[Federal Register Volume 60, Number 201 (Wednesday, October 18, 1995)]
[Notices]
[Pages 53934-53940]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25841]



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[[Page 53935]]


LEGAL SERVICES CORPORATION


Audit Guide for LSC Recipients and Auditors

AGENCY: Legal Services Corporation.

ACTION: Final audit guide for recipients and auditors.

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SUMMARY: The Legal Services Corporation (LSC or Corporation) hereby 
publishes as final the Audit Guide for Legal Services Corporation 
Recipients and Auditors (Audit Guide), which was adopted by the LSC 
Board of Directors on October 6, 1995. This Audit Guide will replace 
the audit portions of both editions (1981 and 1986) of the current 
``Audit and Accounting Guide for Recipients and Auditors'' (Audit and 
Accounting Guide). The Audit Guide will be maintained as a separate 
document under the authority of the LSC Office of Inspector General 
(OIG). The accounting and financial reporting requirements of the Audit 
and Accounting Guide will remain in effect until amended in the future, 
and will remain the responsibility of LSC management. All questions 
regarding LSC accounting requirements should be directed to LSC's 
Office of Program Evaluation, Analysis and Review (OPEAR).
    The Audit Guide prescribes the use of Government Auditing Standards 
(GAS or GAGAS), and Office of Management and Budget (OMB) Circular A-
133. There will be three appendices to the new Audit Guide, which in 
themselves establish no new rules, regulations or guidelines for 
recipients, and as such are not published herein. The Appendices are: 
(1) The Compliance Supplement; (2) the Sample Audit Agreement; and (3) 
the Guide for Procurement of Audit Services by Legal Services 
Corporation Recipients.

EFFECTIVE DATE: The requirements of the Audit Guide are effective for 
audits of fiscal years ending on or after December 31, 1995, except as 
otherwise authorized by the Corporation.

FOR FURTHER INFORMATION CONTACT: Charmaine Romear, Office of Inspector 
General, Legal Services Corporation, 750 First St., N.E., 10th Floor, 
Washington, DC 20002-4250 (Telephone: (202) 336-8840).

SUPPLEMENTARY INFORMATION: The Legal Services Corporation Act requires 
that the Corporation ``conduct, or require each grantee, contractor, or 
person or entity receiving financial assistance'' (Section 
1009(c)(1))from the Corporation to provide for an annual financial 
audit. Historically, the Corporation has chosen to require recipients 
to provide the annual audit pursuant to the Corporation's audit 
guidance provided in the Audit and Accounting Guides.
    On 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 comment 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 (June 1977) 
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 
90-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.
    On May 24, 1995, pursuant to the LSC Board Resolution of May 13, 
1995 which transferred responsibility for establishing audit policy to 
the OIG , the OIG published in the Federal Register for public notice 
and comment the proposed Audit Guide for LSC Recipients and Auditors. 
(60 FR 27562-27567). The initial notice established a 30-day comment 
period. The comment period was subsequently extended for 30 additional 
days to July 24, 1995 through two published notices. (60 FR 30901 and 
60 FR 34303).
    The Audit Guide makes one major change in the current standards. 
All financial statement audits for periods ending on or after December 
31, 1995, will be conducted pursuant to GAS and OMB Circular A-133, 
except as otherwise provided by the Corporation.
    Twenty-two comments were received. The comments from the American 
Institute of Certified Public Accountants (AICPA), and the Center for 
Law and Social Policy (CLASP) have been referenced in the Supplementary 
Information, as they mirrored those of many other respondents. The 
comments were analyzed and discussed before the Finance Committee of 
the LSC Board of Directors in September 1995.
    Some of the comments raised issues that relate to the proposed 
Fiscal Year 1996 (FY96) Appropriation. No response is made to those 
comments at this time; however, the Corporation is aware of the varying 
1996 Appropriation Bills passed by the House and the Senate. The 
Corporation will consider the application of the audit requirements of 
this Audit Guide when the Appropriation is enacted.
    Several comments were received opposing or requesting the 
Corporation's re-consideration of the requirement for GAS and OMB 
Circular A-133 because of increased audit costs, decreased LSC funding 
for FY96, the impact of staff reductions, and in some cases, the impact 
on the program's current auditors who may not be qualified to conduct 
such audits. Adoption of GAS for audits of LSC grants will increase 
accountability and credibility with the Congress and the public. Audits 
performed under OMB Circular A-133 will cost more; however, this 
increased cost will significantly enhance accountability. Although we 
expect an initial cost increase, we also expect a subsequent reduction 
in audit costs as auditors become more familiar with the LSC 
requirements, and as programs become better prepared for the audits. We 
believe the incremental costs are not substantial, and are balanced by 
the concomitant savings as a result of a more focused and less 
intrusive monitoring mechanism.
    As to the comments regarding the impact on Independent Public 
Accountants (IPAs) who are not qualified under GAS, the impact is not 
necessarily negative. A requirement that the auditor meets the 
requirements of GAS ensures that a recipient is audited by an IPA with 
specific training, and thus increases accountability.
    There were comments expressing concern about the timing of the 
adoption of the new audit requirements (December, 31, 1995 audits), and 
the impact on a program's ability to respond effectively during a 
period of budget cuts, staff reductions and pending imposition of new 
restrictions for FY96. Most recommended implementation for audits of 
fiscal year ends after December 31, 1995. The AICPA recommended 

[[Page 53936]]
implementation at least six months after finalization of the Audit 
Guide and the Compliance Supplement. CLASP recommended a voluntary 
adoption for programs which are not already subject to the requirements 
and do not have binding audit agreements. The Corporation's Budget 
Request for FY96, distributed to all current recipients February 1995, 
contained a statement that the Corporation intended to implement GAS 
and OMB Circular A-133 for fiscal years ending December 31, 1995, and 
after. In May 1995, after the transfer of the audit function to the 
OIG, the OIG published the proposed Audit Guide for comment in the 
Federal Register. The Board of Directors, having reviewed the comments, 
has decided to adopt the Audit Guide. Given this history, recipients 
have had adequate notice that the new requirements were likely to be 
adopted and it is not unreasonable to implement the new Audit Guide 
effective December 31, 1995. Moreover, implementation of the new Audit 
Guide will significantly enhance the fiscal compliance monitoring 
conducted on behalf of the Corporation, adding comprehensive on-site 
examination of a recipient's compliance with fiscal regulations to the 
current desk reviews and on-site compliance reviews. Achieving 
implementation on December 31, 1995, is particularly important from the 
perspective of audit coverage--recipients with fiscal years ending on 
December 31 receive approximately 63% of the total annualized LSC 
grants. The OIG will extend a one-time exemption on the initial 
application of these requirements for the following groups of 
recipients:
    Category 1: Programs receiving less than $300,000 in total federal 
funding (which includes LSC funding), and are not currently required to 
have a GAGAS audit or an A-133 audit. The one-time exemption is 
automatic, and does not require prior notification to the OIG.
    Category 2: Programs which are not eligible for funding effective 
January 1, 1996. The one-time exemption is automatic, and does not 
require prior notification.
    Category 3: Programs receiving $300,000 or greater in total federal 
funding (which includes LSC funding), and currently have binding 
contracts for generally accepted auditing standards (GAAS) audits. 
Exemptions will only be granted upon written request, and will only 
apply to contracts in effect prior to July 1, 1995, which must be 
submitted to the OIG along with the exemption requests.
    Most comments and calls received by the OIG expressed the need to 
give the recipients and auditors an opportunity to review and comment 
on the Appendices. Some of these comments expressed concern about, or 
seemed to be attributable to the statements made in the initial 
publication that the Appendices were not published as they established 
no new rule or regulation, and that they would be promulgated without 
formal adoption by the Corporation's Board of Directors. The Appendices 
were not published in the Federal Register for notice and comment 
because none of the documents established new rules or regulations. 
Rather, they were a reflection of already existing regulations and 
accounting standards that had been previously subject to notice and 
comment. Notwithstanding this, it was always intended that recipients 
and interested parties would be given an opportunity to comment on the 
Appendices. The ``Compliance Supplement'' was distributed for notice 
and comment to recipients and interested parties on August 30, 1995. 
The ``Sample Audit Agreement'' is merely a model which recipients may 
find useful. The ``Guide for Procurement of Audit Services by Legal 
Services Corporation Recipients'' was previously distributed in April 
1994 to all LSC recipients. Any future revisions to the Audit Guide or 
its Appendices that reflect or implement new policies or rules would be 
published for notice and comment in the Federal Register, and would be 
distributed to recipients and interested parties for comment.
    Two Appendices referenced in the May 24, 1995 Federal Register 
notice of the ``Audit Guide'' were more appropriate to the LSC 
Accounting Guide, and will be drafted by management. We, therefore, 
excluded the following from the Audit Guide: 1) Model Format for 
Audited Financial Statements and Footnotes; and 2) the Fundamental 
Criteria of an Accounting and Financial Reporting System. Both 
Appendices were excerpts from the previous Audit and Accounting Guides 
to make auditors aware of existing LSC requirements for internal 
control from an audit perspective, and to achieve some form of 
standardization in the classification of accounts reported in the 
annual audits. These documents would be subject to review and revision 
in the near future as a result of changes to two accounting standards 
for non-profits, Statements of Financial Accounting Standards (SFAS): 
SFAS 116, Accounting for Contributions Received and Contributions Made; 
and SFAS 117, Financial Statements of Not-for-Profit Organizations.
    There were several comments recommending deletion of paraphrases or 
quotes from the GAGAS and GAAS standards. It was stated that GAS and 
GAAS contain sufficient guidance to the auditor, and it was suggested 
that to streamline the Guide these requirements be incorporated by 
reference only. Except where special emphasis was needed, we have 
deleted the restated existing standard.
    Some comments disagreed with defining LSC as a major program in the 
initial publication. The general view was that LSC should not impose 
criteria for determining a major program for the purposes of OMB 
Circular A-133 as the Circular already defines the criteria for such 
determinations. The Audit Guide has been revised to eliminate the 
reference to LSC as a major program.
    Financial Responsibilities of Recipients (Section I-7, Subsection 
A): The AICPA suggested that the Audit Guide, in discussing the 
objectives of a financial system, adopt language that is consistent 
with the definition of internal controls in the Internal Control-
Integrated Framework issued by the Committee of Sponsoring 
Organizations of the Treadway Commission (COSO). The AICPA also 
suggested that the title of the Section, ``Maintain Adequate Accounting 
System,'' be changed to ``Maintain Adequate Internal Controls.'' Both 
suggestions reflect the view within the audit community that 
management's responsibility for maintaining adequate internal controls 
should be emphasized.
    The AICPA's suggestion that the Audit Guide adopt the COSO 
definition of internal controls is contingent on revisions to existing 
audit standards, viz. Statement on Auditing Standards (SAS) 55, 
``Consideration of the Internal Control Structure in a Financial 
Statement Audit.'' Since SAS 55 revisions have not yet been finalized 
or implemented, we did not make any revisions to the Audit Guide; 
however, we have revised the Audit Guide to adopt the suggested title.
    Basis for Precluding the Appointment of the Auditor (Section I-7, 
Financial Responsibilities of Recipients, Subsection B): Comments 
questioned the definition of the phrase ``if a conflict of interest 
exists'' as a basis for LSC preclusion on the appointment of an 
auditor. The respondents argued that GAS addresses auditor 
independence, and that LSC should not establish different independence 
standards. We have revised the language to ensure consistency with GAS. 
The Audit Guide makes reference to the qualification requirements of 
GAS as one of the bases for LSC's preclusion of the appointment of the 
auditor. 

[[Page 53937]]

    Retention Period for Audit Working Papers (Section II-1, Audit 
Requirements, Subsection D): There were comments stating that the eight 
year period for retention of the audit working papers was too long and 
burdensome. The retention period has been revised to three years, 
consistent with the requirements of OMB Circular A-133.
    Access to Audit Working Papers and Impact on Attorney Client 
Privilege (Sections II-1, Audit Requirements, Sub-sections E and G): 
There were several comments on third party access to information that 
is protected by the attorney-client privilege, an issue which was 
raised by management prior to the publication of the proposed Audit 
Guide. The general concern was that the Audit Guide, under the sections 
related to ``Access to Audit Working Papers,'' and ``Privileged or 
Confidential Information,'' did not identify the LSC Act restriction 
(Sec. 1009(d)) on access to attorney-client privileged information, nor 
did it provide guidance on how such information should be handled in 
the course of the audit. CLASP suggested that the language on 
``Privileged and Confidential Information'' (Section II-1, Subsection G 
of the initial notice) be deleted and access be discussed under 
``Access to Audit Working Papers'' (Section II-1, Subsection E). We 
agreed with the concerns expressed and adopted CLASP's recommendation. 
The Guide has been revised to delete Section II-1, Subsection G. In 
addition, the LSC Act restriction has been referenced under Section II-
1, Subsection E. We have not accepted CLASP's suggestion that the 
provisions of state codes of ethics concerning confidential information 
also be included as a restriction on access. Similarly, we have not 
accepted management's suggestion that auditors be cautioned to exclude 
from their working papers material which might be protected. The OIG 
believes that an audit guide is not the proper vehicle for resolving 
disputed issues, and that auditing standards provide adequate guidance 
to the auditors with respect to confidential and/or sensitive 
information. The Corporation's Board has adopted the OIG position.
    Disclosure of Errors and Irregularities and Illegal Acts to Third 
Parties (Section II-1 Audit Requirements, Subsection F): The AICPA 
expressed the concern that the terminology used in this section was 
inconsistent with GAS and the requirement for the notification to the 
OIG appeared to exceed the requirements of Statement on Auditing 
Standards (SAS) 53, ``The Auditor's Responsibility to Detect and Report 
Errors and Irregularities'' and SAS 54, ``Illegal Acts by Clients.'' 
The Corporation, pursuant to the applicable grant condition and the IG 
Act, believes that it should be notified of irregularities and illegal 
acts that come to the attention of the auditor in the course of the 
audit. This position is consistent with the Corporation's position 
taken in the 1981 and 1986 Audit and Accounting Guides. The language in 
the May 24, 1995 notice of the Audit Guide was retained. In addition, 
the Audit Guide was revised to identify the criteria for the auditor's 
reporting of such matters that come to his/her attention during the 
audit, consistent with the 1981 Audit and Accounting Guide.
    Review of Internal Controls (Section II-2): The AICPA commented 
that the ``Fundamental Criteria of an Accounting and Financial 
Reporting System'' (Appendix D) can be helpful to auditors in assessing 
the internal control structure as required by GAS and OMB Circular A-
133. However, they suggested that the Guide ``should clearly state that 
the auditor's responsibility for considering and reporting on the 
organization's internal control structure does not exceed the 
requirements of'' GAS.
    We do not believe that the language as written in the initial 
notice requires revision; however, for reasons previously expressed and 
unrelated to this comment, we deleted reference to the ``Fundamental 
Criteria for an Accounting and Financial Reporting System.'' No further 
revisions were deemed necessary.
    Audit Follow-up on Immaterial Findings (Section II-4, Audit Follow-
up): Some comments questioned the requirement for the auditor to 
follow-up on immaterial findings disclosed in the management letter, 
stating that the requirement exceeded GAS. Management believes that the 
requirement for the auditor's follow-up of findings in the management 
letter is appropriate. This requirement is consistent with the 1981 and 
1986 Audit and Accounting Guides.
    Audit Objectives (Section II-1, Subsection A): The AICPA commented 
that the term ``results of operations'' is no longer used in describing 
financial statements of not-for-profit organizations and recommended 
substitute language. The Audit Guide was revised to adopt the AICPA's 
suggested language.
    Audit Reports (Section II-1, Subsection B): The AICPA commented 
that the audit reports referenced in the May 24, 1995 notice identified 
the reports required under GAS, but did not include the additional 
reports required under OMB Circular A-133. We have deleted the reports 
identified in the initial notice and instead made reference to GAS and 
OMB Circular A-133.
    Assessing Compliance with Laws and Regulations (Section II-3): The 
AICPA suggested that the Audit Guide refer to the laws and regulations 
as having a material effect on the ``program'' as opposed to the 
``organization's financial statements.'' We have adopted the AICPA's 
suggestion and revised the Audit Guide accordingly.
    Audit Report Due Dates (Financial Responsibilities of Recipients, 
Section I-7, Subsection B): The AICPA commented that the 90-day 
submission date for the reports was inconsistent with the 13-month 
requirement of OMB Circular A-133. The Corporation is aware of the 
inconsistency with OMB Circular A-133, but has chosen not to expand the 
time limit to 13 months. LSC recipients are currently required to 
submit their audit reports within 90 days of the close of the audit 
period. Given the increased attention paid to the activities of LSC 
grantees at this time, we do not believe it would be prudent to expand 
that requirement to 13 months. While the Audit Guide requires a 
submission date that is much shorter than the requirements of OMB 
Circular A-133, a majority of LSC recipients have been able to submit 
the audit reports within the period. Based on an OIG analysis of 
submission of 1993 audits conducted in accordance with OMB Circular A-
133, we found that 34% of the recipients submitted reports within the 
90 days, and an additional 65% submitted the reports well within the 60 
day extension period currently allowed. We believe that these 
statistics indicate that LSC current requirements are not overly 
burdensome, in that 99% of recipients comply with the permitted 150 
days. We, therefore, extended the 90-day submission requirement to 150 
days. Extensions should no longer be necessary, and will be granted 
only in exceptional cases.
    In addition to the general and specific comments noted above, there 
were minor comments related to the use of inconsistent terms or phrases 
within the Audit Guide, or the Audit Guide's reference to certain 
auditing standards without a title description. While these comments do 
not require a separate response, we have considered them and have 
revised the Audit Guide accordingly.
    For the reasons set forth above, the LSC Audit Guide reads as 
follows:

[[Page 53938]]


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. 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 three appendices to this Audit 
Guide for use by recipients and auditors.
    Appendix A. 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 B. A Sample Audit Agreement which contains provisions LSC 
recommends recipients consider incorporating in their audit agreements.
    Appendix C. 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. Until so notified, recipients should continue to refer to the 
1981 and 1986 Audit and Accounting Guide for LSC financial accounting 
requirements.

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 and Distribution
    III-2  Views of Responsible Officials
IV. Reference Materials
    Appendix
    Appendix A--Compliance Supplement
    Appendix B--Sample Audit Agreement
    Appendix C--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 A). 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 Government 
Auditing Standards (GAS or GAGAS) issued by the Comptroller General of 
the United States; 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, the Compliance Supplement 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 audit requirements will be determined by the OIG in 
conjunction with LSC management.

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 

[[Page 53939]]
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, except as otherwise 
authorized by the Corporation.

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 Independent Public Accountants (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.                    
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.
------------------------------------------------------------------------

I-7. Financial Responsibilities of Recipients

A. Maintain Adequate Internal Controls

    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 Act, 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 150 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 and/or the auditor does not meet 
the qualification requirements of GAS.
    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). Contracts or engagement letters should also contain an escape 
clause that would allow, without significant penalty, modification or 
cancellation made necessary by changes in the law.
    Appendix B 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 
C).

II. Audit Performance Requirements

II-1. Audit Requirements

A. Objectives

    The primary audit objectives are to determine whether:
    1. the financial statements are presented fairly, in all material 
respects, in conformity with Generally Accepted Accounting Principles 
(GAAP), or other Comprehensive Basis of Accounting;
    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 audit reports required by GAS and OMB 
Circular A-133. Recipients should ensure that the management letters 
are included with the report submissions to LSC.

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 

[[Page 53940]]
will be retained by the IPA for at least three years from the date of 
the final audit report.

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 LSC Act, Sec. 1009(d), restricts the Corporation and 
the Comptroller General's access to any reports or records subject to 
the attorney-client privilege. 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 Statement on Auditing Standards (SAS) Number 
53, ``The Auditor's Responsibility to Detect and Report Errors and 
Irregularities,'' and SAS Number 54, ``Illegal Acts by Clients.'' While 
the auditor may contract directly with the recipient for audit 
services, it is emphasized that any items considered by the auditor to 
justify reporting to the recipient's program director and/or board of 
directors, should also be included in the management letter for LSC's 
consideration. If such items relate to the recipient's capabilities to 
safeguard and account for LSC funds, the IPA shall notify immediately 
the Office of Inspector General at (202) 336-8830.

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.

II-3. Assessing Compliance With Laws and Regulations

    The requirements set out in the Compliance Supplement (Appendix A) 
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 and Distribution

    IPAs should follow the requirements of GAS, OMB Circular A-133 and 
Statement on Auditing Standards (SAS) 74 (and any revisions thereto) 
for the content and format of the reports. Four copies of the audit 
reports and management letter, where applicable, are to be submitted to 
the LSC OIG within 150 days of the recipient's year end. Under 
exceptional circumstances, an extension of the 150-day requirement may 
be granted. Requests for extensions should be in writing, and directed 
to the Office of Inspector General.

III-2. Views of Responsible Officials

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

IV. Reference Materials

    A. Title X--Legal Services Corporation Act of 1974, 42 USC 2996; 
Public Law 93-355, amended by Public Law 95-222 and 98-166.
    B. 45 Code of Federal Regulations 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 C.F.R. 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: October 13, 1995.
Victor M. Fortuno,
General Counsel.
[FR Doc. 95-25841 Filed 10-17-95; 8:45 am]
BILLING CODE 7050-01-P