[Federal Register Volume 61, Number 215 (Tuesday, November 5, 1996)]
[Notices]
[Pages 57232-57249]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27819]



[[Page 57231]]


_______________________________________________________________________

Part V





Office of Management and Budget





_______________________________________________________________________



Audits of States, Local Governments, and Non-Profit Organizations; 
Notice

  Federal Register / Vol. 61, No. 215 / Tuesday, November 5, 1996 / 
Notices  

[[Page 57232]]



OFFICE OF MANAGEMENT AND BUDGET


Audits of States, Local Governments, and Non-Profit Organizations

AGENCY: Office of Management and Budget.

ACTION: Proposed revision of OMB Circular No. A-133 and proposed 
rescission of OMB Circular No. A-128.

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SUMMARY: This Notice offers interested parties an opportunity to 
comment on further proposed revisions to Office of Management and 
Budget (OMB) Circular No. A-133, ``Audits of Institutions of Higher 
Education and Other Non-Profit Institutions,'' and the proposed 
consolidation of OMB Circular No. A-128, ``Audits of State and Local 
Governments,'' into Circular No. A-133 (with Circular A-128 being 
rescinded). This Notice also requests comment on two proposed 
information collections contained in the proposed revision to Circular 
A-133. These actions are being proposed to implement the Single Audit 
Act Amendments of 1996 (1996 Amendments), which were signed into law on 
July 5, 1996 (Public Law 104-156).
    In the proposed revisions to Circular A-133, as published in the 
Federal Register on March 17, 1995 (60 FR 14594), OMB stated an intent 
to seek modifications to the Single Audit Act of 1984 (1984 Act) and, 
upon passage, extend the provisions of Circular A-133 to include audits 
of States and local governments and then rescind Circular A-128. 
(Indian tribal governments are included under the definition of States 
and are covered under the 1984 Act, Circular A-128, the 1996 
Amendments, and this proposed revision.) The April 1996 revision of 
Circular A-133 was coordinated with the 1996 Amendments such that only 
minimum changes are now necessary to include States and local 
governments under Circular A-133. When States and local governments are 
covered under Circular A-133, OMB will rescind Circular A-128.
    Interested parties may wish to refer to the March 17, 1995, and 
April 30, 1996, Federal Register (61 FR 19134) for a more detailed 
discussion of the changes made during the recent revisions to Circular 
A-133.

DATES: All comments on this proposal should be in writing, and must be 
received by January 6, 1997. Late comments will be considered to the 
extent practicable.

ADDRESSES: Comments should be mailed to Office of Management and 
Budget, Office of Federal Financial Management, Financial Standards and 
Reporting Branch, Room 6025, New Executive Office Building, Washington, 
DC 20503. Where possible, comments should reference applicable 
paragraph or section numbers in the proposed revision. When comments 
are sent in by facsimile (fax), they should be faxed to (202) 395-4915. 
Electronic mail comments may be submitted via Internet to 
[email protected]. Please include the full body of electronic mail 
comments in the text of the message and not as an attachment. Please 
include the name, title, organization, postal address, and E-mail 
address in the text of the message.
    To facilitate conversion of the comments into a computer format for 
analysis, it would be helpful if respondents send a copy of comments on 
either a 3.5 or 5.25 inch diskette in either WordPerfect 5.1, 
WordPerfect for Windows, or ASCII format. When a diskette cannot be 
provided, it would be helpful if the comments were printed in pica or 
an equivalent 10 characters per inch type on white paper so the 
document can be easily scanned into a computer format.
    A copy of the current Circulars A-128 and A-133 may be obtained 
from the OMB fax information line, 202-395-9068, document numbers 1128 
and 1133, respectively, or by writing or calling the Office of 
Administration, Publications Office, Room 2200, New Executive Office 
Building, Washington, DC 20503, telephone (202) 395-7332. Also, 
Circular A-133 and this proposed revision are available on the OMB home 
page on the internet which is currently located at http://
www.whitehouse.gov/WH/EOP/OMB/html/ombhome.html.

FOR FURTHER INFORMATION CONTACT: Sheila O. Conley, Office of Federal 
Financial Management (OFFM), Financial Standards and Reporting Branch, 
OMB telephone (202) 395-3993 and fax (202) 395-4915. A redlined/
strikeout version showing the detailed changes between the recently 
revised OMB Circular A-133 and the further proposed revision is 
available by written request to OFFM.

SUPPLEMENTARY INFORMATION: Pursuant to the Single Audit Act Amendments 
of 1996 (Pub. L. 104-156), the proposed revision requires non-Federal 
entities (States, local governments, and non-profit organizations) 
expending $300,000 or more in a year in Federal awards to have an 
audit, sets forth requirements for both the performance and reporting 
of this audit, and provides for follow-up on audit findings. Each non-
Federal entity is responsible for having its audit conducted and 
ensuring that subrecipients expending $300,000 or more in a year meet 
the audit requirements of Office of Management and Budget (OMB) 
Circular A-133 which will be renamed ``Audits of States, Local 
Governments, and Non-Profit Organizations.''

Significant Changes from Circular A-128 to Circular A-133

    The Single Audit Act Amendments of 1996, signed by the President on 
July 5, 1996, called for uniform requirements for audits of all types 
of organizations. As a consequence, OMB proposes to co-locate 
requirements for States, local governments, and non-profit 
organizations in Circular A-133, which currently addresses only non-
profit organizations. At the same time, OMB would rescind Circular A-
128, ``Audits of State and Local Governments,'' which currently 
specifies audit requirements for States and local governments.
    The April 1996 revision of Circular A-133 includes the following 
major changes which are not reflected in Circular A-128 issued April 
12, 1985:
    (1) increased the threshold that triggers an audit requirement 
under the Circular from $25,000 to $300,000 (Sec. __.200(a));
    (2) prescribed a risk-based approach to determine major programs 
(Sec. __.520);
    (3) required a minimum major program coverage of 50 percent (25 
percent for low-risk auditees) of Federal awards expended 
(Sec. __.520(f));
    (4) clarified the required level of internal control testing 
(Sec. __.500(c));
    (5) provided minimum reporting requirements for the schedule of 
expenditures of Federal awards (Sec. __.310(b));
    (6) required auditees to prepare a summary schedule of prior audit 
findings (Sec. __.315) and a data collection form (Sec. __.320(b));
    (7) required auditors to report audit findings and questioned costs 
in a single schedule, including a summary of the auditor's results 
(Sec. __.505(a)(4));
    (8) prescribed criteria for reporting audit findings and questioned 
costs (Sec. __.510);
    (9) modified the method of determining the cognizant agency for 
audit (Sec. __.400(a));
    (10) after a two-year transition period, precluded the same auditor 
from preparing the indirect cost proposal or cost allocation plan when 
indirect costs exceeded $1 million in the prior year (Sec. __.305(b));
    (11) after a two-year transition period, shortened the due date for 
submitting reports from 13 months to nine months (Sec. __.320(a));
    (12) streamlined the report submission process and expanded the

[[Page 57233]]

role of the Federal clearinghouse (Sec. __.320);
    (13) changed the basis for determining the amount of Federal awards 
administered by the non-Federal entity from receipts to expenditures 
(Sec. __.200);
    (14) provided guidance for conducting program-specific audits 
(Sec. __.235); and,
    (15) reorganized the Circular into a ``common rule'' format to 
facilitate codification by Federal agencies and improve the 
presentation of information included in the Circular.

Significant Proposed Revisions to Circular A-133

    The most significant difference between this proposed revision and 
the recently revised Circular A-133 is the inclusion of States and 
local governments. This proposed revision also includes changes 
relating to the effective date (31 U.S.C. 7507), the provisions 
permitting biennial audits in limited circumstances (31 U.S.C. 
7502(b)(2) and (3)), and the allowability of audit costs (31 U.S.C. 
7505(b)(1)(A)(ii)) to conform the April 1996 revision of Circular A-133 
to the 1996 Amendments. Aside from these changes, the 1996 Amendments 
do not require other substantive changes to Circular A-133.
    The following discussion is provided to describe the changes needed 
to conform this proposed revision with the 1996 Amendments, solicit 
input from interested parties, and summarize some of the other changes 
included in this proposed revision. The readers' attention is directed 
to section D. Proposed Requirement for the Auditor to Prepare and Sign 
the Data Collection Form Required by Circular A-133, because it is 
particularly important to OMB that commenters provide views on the 
matters discussed in this section.

A. Effective Dates

    The 1996 Amendments apply to any non-Federal entity with respect to 
any of its fiscal years which begin after June 30, 1996 (31 U.S.C. 
7507). Changes are proposed in paragraph 10 of the Circular, 
``Effective Dates,'' to reflect the effective dates mandated in the 
1996 Amendments.
    Inquirers asked which circular applies for biennial audits when the 
biennial period includes time before and after the effective date of 
the proposed revision. The 1996 Amendments do not specifically address 
the effective dates for biennial audits. OMB interprets the 1996 
Amendments to be effective for any biennial periods which begin after 
June 30, 1996. As with annual audits, the prior circulars are in effect 
until this proposed revision is effective. Therefore, a non-Federal 
entity which elects a biennial audit and has a biennial period 
beginning on or before June 30, 1996, should apply the provisions of 
Circular A-128 issued April 12, 1985 (for a State or local government) 
or Circular A-133 issued March 8, 1990 (for a non-profit organization), 
as applicable. The requirements of this proposed revision apply to any 
biennial periods beginning after June 30, 1996.
    Circular A-133 shortened the report due date from 13 months to nine 
months after the end of the audit period (Sec. __.320(a)). However, the 
1996 Amendments (31 U.S.C. 7502(h)) provide for a transition period of 
at least two years during which the report due date would remain at 13 
months. The proposed revision at Sec. __.320(a) incorporates this 
transition period such that the due date of nine months after the end 
of the audit period is not effective until audits of fiscal years 
beginning after June 30, 1998. Cognizant or oversight agencies may 
still provide extensions.
    Paragraphs 6 and 10 of the April 1996 revision of Circular A-133 
instructed Federal agencies to adopt the standards set forth in the 
Circular in codified regulations not later than November 30, 1996. As a 
result of the 1996 Amendments, the April 1996 revision of Circular A-
133, which applies only to non-profit organizations, will not become 
operable unless this proposed revision is not finalized by June 30, 
1997 (i.e., OMB expects that Circular A-133 issued March 8, 1990, will 
apply to non-profit organizations and Circular A-128 issued April 12, 
1985, will apply to States and local governments prior to the effective 
dates of the 1996 Amendments, and this proposed revision will apply to 
these types of organizations when the 1996 Amendments become 
effective). Therefore, Federal agencies may forgo the requirement under 
the April 1996 revision of Circular A-133 to adopt the standards set 
forth in the Circular in codified regulations not later than November 
30, 1996. However, the 1996 Amendments (31 U.S.C. 7505(a)) require each 
Federal agency to promulgate such revisions to its regulations as may 
be necessary to conform such regulations to the requirements of the 
1996 Amendments and OMB implementing guidance. Accordingly, the 
proposed revision includes a provision in paragraphs 6 and 10 of the 
Circular whereby Federal agencies shall adopt the standards set forth 
in the Circular in codified regulations not later than six months after 
publication of the final revision in the Federal Register.

B. Biennial Audits in Limited Circumstances

    Changes are proposed at Sec. __.220 to permit biennial audits in 
limited circumstances in accordance with the 1996 Amendments. The 
provisions in the 1996 Amendments which allow non-Federal entities to 
elect a biennial audit are very specific (31 U.S.C. 7502(b)(2)and (3)). 
For a State or local government to qualify for a biennial audit 
election, there must be a requirement (as opposed to authorization) in 
a State's constitution or State or local law which was in effect on 
January 1, 1987. Also, this requirement must still be in effect. Only 
non-profit organizations that had biennial audits for all biennial 
periods ending between July 1, 1992, and January 1, 1995, may elect a 
biennial audit. OMB expects that very few States, local governments, or 
non-profit organizations meet this criteria. Nonetheless, all auditees 
are encouraged to have annual audits which provide increased 
accountability.
    The April 1996 revision of Circular A-133 includes a provision 
whereby a Federal agency or pass-through agency may allow a non-profit 
organization that elects a program-specific audit under Sec. __.200(c) 
to perform the audit every two years. This provision was removed from 
the proposed revision to conform with the biennial audit requirements 
specified in the 1996 Amendments.
    Changes are also proposed at Sec. __.520 and Sec. __.530(a) to the 
major program determination process and the criteria for low-risk 
auditee for situations which are unique to single audits which are 
performed on a biennial basis.

C. Audit Costs Prohibited for Subrecipients With Federal Awards 
Expended of Less Than $300,000 Annually

    The 1996 Amendments discourage pass-through entities from requiring 
single audits of subrecipients with total Federal awards expended of 
less than $300,000 annually. This is done by prohibiting charges to 
Federal awards for audit costs under these circumstances (31 U.S.C. 
7505(b)(1)(A)(ii)). However, pass-through entities are not prohibited 
from charging subrecipient monitoring costs, provided those procedures 
are of lesser scope than a single audit.
    For example, if a pass-through entity requires a subrecipient which 
expends less than $300,000 annually in total Federal awards to have a 
single audit conducted in accordance with the 1996 Amendments, this 
audit must be paid for with other than Federal funds.

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However, the 1996 Amendments do not prohibit charging Federal awards 
for limited scope audits and other subrecipient monitoring procedures.
    Pass-through entities would need to make appropriate changes in 
their agreements with subrecipients to reflect that audits will no 
longer be required for non-Federal entities with total Federal awards 
expended of less than $300,000 annually. Pass-through entities will 
need to review their overall subrecipient monitoring process, and 
decide what, if any, additional monitoring procedures may be necessary 
to ensure subrecipient compliance. Monitoring procedures, which include 
limited scope audits, can be more targeted and less costly than a full 
Circular A-133 audit. Subrecipient monitoring procedures include: on-
site visits, reviews of documentation supporting requests for 
reimbursement, limited scope audits of specific compliance areas (e.g., 
eligibility determinations made by subrecipients), and financial 
statement audits in accordance with generally accepted government 
auditing standards. A pass-through entity should consider the cost-
effectiveness of monitoring procedures compared to the relative size 
and complexity of the Federal awards administered by subrecipients in 
determining the appropriateness of monitoring procedures.

D. Proposed Requirement for the Auditor To Prepare and Sign the Data 
Collection Form Required by Circular A-133

    To streamline the distribution of audit reports and improve the 
governmentwide collection and analysis of single audit results, 
Circular A-133 provides for a machine-readable form (Sec. __.320(b)) to 
be prepared at the completion of each audit and submitted to the 
Federal clearinghouse designated by OMB and pass-through entities. The 
data collection form will provide key information about the non-Federal 
entity, the Federal awards it administers, and the audit results. It 
will serve as the basis for developing a governmentwide database on 
covered Federal awards administered by non-Federal entities. The April 
1996 revision of Circular A-133 provides for a data collection form to 
be submitted to the Federal clearinghouse and each pass-through entity 
in lieu of sending the full single audit reporting package when there 
are no audit findings.
    The April 1996 revision of Circular A-133 requires the auditee's 
management to prepare the data collection form. Many auditees are 
concerned about the additional burden this reporting requirement would 
place on them. A more efficient and effective method could be to have 
the auditor prepare the form and sign it as preparer. OMB believes this 
would not significantly increase audit costs, since most of the 
information requested on the form will be obtained directly from the 
schedule of expenditures of Federal awards and the auditor's reports. 
Since the auditor is most knowledgeable about the audit results, OMB 
expects that it will be efficient for the auditor to simply prepare the 
form at the completion of the audit. Also, OMB believes that the 
incremental legal exposure faced by the auditor as a result of signing 
the form can be minimized by restricting its use to the Federal 
clearinghouse and pass-through entities for the sole purpose of data 
collection and so stating on the form. Under this method, the auditee 
would continue to be required to provide assurance to the Federal 
Government and pass-through entities that the auditee engaged an 
auditor to conduct an audit in accordance with the Circular, that the 
audit was completed, and that the information included on the form is 
accurate.
    OMB believes that the auditor's association with the data 
collection form will add value to its usefulness, reduce the need for 
Federal awarding agencies and pass-through entities to perform 
unnecessary verification procedures, improve the accuracy of the 
governmentwide database, streamline the single audit report submission 
process, and reduce burden on auditees.
    Therefore, OMB is considering adding a provision that requires the 
auditor to prepare the data collection form and sign it. If this change 
is made, OMB will work with the auditing profession and other 
interested parties to develop any necessary revisions to the form. 
Respondents are encouraged to comment on this change, including: 
Whether the auditor should prepare and sign the data collection form; 
what would be the estimated cost of the auditor's performing this 
service; whether it would be beneficial to auditees, Federal agencies, 
and pass-through entities; and, whether there are concerns over 
litigation exposure.
    The name of the certification form required under Sec. __.320(b) of 
the April 1996 revision of Circular A-133 is changed to ``Data 
Collection Form'' in the proposed revision to more appropriately 
characterize the nature of the information request. This name change 
also affects Sec. __.235(c)(2), Sec. __.235(c)(3), Sec. __.320(c), 
Sec. __.320(e)(i), and Sec. __.320(h).

E. Audit Coverage Over the Allowability of Charges to Cost Pools

    Changes are proposed at Sec. __.500(c), Sec. __.500(d), 
Sec. __.505(b), Sec. __.505(c), and Sec. __.510(a) to clarify the 
auditor's responsibility for testing and reporting on the allowability 
of costs charged to cost pools: (1) used to support an indirect cost 
rate, or (2) allocated through a State/local-wide central service cost 
allocation plan (as fully described in Appendix C of Circular A-87, 
``Cost Principles for State, Local and Indian Tribal Governments,'' 
issued May 4, 1995 (60 FR 26484), and hereinafter referred to as a 
``cost allocation plan''). The proposed language is added to address 
the timing of costs charged to cost pools used to support an indirect 
cost rate or allocated through a cost allocation plan. Indirect cost 
rates are based on costs incurred in a base period and applied 
prospectively. Costs allocated through a cost allocation plan are based 
on the actual costs incurred in two previous years.
    Because it would not be practical to perform such tests 
retroactively, the auditor is expected to perform tests of costs 
charged to cost pools during the period that the actual costs were 
incurred, rather than during the period in which the rate was applied 
or in which the costs were allocated. For example, if the actual costs 
charged to cost pools for 1997 form the basis for the indirect cost 
proposal and the final negotiated indirect cost rate that will be 
applied in 1998 and 1999, then the auditor should test actual costs 
charged to cost pools during 1997 as part of the 1997 audit, since 1997 
is the base year. The auditor would not be expected to test such costs 
as part of the 1998 and 1999 audits.

F. Pilot Project Authority

    The 1996 Amendments (31 U.S.C. 7502(j)) authorize OMB, in 
consultation with the Chair and Ranking Minority Member of the 
Committee on Governmental Affairs of the Senate and the Chair and 
Ranking Minority Member of the Committee on Government Reform and 
Oversight of the House of Representatives, to approve pilot projects to 
test alternative methods of achieving the purposes of the 1996 
Amendments. Such pilot projects, which would be voluntary undertakings 
by non-Federal entities, would provide a means of assessing new ways of 
testing and reporting on Federal awards.
    Suggestions from auditees for pilot projects should be submitted 
first to Federal funding agencies. If a Federal agency concludes that a 
suggested pilot project has merit, the Federal agency

[[Page 57235]]

may present the suggestion to OMB for consideration. OMB will consult 
with the appropriate members of the House and Senate prior to 
authorizing any pilot projects under the 1996 Amendments.

G. Other Changes To Comply With the 1996 Amendments

    The revision proposes the following other changes to comply with 
the 1996 Amendments and include States and local governments under 
Circular A-133.
    (1) Retitles the Circular to include States and local governments. 
States and local governments were also added to paragraph 1 of the 
Circular.
    (2) Deletes the references to Circular A-128 from paragraph 4 of 
the Circular and sections Sec. __.105 and Sec. __.400(d)(4) of the 
attachment.
    (3) Changes definitions in Sec. __.105 of ``Federal award'' 
``Federal financial assistance'' ``Federal program'' ``internal 
control'' ``internal control pertaining to the compliance requirements 
over Federal programs'' ``pass-through entity'' and ``subrecipient'' to 
conform with the definitions included in the 1996 Amendments.
    (4) Adds definitions in Sec. __.105 for the terms ``Indian tribe,'' 
``local government,'' and ``State,'' which are defined terms in the 
1996 Amendments.
    (5) Adds definitions in Sec. __.105 for the term ``non-Federal 
entity'' and replaces the term ``non-profit organization'' with ``non-
Federal entity'' in paragraphs 4, 6, and 10 of the Circular and 
sections Sec. __.100, Sec. __.105, Sec. __.200(d), Sec. __.205(a), and 
Sec. __.205(h) of the attachment.
    (6) Replaces the term ``non-profit organization'' with 
``subrecipient'' in Sec. __.205(i).
    (7) Adds ``full'' as a modifier of cost in Sec. 7.215(b).
    (8) Changes title of schedule in Sec. __.235(b)(2) to ``schedule of 
expenditures of Federal awards.''
    (9) Changes title of ``central clearinghouse'' to ``Federal 
clearinghouse'' in Sec. __.235(c)(2), Sec. __.235(c)(3), 
Sec. __.300(e), Sec. __.315(b)(4)(i), Sec. __.320(b), Sec. __.320(d), 
Sec. __.320(g), Sec. __.320(h), Sec. __.320(i), and Sec. __.320(j).
    910) Adds reference to Grants Management Common Rule in 
Sec. __.305(a).
    (11) Drops ``non-profit'' as a modifier to pass-through entity and 
subrecipients in Sec. __.400(d) and Sec. __.400(d)(4), respectively.
    (12) Adds a provision to cover a series of audits in 
Sec. __.500(a).
    (13) Changes the schedule of findings and questioned costs 
(Sec. __.505(d)) to include information from the audit of the financial 
statements performed in accordance with generally accepted government 
auditing standards. Consistency changes were made to 
Sec. __.235(b)(4)(iv) for program-specific audits.
    (14)Drops from Sec. __.520(b)(3) the reference to insurance 
programs because insurance programs are not specifically cited in the 
1996 Amendments.

H. Other Changes

    The revision proposes the following detailed changes.
    (1) Adds to Sec. __.235(c)(3) a requirement that one copy of the 
data collection form prepared in accordance with Sec. __.320(b) be 
submitted to each pass-through entity.
    (2) Adds to Sec. __.320(b) a requirement that the auditee identify 
the cognizant or oversight agency for audit on the data collection 
form.
    (3) Changes the requirement in Sec. __.400(a)(4) for the cognizant 
agency for audit to report to other Federal agencies any direct 
reporting of irregularities and illegal acts.
    (4) Simplifies the summary of the auditor's results in Sec. __.505 
by removing the requirement for a statement concerning the auditee's 
ability to continue as a going concern and consolidating the reporting 
of audit findings which were not reportable conditions or material non-
compliance.
    (5) Adds to the definition of audit findings reported 
(Sec. __.510(a)(4)) known questioned costs greater than $10,000 for 
Federal programs which are not audited as major programs. Consistent 
with this, adds in Sec. __.520(c) a reference to this requirement.
    (6) Removes from Sec. __.510(a)(6) the definition of fraud because 
this term is the same as in professional auditing standards.
    (7) Adds in Sec. __.520(d) and Sec. __.520(e) an option to allow an 
auditor to minimize the risk assessment required for Type B programs 
under certain circumstances.
    (8) Adds in Sec. __.520(e) a statement to encourage auditors to use 
an approach in identifying high-risk Type B program which provides an 
opportunity for different high-risk Type B programs to be audited as 
major over a period of time.

I. Changes for Clarity

    The revision proposes the following changes for clarity.
    (1) Changes the title of the Circular to use the term ``non-profit 
organizations'' in lieu of the phrase ``institutions of higher 
education and other non-profit institutions'' since non-profit 
organization is the defined term (Sec. __.105) which includes non-
profit institutions of higher education.
    (2) Changes the definitions in Sec. __.105 of cluster of programs 
and Federal programs to clarify that research and development (R&D) and 
student financial aid (SFA) are types of clusters of programs. Based 
upon this change, the phrase ``category of programs'' was replaced with 
``cluster of programs'' in Sec. __.105, Sec. __.310(b)(6), 
Sec. __.320(b). Moves discussion of State governments combining funding 
from definition of Federal programs to definition of cluster of 
programs in Sec. __.105. Adds to Sec. __.105 emphasis that when a State 
designates a cluster of programs, the State must identify the Federal 
awards and advise subrecipients of the applicable compliance 
requirements.
    (3) Replaces the reference to ``Federal expenditures'' with 
``Federal awards expended'' in Sec. __.200(d), Sec. __.310(b)(2), 
Sec. __.310(b)(6), Sec. __.310(b)(7), Sec. __.520(b)(1), 
Sec. __.520(d)(2), Sec. __.520(f), Sec. __.525(d)(4), 
Sec. __.530(d)(3).
    (4) For consistency with the format of the effective date of the 
Circular, changes the date format from fiscal years ``ending'' to 
fiscal years ``beginning'' in Sec. __.305(b).
    (5) Clarifies in Sec. __.315(b) that follow-up on prior audit 
findings is concerned with those relative to Federal awards as opposed 
to those relative to the financial statements of the entity.
    (6) Clarifies in Sec. __.500(a) that the entity's financial 
statements and schedule of expenditures of Federal awards must be for 
the same fiscal year.
    (7) Replaces in Sec. __.500(c) the term ``achieve'' with 
``support.''
    (8) Clarifies in Sec. __.510(a)(2) that this reporting only relates 
to major programs and removes discussion relating to auditor 
conclusions which is included in generally accepted government auditing 
standards.
    (9) Clarifies in Sec. __.510(a)(5) and Sec. __.510(a)(6) that the 
reference to the schedule of findings and questioned costs is to the 
part of the schedule that deals with Federal awards.
    (10) Changes the term ``50 percent rule'' to ``percentage of 
coverage rule'' in Sec. __.520(d)(2), Sec. __.520(e)(3), 
Sec. __.520(f), Sec. __.520(i).
    (11) Clarifies in Sec. __.530(d) that this provision applies for 
either of the preceding two years in which the program was classified 
as a Type A program.

Information Collection Activity Under OMB Review

    In accordance with the Paperwork Reduction Act (44 U.S.C. Chapter 
35 et seq.), this notice requests comment on

[[Page 57236]]

the following two proposed information collections contained in this 
proposed revision. The information collection request involves two 
types of entities: (1) Reports from auditors to auditees concerning 
audit results, audit findings, and questioned costs; and, (2) reports 
from auditees to the Federal Government providing information about the 
auditees, the awards they administer, and the audit results. The 
proposed revision specifies what auditors are required to report to 
auditees, under Sec. __.235(b)(4), for program-specific audits, and 
Sec. __.505, ``Audit Reporting,'' for single audits. The proposed 
revision also specifies what auditees are required to report to the 
Federal clearinghouse designated by OMB and pass-through entities, if 
applicable, under Sec. __.235(c), for program-specific audits, and 
Sec. __.320, ``Report Submission,'' for single audits.
    The information collection requests included in this proposal would 
result in a decrease in overall reporting burden. Although the 
reporting burden per audit will increase under this proposal from 26 to 
34 hours (described in the following paragraphs), fewer entities will 
be subject to the reporting requirements as a result of the proposal to 
increase the threshold that triggers an audit requirement under the 
Circular from $25,000 to $300,000. Based on available information, OMB 
estimates that approximately 25,000 non-Federal entities would be 
subject to the information collection requirement included in this 
proposal; whereas, approximately 35,000 non-Federal entities are 
subject to the current requirements under Circulars A-128 and A-133. 
The overall reporting burden currently approximates 910,000 hours 
(35,000 non-Federal entities at 26 hours per audit). Under the 
proposal, the overall reporting burden would be approximately 850,000 
hours (25,000 non-Federal entities at 34 hours per audit), or 60,000 
hours less than the current reporting burden. In addition, as more 
fully discussed below, there is an opportunity to reduce further the 
overall reporting burden under the proposal from 850,000 to 800,000 
hours by having auditors, rather than auditees, prepare the data 
collection form discussed below.
    Congress intended to improve the contents of single audit reports 
to make them more useful by enacting the 1996 Amendments. OMB believes 
that the increase in reporting burden per audit is warranted because 
several changes included in the proposed revision would improve the 
usefulness and effectiveness of single audit reporting with respect to 
information provided by both auditors and auditees.
    OMB estimates that reporting by auditors currently takes 
approximately 10 hours on the average per audit under Circulars A-128 
and A-133, and will take 14 hours under the proposal. The estimated 
increase of 4 hours of reporting burden per audit on auditors is due 
primarily to a provision in the 1996 Amendments (31 U.S.C. 7502(g)(2)) 
which requires the auditor, for the first time, to prepare a summary of 
audit results. In its report on the 1996 Amendments, the Committee on 
Government Reform and Oversight stated that ``the complexity of the 
reports makes it difficult for the average reader to understand what 
has been audited and reported ... A summary of the audit results would 
highlight important information and thus enable users to quickly 
discern the overall results of an audit'' (H.R. Report 104-607, page 
18).
    OMB estimates that reporting by auditees currently takes 
approximately 16 hours on the average per audit under Circulars A-128 
and A-133, and will take 20 hours under the proposal. The estimated 
increase of 4 hours of reporting burden per audit on auditees is due 
primarily to a proposed requirement whereby management would prepare 
two new documents to improve the usefulness of single audit reports.
    The first of these reports is a summary schedule of prior audit 
findings which will provide the current status of previously reported 
audit findings until such findings are corrected. This information, 
which is important to Federal funding agencies and pass-through 
entities, is currently required under Circulars A-128 and A-133 but it 
is not consistently provided in single audit reports. As a result, 
Federal funding agencies and pass-through entities frequently request 
this type of information long after a finding is reported, which 
results in additional burden on Federal agencies, auditees, and 
auditors. The proposed requirements provide additional guidance to 
auditees on where and how to present information regarding prior audit 
findings. While additional time may be required up-front for certain 
auditees to prepare the summary schedule of prior audit findings, the 
reporting burden for such entities should be offset by the elimination 
of the inefficiencies caused by the current practice of having to 
retrieve and provide information after-the-fact on old audit findings.
    The second report management would be required to prepare is the 
``Data Collection Form'' prescribed in Sec. ____.320(b) of the proposed 
revision and discussed previously in Section D (Proposed Requirement 
for the Auditor to Prepare and Sign the Data Collection Form Required 
by Circular A-133). The data collection form will facilitate 
streamlining the report distribution process and improve the 
governmentwide collection and analysis of single audit results.
    OMB believes that the overall reporting burden under the proposed 
revision could be further reduced by having the auditor prepare the 
data collection form. Specifically, OMB estimates that if auditors, 
rather than auditees, prepare the data collection form then the 
estimate of reporting burden on auditors would increase by two hours 
(that is, from 14 hours to 16 hours), and the estimate of reporting 
burden on auditees would decrease by four hours (that is, from 20 hours 
to 16 hours) per audit under the proposal. This would result in a net 
decrease of 2 hours per audit, or 50,000 hours in overall reporting 
burden (25,000 non-Federal entities at 2 hours savings per audit). As a 
result of having auditors, rather than auditees, prepare the data 
collection form, overall reporting burden could be reduced from 850,000 
to 800,000 hours.
    Comments are invited on: (a) Whether the proposed information 
collection is necessary for the proper performance of the functions of 
the agencies, including whether the information has practical utility; 
(b) the accuracy of the estimate of the burden of the collection of the 
information; (c) ways to enhance the quality, utility, and clarity of 
the information to be collected; and (d) ways to minimize the burden 
related to the collection of information on respondents, including use 
of automated collection techniques or other forms of information 
technology.
G. Edward DeSeve,
Controller.

    1. OMB proposes to rescind Circular A-128 upon issuance of a 
revised Circular A-133 that covers States and local governments.
    2. OMB proposes to revise Circular A-133 to read as follows:

To the Heads of Executive Departments and Establishments

Subject: Audits of States, Local Governments, and Non-Profit 
Organizations

    1. Purpose. This Circular is issued pursuant to the Single Audit 
Act of 1984, Public Law 98-502, and the Single Audit Act Amendments 
of 1996, Public Law 104-156. It sets forth standards for obtaining 
consistency and uniformity among Federal agencies for the audit of 
States, local

[[Page 57237]]

governments, and non-profit organizations expending Federal awards.
    2. Authority. Circular A-133 is issued under the authority of 
sections 503, 1111, and 7501 et seq. of title 31, United States 
Code, and Executive Orders 8248 and 11541.
    3. Rescission and Supersession. This Circular rescinds Circular 
A-128, ``Audits of State and Local Governments,'' issued April 12, 
1985, and supersedes the prior Circular A-133, ``Audits of 
Institutions of Higher Education and Other Non-Profit 
Institutions,'' issued April 22, 1996. 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-Federal entities, 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).
    This Circular does not apply to non-U.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 Sec. ____.105 in the Attachment to this 
Circular.
    6. Required Action. The specific requirements and 
responsibilities of Federal agencies and non-Federal entities are 
set forth in the Attachment to this Circular. Federal agencies 
making awards to non-Federal entities, either directly or 
indirectly, shall adopt the language in the Circular in codified 
regulations as provided in Section 10 (below), 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 
uniform, 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. Review Date. This Circular will have a policy review three 
years from the date of issuance.
    10. Effective Dates. The standards set forth in Sec. ____.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 beginning after June 30, 1996.
    The standards set forth in this Circular that Federal agencies 
are to apply to non-Federal entities shall be adopted by Federal 
agencies in codified regulations not later than six months after 
publication of the final revision in the Federal Register, so that 
they will apply to audits of fiscal years beginning after June 30, 
1996, with the exception that Sec. ____.305(b) of the Attachment 
applies to audits of fiscal years beginning after June 30, 1998. In 
the interim period, until the standards in this Circular are adopted 
and become applicable, the audit provisions of Circular A-128 issued 
April 12, 1985, and Circular A-133, issued April 22, 1996, shall 
continue in effect.
Franklin D. Raines,
Director.
    Attachment

PART ____--AUDITS OF STATES, LOCAL GOVERNMENTS, AND NON-PROFIT 
ORGANIZATIONS

Subpart A--General

Sec.
____.100  Purpose.
____.105  Definitions.

Subpart B--Audits

____.200  Audit requirements.
____.205  Basis for determining Federal awards expended.
____.210  Subrecipient and vendor determinations.
____.215  Relation to other audit requirements.
____.220  Frequency of audits.
____.225  Sanctions.
____.230  Audit costs.
____.235  Program-specific audits.

Subpart C--Auditees

____.300  Auditee responsibilities.
____.305  Auditor selection.
____.310  Financial statements.
____.315  Audit findings follow-up.
____.320  Report submission.

Subpart D--Federal Agencies and Pass-Through Entities

____.400  Responsibilities.
____.405  Management decision.

Subpart E--Auditors

____.500  Scope of audit.
____.505  Audit reporting.
____.510  Audit findings.
____.515  Audit working papers.
____.520  Major program determination.
____.525  Criteria for Federal program risk.
____.530  Criteria for a low-risk auditee.

Subpart A--General


Sec. ____.100   Purpose.

    This part sets forth standards for obtaining consistency and 
uniformity among Federal agencies for the audit of non-Federal entities 
expending Federal awards.


Sec. ____.105   Definitions.

    Auditee means any non-Federal entity that expends Federal awards 
which must be audited under this part.
    Auditor means an auditor that is a public accountant or a Federal, 
State or local government audit organization, which meets the general 
standards specified in generally accepted government auditing standards 
(GAGAS). The term auditor does not include internal auditors of non-
profit organizations.
    Audit finding means deficiencies which the auditor is required by 
Sec. ____.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 a grouping of closely related programs 
that share common compliance requirements. The types of clusters of 
programs are research and development (R&D), student financial aid 
(SFA), and other clusters. ``Other clusters'' are as defined by the 
Office of Management and Budget (OMB) in the compliance supplements or 
as designated by a State for Federal awards the State provides to its 
subrecipients that meet the definition of a cluster of programs. When 
designating an ``other cluster,'' a State shall identify the Federal 
awards included in the cluster and advise the subrecipients of 
compliance requirements applicable to the cluster, consistent with 
Sec. ____.400(d)(1) and Sec. ____.400(d)(2), respectively. A cluster of 
programs shall be considered as one program for determining major 
programs, as described in Sec. ____.520, and, with the exception of R&D 
as described in Sec. ____.200(c), whether a program-specific audit may 
be elected.
    Cognizant agency for audit means the Federal agency designated to 
carry out the responsibilities described in Sec. ____.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 Audits of State 
and Local Governments or such documents as 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 cost-

[[Page 57238]]

reimbursement contracts that non-Federal entities receive directly from 
Federal awarding agencies or indirectly from pass-through entities. It 
does not include procurement contracts, under grants or contracts, used 
to buy goods or services from vendors. Any audits of such vendors shall 
be covered by the terms and conditions of the contract. Contracts to 
operate Federal Government owned, contractor operated facilities 
(GOCOs) are excluded from the requirements of this part.
    Federal awarding agency means the Federal agency that provides an 
award directly to the recipient.
    Federal financial assistance means assistance that non-Federal 
entities receive or administer in the form of grants, loans, loan 
guarantees, property (including donated surplus property), cooperative 
agreements, interest subsidies, insurance, food commodities, direct 
appropriations, and other assistance, but does not include amounts 
received as reimbursement for services rendered to individuals as 
described in Sec. ____.205(h) and Sec. ____.205(i).
    Federal program means:
    (1) All Federal awards to a non-Federal entity assigned a single 
number in the CFDA.
    (2) When no CFDA number is assigned, all Federal awards from the 
same agency made for the same purpose should be combined and considered 
one program.
    (3) Notwithstanding paragraphs (1) and (2) of this definition, a 
cluster of programs. The types of clusters of programs are:
    (i) Research and development (R&D);
    (ii) Student financial aid (SFA); and
    (iii) ``Other clusters,'' as described in the definition of cluster 
of programs in this section.
    GAGAS means generally accepted government auditing standards issued 
by the Comptroller General of the United States, which are applicable 
to financial audits.
    Generally accepted accounting principles has the meaning specified 
in generally accepted auditing standards issued by the American 
Institute of Certified Public Accountants (AICPA).
    Indian tribe means any Indian tribe, band, nation, or other 
organized group or community, including any Alaskan Native village or 
regional or village corporation (as defined in, or established under, 
the Alaskan Native Claims Settlement Act) that is recognized by the 
United States as eligible for the special programs and services 
provided by the United States to Indians because of their status as 
Indians.
    Internal control means a process, effected by an entity's 
management and other personnel, designed to provide reasonable 
assurance regarding the achievement of objectives in the following 
categories:
    (1) Effectiveness and efficiency of operations;
    (2) Reliability of financial reporting; and
    (3) Compliance with applicable laws and regulations.
    Internal control pertaining to the compliance requirements for 
Federal programs (Internal control over Federal programs) means a 
process--effected by an entity's management and other personnel--
designed to provide reasonable assurance regarding the achievement of 
the following objectives for Federal programs:
    (1) Transactions are properly recorded and accounted for to:
    (i) Permit the preparation of reliable financial statements and 
Federal reports;
    (ii) Maintain accountability over assets; and
    (iii) Demonstrate compliance with laws, regulations, and other 
compliance requirements;
    (2) Transactions are executed in compliance with:
    (i) Laws, regulations, and the provisions of contracts or grant 
agreements that could have a direct and material effect on a Federal 
program; and
    (ii) Any other laws and regulations that are identified in the 
compliance 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-Federal entity.
    Local government means any unit of local government within a State, 
including a county, borough, municipality, city, town, township, 
parish, local public authority, special district, school district, 
intrastate district, council of governments, and any other 
instrumentality of local government.
    Major program means a Federal program determined by the auditor to 
be a major program in accordance with Sec. ____.520 or a program 
identified as a major program by a Federal agency or pass-through 
entity in accordance with Sec. ____.215(c).
    Management decision means the evaluation by the Federal awarding 
agency or pass-through entity of the audit findings and corrective 
action plan and the issuance of a written decision as to what 
corrective action is necessary.
    Non-Federal entity means a State, local government, or non-profit 
organization.
    Non-profit organization means:
    (1) any corporation, trust, association, cooperative, or other 
organization that:
    (i) Is operated primarily for scientific, educational, service, 
charitable, or similar purposes in the public interest;
    (ii) Is not organized primarily for profit; and
    (iii) Uses its net proceeds to maintain, improve, or expand its 
operations; and
    (2) The term non-profit organization includes non-profit 
institutions of higher education and hospitals.
    OMB means the Executive Office of the President, Office of 
Management and Budget.
    Oversight agency for audit means the Federal awarding agency that 
provides the predominant amount of direct funding to a recipient not 
assigned a cognizant agency for audit. When there is no direct funding, 
the Federal agency with the predominant indirect funding shall assume 
the oversight responsibilities. The duties of the oversight agency for 
audit are described in Sec. ____.400(b).
    Pass-through entity means a non-Federal entity that provides a 
Federal award to a subrecipient to carry out a Federal program.
    Program-specific audit means an audit of one Federal program as 
provided for in Sec. ____.200(c) and Sec. ____.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-Federal entity that expends Federal awards 
received directly from a Federal awarding agency to carry out a Federal 
program.
    Research and development (R&D) means all research activities, both 
basic and applied, and all development activities that are performed by 
a non-Federal entity. Research is defined as a systematic study 
directed toward fuller scientific knowledge or understanding of the 
subject studied. The term research also includes activities involving 
the training of individuals in research

[[Page 57239]]

techniques where such activities utilize the same facilities as other 
research and development activities and where such activities are not 
included in the instruction function. Development is the systematic use 
of knowledge and understanding gained from research directed toward the 
production of useful materials, devices, systems, or methods, including 
design and development of prototypes and processes.
    Single audit means an audit which includes both the entity's 
financial statements and the Federal awards as described in 
Sec. ____.500.
    State means any State of the United States, the District of 
Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, 
American Samoa, the Commonwealth of the Northern Mariana Islands, and 
the Trust Territory of the Pacific Islands, any instrumentality 
thereof, any multi-State, regional, or interstate entity which has 
governmental functions, and any Indian tribe as defined in this 
section.
    Student Financial Aid (SFA) includes those programs of general 
student assistance, such as those authorized by Title IV of the Higher 
Education Act of 1965, as amended (20 U.S.C. 1070 et seq.), which is 
administered by the U.S. Department of Education, and similar programs 
provided by other Federal agencies. It does not include programs which 
provide fellowships or similar Federal awards to students on a 
competitive basis, or for specified studies or research.
    Subrecipient means a non-Federal entity that expends Federal awards 
received from a pass-through entity to carry out a Federal program, but 
does not include an individual that is a beneficiary of such a program. 
A subrecipient may also be a recipient of other Federal awards directly 
from a Federal awarding agency. Guidance on distinguishing between a 
subrecipient and a vendor is provided in Sec. ____.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 Sec. ____.210.

Subpart B--Audits


Sec. ____.200  Audit Requirements.

    (a) Audit required. Non-Federal entities that expend $300,000 or 
more in a year in Federal awards shall have a single or program-
specific audit conducted for that year in accordance with the 
provisions of this part. Guidance on determining Federal awards 
expended is provided in Sec. ____.205.
    (b) Single audit. Non-Federal entities that expend $300,000 or more 
in a year in Federal awards shall have a single audit conducted in 
accordance with Sec. ____.500 except when they elect to have a program-
specific audit conducted in accordance with paragraph (c) of this 
section.
    (c) Program-specific audit election. When an auditee expends 
Federal awards under only one Federal program (excluding R&D) and the 
Federal program's laws, regulations, or grant agreements do not require 
a financial statement audit of the auditee, the auditee may elect to 
have a program-specific audit conducted in accordance with 
Sec. ____.235. A program-specific audit may not be elected for R&D 
unless all of the Federal awards expended were received from the same 
Federal agency, or the same Federal agency and the same pass-through 
entity, and that Federal agency, or pass-through entity in the case of 
a subrecipient, approves in advance a program-specific audit.
    (d) Exemption when Federal awards expended are less than $300,000. 
Non-Federal entities that expend less than $300,000 a year in Federal 
awards are exempt from Federal audit requirements for that year, except 
as noted in Sec. ____.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 an FFRDC may elect to 
treat the FFRDC as a separate entity for purposes of this part.


Sec. ____.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 non-Federal entity to comply with laws, regulations, and 
the provisions of contracts or grant agreements, such as: expenditure/
expense transactions associated with grants, cost-reimbursement 
contracts, cooperative agreements, and direct appropriations; the 
disbursement of funds passed through to subrecipients; the use of loan 
proceeds under loan and loan guarantee programs; the receipt of 
property; the receipt of surplus property; the receipt or use of 
program income; the distribution or consumption of food commodities; 
the disbursement of amounts entitling the non-Federal entity to an 
interest subsidy; and, the period when insurance is in force.
    (b) Loan and loan guarantees (loans). Since the Federal Government 
is at risk for loans until the debt is repaid, the following guidelines 
shall be used to calculate the value of Federal awards expended under 
loan programs, except as noted in paragraphs (c) and (d) of this 
section:
    (1) Value of new loans made or received during the fiscal year; 
plus
    (2) Balance of loans from previous years for which the Federal 
Government imposes continuing compliance requirements; plus
    (3) Any interest subsidy, cash, or administrative cost allowance 
received.
    (c) Loan and loan guarantees (loans) at institutions of higher 
education. When loans are made to students of an institution of higher 
education but the institution does not make the loans, then only the 
value of loans made during the year shall be considered Federal awards 
expended in that year. The balance of loans for previous years is not 
included as Federal awards expended because the lender accounts for the 
prior balances.
    (d) Prior loan and loan guarantees (loans). Loans, the proceeds of 
which were received and expended in prior-years, are not considered 
Federal awards expended under this part when the laws, regulations, and 
the provisions of contracts or grant agreements pertaining to such 
loans impose no continuing compliance requirements other than to repay 
the loans.
    (e) Endowment funds. The cumulative balance of Federal awards for 
endowment funds which are federally restricted are considered awards 
expended in each year in which the funds are still restricted.
    (f) Free rent. Free rent received by itself is not considered a 
Federal award expended under this part. However, free rent received as 
part of an award to carry out a Federal program shall be included in 
determining Federal awards expended and subject to audit under this 
part.
    (g) Valuing non-cash assistance. Federal non-cash assistance, such 
as free rent, food stamps, food commodities, donated property, or

[[Page 57240]]

donated surplus property, shall be valued at fair market value at the 
time of receipt or the assessed value provided by the Federal agency.
    (h) Medicare. Medicare payments to a non-Federal entity for 
providing patient care services to Medicare eligible individuals are 
not considered Federal awards expended under this part.
    (i) Medicaid. Medicaid payments to a subrecipient for providing 
patient care services to Medicaid eligible individuals are not 
considered Federal awards expended under this part unless a State 
requires the funds to be treated as Federal awards expended because 
reimbursement is on a cost-reimbursement basis.


Sec. ____.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 for-profit 
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.


Sec. ____.215  Relation to other audit requirements.

    (a) Audit under this part in lieu of other audits. An audit made in 
accordance with this part shall be in lieu of any financial audit 
required under individual Federal awards. To the extent this audit 
meets a Federal agency's needs, it shall rely upon and use such audits. 
The provisions of this part neither limit the authority of Federal 
agencies, including their Inspectors General, or GAO to conduct or 
arrange for additional audits (e.g., financial audits, performance 
audits, evaluations, inspections, or reviews) nor authorize any auditee 
to constrain Federal agencies from carrying out additional audits. Any 
additional audits shall be planned and performed in such a way as to 
build upon work performed by other auditors.
    (b) Federal agency to pay for additional audits. A Federal agency 
that conducts or contracts for additional audits shall, consistent with 
other applicable laws and regulations, arrange for funding the full 
cost of such additional audits.
    (c) Request for a program to be audited as a major program. A 
Federal agency may request an auditee to have a particular Federal 
program audited as a major program in lieu of the Federal agency 
conducting or arranging for the additional audits. To allow for 
planning, such requests should be made at least 180 days prior to the 
end of the fiscal year to be audited. The auditee, after consultation 
with its auditor, should promptly respond to such request by informing 
the Federal agency whether the program would otherwise be audited as a 
major program using the risk-based audit approach described in 
Sec. ____.520 and, if not, the estimated incremental cost. The Federal 
agency shall then promptly confirm to the auditee whether it wants the 
program audited as a major program. If the program is to be audited as 
a major program based upon this Federal agency request, and the Federal 
agency agrees to pay the full incremental costs, then the auditee shall 
have the program audited as a major program. A pass-through entity may 
use the provisions of this paragraph for a subrecipient.


Sec. ____.220  Frequency of audits.

    Except for the provisions for biennial audits provided in 
paragraphs (a) and (b) of this section, audits required by this part 
shall be performed annually. Any biennial audit shall cover both years 
within the biennial period.
    (a) A State or local government that is required by constitution or 
statute, in effect on January 1, 1987, to undergo its audits less 
frequently than annually, is permitted to undergo its audits pursuant 
to this part biennially. This requirement must still be in effect for 
the biennial period under audit.
    (b) Any non-profit organization that had biennial audits for all 
biennial periods ending between July 1, 1992, and January 1, 1995, is 
permitted to undergo its audits pursuant to this part biennially.


Sec. ____.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

[[Page 57241]]

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.


Sec. ____.230  Audit costs.

    (a) Allowable costs. Unless prohibited by law, the cost of audits 
made in accordance with the provisions of this part are allowable 
charges to Federal awards. The charges may be considered a direct cost 
or an allocated indirect cost, as determined in accordance with the 
provisions of applicable OMB cost principles circulars, the Federal 
Acquisition Regulation (FAR) (48 CFR parts 30 and 31), or other 
applicable cost principles or regulations.
    (b) Unallowable costs. A non-Federal entity shall not charge the 
following to a Federal award:
    (1) The cost of any audit under the Single Audit Act Amendments of 
1996 (31 U.S.C. 7501 et seq.) not conducted in accordance with this 
part.
    (2) The cost of auditing a non-Federal entity which has Federal 
awards expended of less than $300,000 per year and is thereby exempted 
under Sec. ____.200(d) from having an audit conducted under this part. 
However, this does not prohibit a pass-through entity from charging 
Federal awards for the cost of limited scope audits to monitor its 
subrecipients in accordance with Sec. ____.400(d)(3), provided the 
subrecipient does not have a single audit.


Sec. ____.235  Program-specific audits.

    (a) Program-specific audit guide available. In many cases, a 
program-specific audit guide will be available to provide specific 
guidance to the auditor with respect to internal control, compliance 
requirements, suggested audit procedures, and audit reporting 
requirements. The auditor should contact the Office of Inspector 
General of the Federal agency to determine whether such a guide is 
available. When a current program-specific audit guide is available, 
the auditor shall follow GAGAS and the guide when performing a program-
specific audit.
    (b) Program-specific audit guide not available. (1) When a program-
specific audit guide is not available, the auditee and auditor shall 
have basically the same responsibilities for the Federal program as 
they would have for an audit of a major program in a single audit.
    (2) The auditee shall prepare the financial statement(s) for the 
Federal program that includes, at a minimum, a schedule of expenditures 
of Federal awards for the program and notes that describe the 
significant accounting policies used in preparing the schedule, a 
summary schedule of prior audit findings consistent with the 
requirements of Sec. ____.315(b), and a corrective action plan 
consistent with the requirements of Sec. ____.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 Sec. ____.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 Sec. ____.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 Sec. ____.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 includes a summary of the auditor's results relative to 
the Federal program in a format consistent with Sec. ____.505(d)(1) and 
findings and questioned costs consistent with the requirements of 
Sec. ____.505(d)(3).
    (c) Report submission for program-specific audits. 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. (However, for fiscal years beginning on 
or before June 30, 1998, auditees shall have 13 months after the end of 
the audit period to complete the audit and submit the reporting package 
unless a different period is specified in a program-specific audit 
guide.) 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 Federal clearinghouse designated by OMB one copy of 
the data collection form prepared in accordance with Sec. ____.320(b), 
as applicable to a program-specific audit, and the reporting required 
by the program-specific 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 
data collection form prepared in accordance with Sec. ____.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 Federal clearinghouse designated by OMB to be retained as an 
archival copy and one copy of the data collection form prepared in 
accordance with Sec. ____.320(b) shall be submitted to each pass-
through entity. Also, when the schedule of findings and questioned

[[Page 57242]]

costs disclosed audit findings or the summary schedule of prior audit 
findings reported the status of any audit findings, the auditee shall 
submit one copy of the reporting package to the Federal clearinghouse 
on behalf of the Federal awarding agency, or directly to the pass-
through entity in the case of a subrecipient.
    (d) Other sections of this part may apply. Program-specific audits 
are subject to Sec. ____.100 through Sec. ____.215(b), Sec. ____.220 
through Sec. ____.230, Sec. ____.300 through Sec. ____.305, 
Sec. ____.315, Sec. ____.320(f) through Sec. ____.320(j), Sec. ____.400 
through Sec. ____.405, Sec. ____.510 through Sec. ____.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


Sec. ____.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 
Sec. ____.310.
    (e) Ensure that the audits required by this part are properly 
performed and submitted when due. When extensions to the report 
submission due date required by Sec. ____.320(a) are granted by the 
cognizant or oversight agency for audit, promptly notify the Federal 
clearinghouse designated by OMB and each pass-through entity providing 
Federal awards of the extension.
    (f) Follow up and take corrective action on audit findings, 
including preparation of a summary schedule of prior audit findings and 
a corrective action plan in accordance with Sec. ____.315(b) and 
Sec. ____.315(c), respectively.


Sec. ____.305  Auditor selection.

    (a) Auditor procurement. In arranging for audit services, auditees 
shall follow the procurement standards prescribed by the Grants 
Management Common Rule (GMCR) published March 11, 1988 and amended 
April 19, 1995 [Each agency should insert appropriate CFR citation.] 
Circular A-110, ``Uniform Requirements for Grants and Agreements with 
Institutions of Higher Education, Hospitals and Other Non-Profit 
Organizations,'' or the FAR (48 CFR part 42), as applicable. (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 GMCR, 
OMB Circular A-110, or the FAR (48 CFR part 42), as applicable. In 
requesting proposals for audit services, the objectives and scope of 
the audit should be made clear. Factors to be considered in evaluating 
each proposal for audit services include the responsiveness to the 
request for proposal, relevant experience, availability of staff with 
professional qualifications and technical abilities, the results of 
external quality control reviews, and price.
    (b) Restriction on auditor preparing indirect cost proposals. An 
auditor who prepares the indirect cost proposal or cost allocation plan 
may not also be selected to perform the audit required by this part 
when the indirect costs recovered by the auditee during the prior year 
exceeded $1 million. This restriction applies to the base year used in 
the preparation of the indirect cost proposal or cost allocation plan 
and any subsequent years in which the resulting indirect cost agreement 
or cost allocation plan is used to recover costs. To minimize any 
disruption in existing contracts for audit services, this paragraph 
applies to audits of fiscal years beginning after June 30, 1998.
    (c) Use of Federal auditors. Federal auditors may perform all or 
part of the work required under this part if they comply fully with the 
requirements of this part.


Sec. ____.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 pass-through entity and identifying 
number assigned by the pass-through entity shall be included.
    (2) Provide total Federal awards expended for each individual 
Federal program and the CFDA number or other identifying number when 
the CFDA information is not available.
    (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 Sec. ____.520(b).
    (5) To the extent practical, pass-through 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 cluster of programs. 
However, when it is not practical to list each individual Federal award 
for R&D, total Federal awards expended 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 the Federal awards expended in the form of non-cash 
assistance, insurance in effect during the year, and loans or loan 
guarantees outstanding at year end.


Sec. ____.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

[[Page 57243]]

of prior audit findings and the corrective action plan shall include 
the reference numbers the auditor assigns to audit findings under 
Sec. ____.510(c). Since the summary schedule may include audit findings 
from multiple years, it shall include the fiscal year in which the 
finding initially occurred.
    (b) Summary schedule of prior audit findings. The summary schedule 
of prior audit findings shall report the status of all audit findings 
included in the prior audit's schedule of findings and questioned costs 
relative to Federal awards. The summary schedule shall also include 
audit findings reported in the prior audit's summary schedule of prior 
audit findings except audit findings listed as corrected in accordance 
with paragraph (b)(1) of this section, or no longer valid or not 
warranting further action in accordance with paragraph (b)(4) of this 
section.
    (1) When audit findings were fully corrected, the summary schedule 
need only list the audit findings and state that corrective action was 
taken.
    (2) When audit findings were not corrected or were only partially 
corrected, the summary schedule shall describe the planned corrective 
action as well as any partial corrective action taken.
    (3) When corrective action taken is significantly different from 
corrective action previously reported in a corrective action plan or in 
the Federal agency's or pass-through entity's management decision, the 
summary schedule shall provide an explanation.
    (4) When the auditee believes the audit findings are no longer 
valid or do not warrant further action, the reasons for this position 
shall be described in the summary schedule. A valid reason for 
considering an audit finding as not warranting further action is that 
all of the following have occurred:
    (i) Two years have passed since the audit report in which the 
finding occurred was submitted to the Federal clearinghouse;
    (ii) The Federal agency or pass-through entity is not currently 
following up with the auditee on the audit finding; and
    (iii) A management decision was not issued.
    (c) Corrective action plan. At the completion of the audit, the 
auditee shall prepare a corrective action plan to address each audit 
finding included in the current year auditor's reports. The corrective 
action plan shall provide the name(s) of the contact person(s) 
responsible for corrective action, the corrective action planned, and 
the anticipated completion date. If the auditee does not agree with the 
audit findings or believes corrective action is not required, then the 
corrective action plan shall include an explanation and specific 
reasons.


Sec. ____.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. (However, 
for fiscal years beginning on or before June 30, 1998, auditees shall 
have 13 months after the end of the audit period to complete the audit 
and submit the reporting package.) 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) Data Collection. The auditee shall complete a data collection 
form which states whether the audit was completed in accordance with 
this part and provides information about the auditee, its Federal 
programs, and the results of the audit. The form shall be approved by 
OMB, available from the Federal clearinghouse designated by OMB, 
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 is accurate and complete and 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

Data Collection Form

    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 
Sec. ------.320(d)(2) and Sec. ------.320(e)(2), respectively, 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 Sec. ------.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 Sec. ------.530 of OMB Circular A-133.
    6. The dollar threshold used to distinguish between Type A and Type 
B programs as defined in Sec. ------.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 cluster of programs 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, 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: ---------------------------------- Employer 
Identification Number: ---------------------------------- Name and 
Title of Responsible Official: ---------------------------------- 
Telephone Number: ---------------------------------- Signature: ------
---------------------------- Date: ----------------------------------
    12. Auditor Name: ---------------------------------- Name and Title 
of Contact Person: ---------------------------------- Auditor Address: 
----------------------------------

[[Page 57244]]

Auditor Telephone Number: ----------------------------------
    13. Whether the auditee has a cognizant or oversight agency for 
audit.
    14. The name of the cognizant or oversight agency for audit 
determined in accordance with Sec. ------.400(a) and Sec. ------
.400(b), respectively.
    (c) Reporting Package. The reporting package shall include the:
    (1) Data collection form discussed in paragraph (b) of this 
section;
    (2) Financial statements and schedule of expenditures of Federal 
awards discussed in Sec. ____.310(a) and Sec. ____.310(b), 
respectively;
    (3) Summary schedule of prior audit findings discussed in 
Sec. ____.315(b);
    (4) Auditor's report(s) discussed in Sec. ____.505; and
    (5) Corrective action plan discussed in Sec. ____.315(c).
    (d) Submission to clearinghouse. All auditees shall submit to the 
Federal clearinghouse designated by OMB one copy of the reporting 
package described in paragraph (c) of this section for:
    (1) The Federal clearinghouse to retain as an archival copy; and
    (2) Each Federal awarding agency when the schedule of findings and 
questioned costs disclosed audit findings relating to Federal awards 
that the Federal awarding agency provided directly or the summary 
schedule of prior audit findings reported the status of any audit 
findings relating to Federal awards that the Federal awarding agency 
provided directly.
    (e) Additional submission by subrecipients. 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) Data collection form 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 pass-through 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 Federal 
clearinghouse designated by OMB. Pass-through entities shall keep 
subrecipients' submissions on file for three years from date of 
receipt.
    (h) Clearinghouse responsibilities. The Federal clearinghouse 
designated by OMB shall distribute the reporting packages received in 
accordance with paragraph (d)(2) of this section and 
Sec. ____.235(c)(3) to applicable Federal awarding agencies, maintain a 
data base of completed audits, provide appropriate information to 
Federal agencies, and follow up with known auditees which have not 
submitted the required data collection forms and reporting packages.
    (i) Clearinghouse address. The address of the Federal clearinghouse 
currently designated by OMB is Federal Audit Clearinghouse, Bureau of 
the Census, 1201 E. 10th Street, Jeffersonville, IN 47132.
    (j) Electronic filing. Nothing in this part shall preclude 
electronic submissions to the Federal clearinghouse in such manner as 
may be approved by OMB. With OMB approval, the Federal clearinghouse 
may pilot test methods of electronic submissions.

Subpart D--Federal Agencies and Pass-Through Entities


Sec. ____.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 Sec. ____.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 non-Federal auditors, and provide the results, when 
appropriate, to other interested organizations.
    (4) Promptly inform other affected Federal agencies and appropriate 
Federal law enforcement officials of any direct reporting by the 
auditee or its auditor of irregularities or illegal acts, as required 
by GAGAS or laws and regulations.
    (5) Advise the auditor and, where appropriate, the auditee of any 
deficiencies found in the audits when the deficiencies require 
corrective action by the auditor. When advised of deficiencies, the 
auditee shall work with the auditor to take corrective action. If 
corrective action is not taken, the cognizant agency for audit shall 
notify the auditor, the auditee, and applicable Federal awarding 
agencies and pass-through 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 cost-effective 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 
the definition of oversight agency for audit in Sec. ____.105. The 
oversight agency for audit:
    (1) Shall provide technical advice to auditees and auditors as 
requested.
    (2) May assume all or some of the responsibilities normally 
performed by a cognizant agency for audit.
    (c) Federal awarding agency responsibilities. The Federal awarding

[[Page 57245]]

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 pass-through entity 
shall perform the following for the Federal awards it makes:
    (1) Identify Federal awards made by informing each subrecipient of 
CFDA title and number, award name and number, award year, if the award 
is R&D, and name of Federal agency. When some of this information is 
not available, the pass-through entity shall provide the best 
information available to describe the Federal award.
    (2) Advise subrecipients of requirements imposed on them by Federal 
laws, regulations, and the provisions of contracts or grant agreements 
as well as any supplemental requirements imposed by the pass-through 
entity.
    (3) Monitor the activities of subrecipients as necessary to ensure 
that Federal awards are used for authorized purposes in compliance with 
laws, regulations, and the provisions of contracts or grant agreements 
and that performance goals are achieved.
    (4) Ensure that subrecipients expending $300,000 or more in Federal 
awards during the subrecipient's fiscal year have met the audit 
requirements of this part for that fiscal year.
    (5) Issue a management decision on audit findings within six months 
after receipt of the subrecipient's audit report and ensure that the 
subrecipient takes appropriate and timely corrective action.
    (6) Consider whether subrecipient audits necessitate adjustment of 
the pass-through entity's own records.
    (7) Require each subrecipient to permit the pass-through entity and 
auditors to have access to the records and financial statements as 
necessary for the pass-through entity to comply with this part.


Sec. ______.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 Sec. ______.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 Sec. ______.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 case-by-case basis 
by agreement among the Federal agencies concerned.
    (c) Pass-through entity. As provided in Sec. ______.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 Sec. ______.510(c).

Subpart E--Auditors


Sec. ______.500  Scope of audit.

    (a) General. The audit shall be conducted in accordance with GAGAS. 
The audit shall cover the entire operations of the auditee; or, at the 
option of the auditee, such audit shall include a series of audits that 
cover departments, agencies, and other organizational units which 
expended or otherwise administered Federal awards during such fiscal 
year, provided that each such audit shall encompass the financial 
statements and schedule of expenditures of Federal awards for each such 
department, agency, and organizational unit, which shall be considered 
to be a non-Federal entity. The financial statements and schedule of 
expenditures of Federal awards shall be for the same fiscal year.
    (b) Financial statements. The auditor shall determine whether the 
financial statements of the auditee are presented fairly in all 
material respects in conformity with generally accepted accounting 
principles. The auditor shall also determine whether the schedule of 
expenditures of Federal awards is presented fairly in all material 
respects in relation to the auditee's financial statements taken as a 
whole.
    (c) Internal control. (1) In addition to the requirements of GAGAS, 
the auditor shall perform procedures to obtain an understanding of 
internal control over Federal programs sufficient to plan the audit to 
support a low assessed level of control risk for major programs and the 
allowability of costs charged to cost pools used to support an indirect 
cost rate or allocated through a State/local-wide central service cost 
allocation plan (as fully described in Appendix C of Circular A-87, 
``Cost Principles for State, Local and Indian Tribal Governments,'' 
issued May 4, 1995, and hereinafter referred to as a ``cost allocation 
plan''). (Circular available from Office of Administration, 
Publications Office, Room 2200, New Executive Office Building, 
Washington, DC 20503; telephone (202) 395-7332.)
    (2) Except as provided in paragraph (c)(3) of this section, the 
auditor shall:
    (i) Plan the testing of internal control over major programs and 
the allowability of costs charged to cost pools used to support an 
indirect cost rate or allocated through a cost allocation plan to 
support a low assessed level of control risk for the assertions 
relevant to the compliance requirements for each major program; and
    (ii) Perform testing of internal control as planned in paragraph 
(c)(2)(i) of this section.
    (3) When internal control over some or all of the compliance 
requirements for a major program and the allowability of costs charged 
to cost pools used to support an indirect cost rate or allocated 
through a cost allocation plan 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

[[Page 57246]]

shall report a reportable condition or a material weakness in 
accordance with Sec. ______.510, assess the related control risk at the 
maximum, and consider whether additional compliance tests are required 
because of ineffective internal control.
    (d) Compliance. (1) In addition to the requirements of GAGAS, the 
auditor shall determine whether the auditee has complied with laws, 
regulations, and the provisions of contracts or grant agreements that 
may have a direct and material effect on each of its major programs and 
the allowability of costs charged to cost pools used to support an 
indirect cost rate or allocated through a cost allocation plan.
    (2) The principal compliance requirements common to most Federal 
programs and the programmatic compliance requirements of the largest 
Federal programs are included in the compliance supplements.
    (3) For the compliance requirements (common and programmatic) 
related to Federal programs contained in the compliance supplements, an 
audit of these compliance requirements will meet the requirements of 
this part. Where there have been changes to the compliance requirements 
and the changes are not reflected in the compliance 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.
    (4) The compliance testing shall include tests of transactions, 
including costs charged to cost pools used to support an indirect cost 
rate or allocated through a cost allocation plan, and such other 
auditing procedures necessary to provide the auditor sufficient 
evidence to support an opinion on compliance.
    (e) Audit follow-up. The auditor shall follow up on prior audit 
findings, perform procedures to assess the reasonableness of the 
summary schedule of prior audit findings prepared by the auditee in 
accordance with Sec. ______.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 
or the allowability of costs charged to cost pools used to support an 
indirect cost rate or allocated through a cost allocation plan 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 Sec. ______.320(d)(2) and Sec. ______.320(e)(2), 
respectively. The auditor shall retain a record of this communication 
in the auditor's working papers.


Sec. ______.505  Audit reporting.

    The auditor's report(s) may be in the form of either combined or 
separate reports and may be organized differently from the manner 
presented in this section. The auditor's report(s) shall state that the 
audit was conducted in accordance with this part and include the 
following:
    (a) An opinion (or disclaimer of opinion) as to whether the 
financial statements are presented fairly in all material respects in 
conformity with generally accepted accounting principles and an opinion 
(or disclaimer of opinion) as to whether the schedule of expenditures 
of Federal awards is presented fairly in all material respects in 
relation to the financial statements taken as a whole.
    (b) A report on internal control related to the financial 
statements, major programs, and the allowability of costs charged to 
cost pools used to support an indirect cost rate or allocated through a 
cost allocation plan. This report shall describe the scope of testing 
of internal control and the results of the tests, and, where 
applicable, refer to the separate schedule of findings and questioned 
costs described in paragraph (d) of this section.
    (c) A report on compliance with laws, regulations, and the 
provisions of contracts or grant agreements, noncompliance with which 
could have a material effect on the financial statements. This report 
shall also include an opinion (or disclaimer of opinion) as to whether 
the auditee complied with laws, regulations, and the provisions of 
contracts or grant agreements which could have a direct and material 
effect on each major program and on the allowability of costs charged 
to cost pools used to support an indirect cost rate or allocated 
through a cost allocation plan, and, where applicable, refer to the 
separate schedule of findings and questioned costs described in 
paragraph (d) of this section.
    (d) A schedule of findings and questioned costs which shall include 
the following three components:
    (1) A summary of the auditor's results which shall include:
    (i) The type of report the auditor issued on the financial 
statements of the auditee (i.e., unqualified opinion, qualified 
opinion, adverse opinion, or disclaimer of opinion);
    (ii) Where applicable, a statement that reportable conditions in 
internal control were disclosed by the audit of the financial 
statements and whether any such conditions were material weaknesses;
    (iii) A statement as to whether the audit disclosed any 
noncompliance which is material to the financial statements of the 
auditee;
    (iv) Where applicable, a statement that reportable conditions in 
internal control over major programs and the allowability of costs 
charged to cost pools used to support an indirect cost rate or 
allocated through a cost allocation plan were disclosed by the audit 
and whether any such conditions were material weaknesses;
    (v) The type of report the auditor issued on compliance for major 
programs and with the provisions of applicable OMB cost principles 
circulars, the FAR (48 CFR parts 30 and 31), or other applicable cost 
principles or regulations pertaining to the allowability of costs 
charged to cost pools used to support an indirect cost rate or 
allocated through a cost allocation plan (i.e., unqualified opinion, 
qualified opinion, adverse opinion, or disclaimer of opinion); and
    (vi) A statement as to whether the audit disclosed any audit 
findings which the auditor is required to report under 
Sec. ______.510(a).
    (2) Findings and questioned costs for the financial statements 
which are required to be reported in accordance with GAGAS.
    (3) Findings and questioned costs for Federal awards which shall 
include audit findings as defined in Sec. ______.510(a).
    (i) Audit findings (e.g., internal control findings, compliance 
findings, questioned costs, or fraud) which relate to the same issue 
should be presented as a single audit finding. Where

[[Page 57247]]

practical, audit findings should be organized by Federal agency or 
pass-through entity.
    (ii) Audit findings which relate to both the financial statements 
and Federal awards, as reported under paragraphs (d)(2) and (d)(3) of 
this section, respectively, should be reported in both schedules. 
However, the reporting in one schedule may be in summary form with a 
reference to a detailed reporting in the other schedule.


Sec. ______.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 
and over the allowability of costs charged to cost pools used to 
support an indirect cost rate or allocated through a cost allocation 
plan. The auditor's determination of whether a deficiency in internal 
control is a reportable condition for the purpose of reporting an audit 
finding is in relation to a type of compliance requirement for a major 
program, total costs charged to cost pools used to support an indirect 
cost rate or allocated through a cost allocation plan, 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 related to a major program 
and the provisions of applicable OMB cost principles circulars, the 
FAR, or other applicable cost principles or regulations pertaining to 
the allowability of costs charged to cost pools used to support an 
indirect cost rate or allocated through a cost allocation plan. 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, total costs charged to cost 
pools used to support an indirect cost rate or allocated through a cost 
allocation plan, 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 and costs charged to 
cost pools used to support an indirect cost rate or allocated through a 
cost allocation plan. Known questioned costs are those specifically 
identified by the auditor. In evaluating the effect of questioned costs 
on the opinion on compliance, the auditor considers the best estimate 
of total costs questioned (likely questioned costs), not just the 
questioned costs specifically identified (known questioned costs). The 
auditor shall also report known questioned costs when likely questioned 
costs are greater than $10,000 for a type of compliance requirement for 
a major program and costs charged to cost pools used to support an 
indirect cost rate or allocated through a cost allocation plan. In 
reporting questioned costs, the auditor shall include information to 
provide proper perspective for judging the prevalence and consequences 
of the questioned costs.
    (4) Known questioned costs which are greater than $10,000 for a 
Federal program which is not audited as a major program. Except for 
audit follow-up, the auditor is not required under this part to perform 
audit procedures for such a Federal program; therefore, the auditor 
will normally not find questioned costs for a program which is not 
audited as a major program. However, if the auditor does become aware 
of questioned costs for a Federal program which is not audited as a 
major program (e.g., as part of audit follow-up or other audit 
procedures) and the known questioned costs are greater than $10,000, 
then the auditor shall report this as an audit finding.
    (5) The circumstances concerning why the auditor's report on 
compliance for major programs and the allowability of costs charged to 
cost pools used to support an indirect cost rate or allocated through a 
cost allocation plan is other than an unqualified opinion, unless such 
circumstances are otherwise reported as audit findings in the schedule 
of findings and questioned costs for Federal awards.
    (6) Known fraud affecting a Federal award, unless such fraud is 
otherwise reported as an audit finding in the schedule of findings and 
questioned costs for Federal awards. This paragraph does not require 
the auditor to make an additional reporting when the auditor confirms 
that the fraud was reported outside of the auditor's reports under the 
direct reporting requirements of GAGAS.
    (7) Instances where the results of audit follow-up procedures 
disclosed that the summary schedule of prior audit findings prepared by 
the auditee in accordance with Sec. ______ .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 pass-through entity in the case 
of a subrecipient, to permit them to determine the cause and effect to 
facilitate prompt and proper corrective action.
    (7) Recommendations to prevent future occurrences of the deficiency 
identified in the audit finding.
    (8) Views of responsible officials of the auditee when there is 
disagreement with the audit findings, to the extent practical.
    (c) Reference numbers. Each audit finding in the schedule of 
findings and questioned costs shall include a reference number to allow 
for easy referencing of the audit findings during follow-up.


Sec. ______.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

[[Page 57248]]

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.


Sec. ______.520 Major program determination.

    (a) General. The auditor shall use a risk-based approach to 
determine which Federal programs are major programs. This risk-based 
approach shall include consideration of: Current and prior audit 
experience, oversight by Federal agencies and pass-through entities, 
and the inherent risk of the Federal program. The process in paragraphs 
(b) through (i) of this section shall be followed.
    (b) Step 1. The auditor shall identify the larger Federal programs, 
which shall be labeled Type A programs. Type A programs are defined as 
Federal programs with Federal awards expended during the audit period 
exceeding the larger of:
    (i) $300,000 or three percent (.03) of total Federal awards 
expended in the case of an auditee for which total Federal awards 
expended equal or exceed $300,000 but are less than or equal to $100 
million.
    (ii) $3 million or three-tenths of one percent (.003) of total 
Federal awards expended in the case of an auditee for which total 
Federal awards expended exceed $100 million but are less than or equal 
to $10 billion.
    (iii) $30 million or 15 hundredths of one percent (.0015) of total 
Federal awards expended in the case of an auditee for which total 
Federal awards expended exceed $10 billion.
    (2) Federal programs not labeled Type A under paragraph (b)(1) of 
this section shall be labeled Type B programs.
    (3) The inclusion of large loan and loan guarantees (loans) should 
not result in the exclusion of other programs as Type A programs. When 
a Federal program providing loans significantly affects the number or 
size of Type A programs, the auditor shall consider this Federal 
program as a Type A program and exclude its values in determining other 
Type A programs.
    (4) For biennial audits permitted under Sec. ______.220, the 
determination of Type A and Type B programs shall be based upon the 
Federal awards expended during the two-year period.
    (c) Step 2. The auditor shall identify Type A programs which are 
low-risk. For a Type A program to be considered low-risk, it shall have 
been audited as a major program in at least one of the two most recent 
audit periods (in the most recent audit period in the case of a 
biennial audit), and, in the most recent audit period, it shall have 
had no audit findings under Sec. ______.510(a). However, the auditor 
may use judgment and consider that audit findings from questioned costs 
under Sec. ______.510(a)(3) and Sec. ______.510(a)(4), fraud under 
Sec. ______.510(a)(6), and audit follow-up for the summary schedule of 
prior audit findings under Sec. ______.510(a)(7) do not preclude the 
Type A program from being low-risk. The auditor shall consider: the 
criteria in Sec. ______.525(c), Sec. ______.525(d)(1), 
Sec. ______.525(d)(2), and Sec. ______.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. The auditor shall identify Type B programs which are 
high-risk using professional judgment and the criteria in 
Sec. ______.525. However, should the auditor select Option 2 under Step 
4 (paragraph (e)(2)(i)(B) of this section), the auditor is not required 
to identify more high-risk Type B programs than the number of low-risk 
Type A programs. Except for known reportable conditions in internal 
control or compliance problems as discussed in Sec. ______.525(b)(1), 
Sec. ______.525(b)(2), and Sec. ______.525(c)(1), a single criteria in 
Sec. ______.525 would seldom cause a Type B program to be considered 
high-risk.
    (2) An audit under this part is not expected to test relatively 
small Federal programs. Therefore, except to meet the percentage of 
coverage 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 
awards expended when the auditee has less than or equal to $100 million 
in total Federal awards expended.
    (ii) $300,000 or three-hundredths of one percent (.0003) of total 
Federal awards expended when the auditee has more than $100 million in 
total Federal awards expended.
    (e) Step 4. At a minimum, the auditor shall audit all of the 
following as major programs:
    (1) All Type A programs, except the auditor may exclude any Type A 
programs identified as low-risk under Step 2 (paragraph (c)(1) of this 
section).
    (2) (i) High-risk Type B programs as identified under either of the 
following two options:
    (A) Option 1. At least one half of the Type B programs identified 
as high-risk under Step 3 (paragraph (d) of this section), except this 
paragraph (e)(2)(i)(A) does not require the auditor to audit more high-
risk Type B programs than the number of low-risk Type A programs 
identified as low-risk under Step 2.
    (B) Option 2. One high-risk Type B program for each Type A program 
identified as low-risk under Step 2.
    (ii) When identifying which high-risk Type B programs to audit as 
major under either Option 1 or 2 in paragraph (a)(2)(i) (A) or (B) of 
this section, the auditor is encouraged to use an approach which 
provides an opportunity for different high-risk Type B programs to be 
audited as major over a period of time.
    (3) Such additional programs as may be necessary to comply with the 
percentage of coverage rule discussed in paragraph (f) of this section. 
This paragraph (e)(3) may require the auditor to audit more programs as 
major than the number of Type A programs.
    (f) Percentage of coverage rule. The auditor shall audit as major 
programs Federal programs with Federal awards expended that, in the 
aggregate, encompass at least 50 percent of total Federal awards 
expended. If the auditee meets the criteria in Sec. ______.530 for a 
low-risk auditee, the auditor need only audit as major programs Federal 
programs with Federal awards expended that, in the aggregate, encompass 
at least 25 percent of total Federal awards expended.
    (g) Documentation of risk. The auditor shall document in the 
working papers the risk analysis process used in determining major 
programs.

[[Page 57249]]

    (h) Auditor's judgment. When the major program determination was 
performed and documented in accordance with this part, the auditor's 
judgment in applying the risk-based approach to determine major 
programs shall be presumed correct. Challenges by Federal agencies and 
pass-through entities shall only be for clearly improper use of the 
guidance in this part. However, Federal agencies and pass-through 
entities may provide auditors guidance about the risk of a particular 
Federal program and the auditor shall consider this guidance in 
determining major programs in audits not yet completed.
    (i) Deviation from use of risk criteria. For first-year audits, the 
auditor may elect to determine major programs as all Type A programs 
plus any Type B programs as necessary to meet the percentage of 
coverage rule discussed in paragraph (f) of this section. Under this 
option, the auditor would not be required to perform the procedures 
discussed in paragraphs (c), (d), and (e) of this section.
    (1) A first-year audit is the first year the entity is audited 
under this part or the first year of a change of auditors.
    (2) To ensure that a frequent change of auditors would not preclude 
audit of high-risk Type B programs, this election for first-year audits 
may not be used by an auditee more than once in every three years.


Sec. ______.525  Criteria for Federal program risk.

    (a) General. The auditor's determination should be based on an 
overall evaluation of the risk of noncompliance occurring which could 
be material to the Federal program. The auditor shall use auditor 
judgment and consider criteria, such as described in paragraphs (b), 
(c), and (d) of this section, to identify risk in Federal programs. 
Also, as part of the risk analysis, the auditor may wish to discuss a 
particular Federal program with auditee management and the Federal 
agency or pass-through entity.
    (b) Current and prior audit experience. (1) Weaknesses in internal 
control over Federal programs would indicate higher risk. Consideration 
should be given to the control environment over Federal programs and 
such factors as the expectation of management's adherence to applicable 
laws and regulations and the provisions of contracts and grant 
agreements and the competence and experience of personnel who 
administer the Federal programs.
    (i) A Federal program administered under multiple internal control 
structures may have higher risk. When assessing risk in a large single 
audit, the auditor shall consider whether weaknesses are isolated in a 
single operating unit (e.g., one college campus) or pervasive 
throughout the entity.
    (ii) When significant parts of a Federal program are passed through 
to subrecipients, a weak system for monitoring subrecipients would 
indicate higher risk.
    (iii) The extent to which computer processing is used to administer 
Federal programs, as well as the complexity of that processing, should 
be considered by the auditor in assessing risk. New and recently 
modified computer systems may also indicate risk.
    (2) Prior audit findings would indicate higher risk, particularly 
when the situations identified in the audit findings could have a 
significant impact on a Federal program or have not been corrected.
    (3) Federal programs not recently audited as major programs may be 
of higher risk than Federal programs recently audited as major programs 
without audit findings.
    (c) Oversight exercised by Federal agencies and pass-through 
entities. (1) Oversight exercised by Federal agencies or pass-through 
entities could indicate risk. For example, recent monitoring or other 
reviews performed by an oversight entity which disclosed no significant 
problems would indicate lower risk. However, monitoring which disclosed 
significant problems would indicate higher risk.
    (2) Federal agencies, with the concurrence of OMB, may identify 
Federal programs which are higher risk. OMB plans to provide this 
identification in the compliance 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 Federal awards expended would be of 
higher risk than programs with substantially smaller Federal awards 
expended.


Sec. ______.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 
Sec. ______.520(f):
    (a) Single audits were performed on an annual basis in accordance 
with the provisions of this part. A non-Federal entity that has 
biennial audits does not qualify as a low-risk auditee.
    (b) The auditor's opinions on the financial statements and the 
schedule of expenditures of Federal awards were unqualified. However, 
the cognizant or oversight agency for audit may judge that an opinion 
qualification does not affect the management of Federal awards and 
provide a waiver.
    (c) There were no deficiencies in internal control which were 
identified as material weaknesses under the requirements of GAGAS. 
However, the cognizant or oversight agency for audit may judge that any 
identified material weaknesses do not affect the management of Federal 
awards and provide a waiver.
    (d) None of the Federal programs had audit findings from any of the 
following in either of the preceding two years in which they were 
classified as Type A programs:
    (1) Internal control deficiencies which were identified as material 
weaknesses;
    (2) Noncompliance with the provisions of laws, regulations, 
contracts, or grant agreements which have a material effect on the Type 
A program; or
    (3) Known or likely questioned costs that exceed five percent of 
the total Federal awards expended for a Type A program during the year.

[FR Doc. 96-27819 Filed 11-4-96; 8:45 am]
BILLING CODE 3110-01-P