do not 
supplant the auditor's judgement of the audit work required in 
particular situations. The suggested procedures included in the 
Compliance Supplement do not cover all the circumstances or conditions 
likely to be encountered during the course of an audit.

I-2. Required Standards and Guidance

    Audits of recipients, contractors, persons or entities receiving 
financial assistance from LSC (all hereinafter referred to as 
``recipients'') are to be performed in accordance with Generally 
Accepted Auditing Standards (GAAS); Government Auditing Standards (GAS 
or GAGAS) issued by the United States General Accounting Office (GAO); 
Office of Management and Budget (OMB) Circular A-133, Audits of 
Institutions of Higher Education and Other Not-for-Profit 
Organizations; and this Audit Guide.
    For purposes of OMB Circular A-133, LSC is to be considered a major 
program. The Compliance Supplement (Appendix C) is to be followed for 
LSC funds. Accordingly, the OMB Compliance Supplement for Audits of 
Institutions of Higher Learning and Other Non-Profit Institutions does 
not apply to LSC programs.
    The requirements of the Audit Guide apply to all recipients and 
subrecipients of LSC funds, except where specific provisions have been 
otherwise made through grant or subgrant agreements. This Audit Guide 
is not intended to apply to grants to law schools, universities or 
other special grants, which are covered by special provisions. 
Exceptions to these requirements will be determined by the OIG in 
conjunction with LSC management.

I-3. Authority

    This Audit Guide has been prepared under the authority provided by 
the following sections of the LSC Act and the IG Act:
    Records and Reports--LSC Act sec. 1008:
    (a) The Corporation is authorized to require such reports as it 
deems necessary from any recipient, contractor, or person or entity 
receiving financial assistance under this title regarding activities 
carried out pursuant to this title.
    (b) The Corporation is authorized to prescribe the keeping of 
records with respect to funds provided by grant or contract and shall 
have access to such records at all reasonable times for the purpose of 
insuring compliance with the grant or contract or terms and conditions 
upon which financial assistance was provided.

Audit--LSC Act sec. 1009(c)(1):
    The corporation shall conduct or require each recipient, 
contractor, or person or entity receiving financial assistance under 
this title to provide for an annual financial audit.
Recipients' Non-LSC Funds--LSC Act sec. 1010(c):
    Non-Federal funds received by the Corporation, and funds received 
by any recipient from a source other than the Corporation, shall be 
accounted for and reported as receipts and disbursements separate and 
distinct from Federal funds. * * *
Duties and Responsibilities * * *--IG Act sec. 4(a)(1) and 4(b)(1):
    4(a) It shall be the duty and responsibility of each Inspector 
General, with respect to the establishment within which his Office is 
established--(1) to provide policy direction for and to conduct, 
supervise, and coordinate audits * * * relating to the programs and 
operations of such establishment. * * *
    4(b)(1) In carrying out the responsibilities specified in 
subsection (a)(1), each Inspector General shall * * * (C) take 
appropriate steps to assure that any work performed by non-Federal 
auditors complies with the standards established by the Comptroller 
General. * * *

I-4. Effective Date

    This Audit Guide is effective for audits of LSC programs for 
periods ending on or after December 31, 1995.

I-5. Revisions and Supplements to the Guide

    The OIG will periodically revise the Audit Guide and its appendices 
through bulletins or replacement sections. Revisions may reflect 
changes to corporate regulations, auditing standards, funding 
requirements, or other published guidelines. Revisions should be 
incorporated into the recipient's copy of the Audit Guide, and 
furnished to the IPAs by the recipients. If there are any questions 
regarding the content of any revisions or supplements, please contact 
the OIG prior to the audit.

I-6. Cumulative Status of Revisions

------------------------------------------------------------------------
   Effective date                         Description                   
------------------------------------------------------------------------
August 1976.........  Original Edition of ``Audit and Accounting Guide  
                       for Recipients and Auditors'' Issued.            
June 1977...........  Revised Original Edition of Audit and Accounting  
                       Guide Issued.                                    
September 1979......  Revision to Pages 4-1 and 6-6.                    
September 1981......  Revision to Pages ii, 4-1, 6-6, VIII-3, and       
                       addition of Page 4-2.                            
January 1, 1986.....  Revised 1986 Edition of Audit and Accounting Guide
                       Effective.                                       
[[Page 27566]]
                                                                        
August 13, 1986.....  Regulation 1630 replaces Chapter 4 of both the    
                       Original and 1986 Edition of the Audit and       
                       Accounting Guide.                                
December 31, 1995...  Chapter 6 of both Original and 1986 Audit and     
                       Accounting Guide replaced by ``Audit Guide.''    
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I-7. Financial Responsibilities of Recipients

A. Maintain Adequate Accounting System

    Recipients, under the direction of their boards of directors, are 
required to establish and maintain adequate accounting records and 
internal control procedures. Until revised, guidance with regard to 
these responsibilities is found in both LSC's Original and 1986 Edition 
of the ``Audit and Accounting Guide for Recipients and Auditors,'' 
referred to in I-6, above. An effective financial system should 
accomplish the following objectives:

 1. Resources are safeguarded against waste, loss and misuse;
 2. Resources are used consistent with LSC regulations and grant 
conditions;
 3. Management is provided with timely, accurate financial information 
sufficient to manage the resources of the recipient; and
 4. Reporting is reliable and in sufficient detail to demonstrate to 
funding sources and the general public the recipient's commitment to 
accountability for the resources with which it has been entrusted.

B. Provide Audited Financial Statements

     Recipients are responsible for preparing annual financial 
statements and arranging for an audit of those statements to be 
completed within ninety days of the recipient's fiscal year end. The 
recipients' boards of directors have the final responsibility for the 
appointment of the auditor. However, consistent with the authority 
granted in the LSC Act sec. 1009(c)(1), LSC reserves the right to 
preclude the appointment of an auditor if experience has shown the 
auditor's work to be unsatisfactory or if a conflict of interest 
exists.
     A written agreement between the recipient and the IPA must be 
executed and, at a minimum, is to specifically include all matters 
described in Section II-1 of this Audit Guide (Subsections A through 
F).
     Appendix A is a sample audit agreement that includes the required 
matters described in Section II-1, and additional provisions that can 
be used to document the understanding between the recipient and the 
IPA. Recipients should consider incorporating these additional 
provisions in their audit.
     In connection with the procurement of audit services, recipients 
should refer to the Guide for Procurement of Audit Services (Appendix 
E).

II. Audit Performance Requirements

II-1. Audit Requirements

A. Objectives

     The primary audit objectives are to determine whether:

 1. The financial statements present fairly the financial position and 
the results of operations in accordance with Generally Accepted 
Accounting Principles (GAAP);
 2. The internal control structure provides reasonable assurance that 
the institution is managing Corporation funds in compliance with 
applicable laws and regulations, and controls ensure compliance with 
the laws and regulations that could have a material impact on the 
financial statements; and
 3. The recipient has complied with applicable provisions of federal 
law, Corporation regulations and the grant agreement that may have a 
direct and material effect on its financial statement amounts.

B. Reports

     The IPA will prepare the following audit reports:

 1. Opinion (or disclaimer of opinion) that the financial statements 
have been prepared in accordance with GAAP;
 2. Report on the Internal Control Structure;
 3. Report on Compliance with Laws and Regulations; and
 4. A Management Letter, if appropriate.

C. Qualifications of the IPA

     The comprehensive nature of auditing performed in accordance with 
GAS places on the IPA the responsibility for ensuring that: (1) the 
audit is conducted by personnel who collectively have the necessary 
skills; (2) independence is maintained; (3) applicable standards are 
followed in planning and conducting audits and reporting the results; 
(4) the IPA has an appropriate internal quality control system in 
place; and (5) the IPA undergoes an external quality control review. 
IPAs must meet the qualifications stated in Government Auditing 
Standards.

D. Audit Working Papers

     The audit working papers will be prepared in accordance with GAS, 
and will be retained by the IPA for at least eight 1 years from 
the date of the final audit report.

    \1\  See GSA General Records Schedule 22, Transmittal No. 3, 
February 22, 1991.
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E. Access to Audit Working Papers

     The audit working papers will be available for examination upon 
request by representatives of LSC and the Comptroller General of the 
United States. The audit working papers will be subject to Quality 
Assurance Review conducted by the LSC OIG.

F. Disclosure of Irregularities, Illegal Acts and Other Non-Compliance

     If, during an audit, matters are uncovered relative to actual, 
potential, or suspected defalcations, or other similar irregularities, 
the IPA will comply with SAS Numbers 53 and 54. In addition, the IPA 
shall notify immediately the Office of Inspector General at (202) 336-
8830.

G. Privileged or Confidential Information

    GAS paragraphs 5.30 and 5.31 state: Certain information may be 
prohibited from general disclosure by federal, state, or local laws or 
regulations. Such information may be provided on a need-to-know basis 
only by persons authorized by law or regulation to receive it. If such 
requirements prohibit auditors from including pertinent data in the 
report, they should state the nature of the information omitted, and 
the requirement that makes the omission necessary. The auditors should 
obtain assurance that a valid requirement for the omission exists and, 
when appropriate, consult with legal counsel.

II-2. Review of Internal Controls

     In accepting LSC funds, recipient management asserts that its 
accounting system is adequate to comply with LSC requirements. As part 
of the review of internal controls the auditor is required to evaluate 
the effectiveness of the recipient's accounting system and internal 
controls. The primary objectives of this evaluation are to ensure that 
resources are safeguarded against waste, loss and misuse and that 
resources are used consistent with LSC regulations and grant 
conditions.
     Appendix D is the Fundamental Criteria of an Accounting and 
Financial Reporting System (Fundamental Criteria). It establishes 
minimum standards for the elements of an [[Page 27567]] adequate 
accounting and financial reporting system. The criteria contained in 
the Fundamental Criteria should be considered in an auditor's 
assessment of the recipient's internal control structure. The 
Fundamental Criteria is in addition to, rather than a substitute for, 
standard internal control checklists, and does not preclude the 
exercise of appropriate auditor's judgement in assessing internal 
controls.

II-3. Assessing Compliance With Laws and Regulations

     The requirements set out in the Compliance Supplement (Appendix C) 
are those that could have a material impact on an organization's 
financial statements. Accordingly, examination of these compliance 
requirements are to be included as part of the audit.
     The Compliance Supplement specifies the objectives and provides 
suggested procedures to be considered in the auditor's assessment of a 
recipient's compliance with laws and regulations. The suggested 
procedures can be used to test for compliance with laws and 
regulations, as well as to evaluate the related controls. Auditors 
should use professional judgement to decide which procedures to apply, 
and the extent to which reviews and tests should be performed. Some 
procedures require a review and evaluation of internal controls. If the 
reviews and evaluations were performed as part of the internal control 
structure review, audit procedures can be modified to avoid 
duplication. Auditors should also refer to the grant agreements for 
additional requirements.
     In certain cases non-compliance may result in questioned costs. 
Auditors are to ensure that sufficient information is obtained to 
support the amounts questioned. Working papers should adequately 
document the basis for any questioned costs and the amounts reported.

II-4. Audit Follow-up

     Consistent with GAS paragraph 4.10, the auditor is required to 
follow-up on known material findings and recommendations from previous 
audits that could affect the financial statement audit. The objective 
is to determine whether timely and appropriate corrective action has 
been taken. Auditors are required to report the status of uncorrected 
material findings and recommendations from prior audits. In addition, 
these requirements are also applicable to findings and recommendations 
issued in a management letter.

III. Audit Reporting Requirements

III-1. Audit Reports

     The IPAs are to issue the reports called for in Paragraph II-1(C) 
and should follow the requirements of GAS and Statement on Auditing 
Standards (SAS) 74 (and any revisions thereto) for the content and 
format of the reports.

III-2. Views of Responsible Officials

     Consistent with GAS paragraph 7.38, auditors should report the 
views of responsible program officials concerning the auditors' 
findings, conclusions, and recommendations, as well as corrections 
planned.

III-3. Report Distribution

     Four copies of the audit reports are to be submitted to the LSC 
OIG within ninety days of the recipient's year end. Under extenuating 
circumstances, an extension of the ninety-day requirement may be 
granted. Requests for extensions should be in writing, and directed to 
the Chief for Audits of the OIG.

IV. Reference Materials

A. Title X--Legal Services Corporation Act of 1974, 42 USC 2996; Pub. 
L. 93-355, amended by Pub. L. 95-222 and 98-166.
B. 45 CFR Part 1600, et seq.
C. Government Auditing Standards, issued by the Comptroller General of 
the United States, 1994 Revision.
D. OMB Circular A-133, Audits of Institutions of Higher Education and 
Other Non-Profit Institutions.
E. AICPA Professional Standards, Volume I.
F. AICPA Integrated Practice System, Not-For-Profit Organizations Audit 
Manual.
G. Practitioners Publishing Company Guide to Audits of Nonprofit 
Organizations, Seventh Edition (June 1994).
H. AICPA Statement of Position (SOP) 92-9, Audits of Not-for-Profit 
Organizations Receiving Federal Awards, December 28, 1992.
I. Pursuant to LSC Regulations, 45 CFR 1630.4(g):
    The Circulars of the Office of Management and Budget shall provide 
guidance for all allowable cost questions arising under this part when 
relevant policies or criteria therein are not inconsistent with the 
provisions of the Act, applicable appropriations acts, this part, the 
Audit and Accounting Guide for Recipients and Auditors, and Corporation 
rules, regulations, guidelines, and instructions.
    Among the OMB Circulars which might be referred to if LSC policies 
are not dispositive:
1. Office of Management and Budget (OMB) Circular A-50 (Revised), Audit 
Follow-up.
2. OMB Circular A-110, Uniform Administrative Requirements for Grants 
and Agreements with Institutions of Higher Education, Hospitals, and 
Other Nonprofit Organizations.
3. OMB Circular A-122, Cost Principles for Nonprofit Organizations.
4. OMB Circular A-123, Internal Control Systems.
5. OMB Circular A-127, Financial Management Systems.

    Dated: May 19, 1995.
Victor M. Fortuno,
General Counsel.
[FR Doc. 95-12764 Filed 5-23-95; 8:45 am]
BILLING CODE 7050-01-P