[Federal Register Volume 62, Number 125 (Monday, June 30, 1997)]
[Notices]
[Pages 35278-35302]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16965]



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Part III





Office of Management and Budget





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Audits of States, Local Governments, and Non-Profit Organizations and 
OMB Circular A-133 Information Collection Under OMB Review; Notices

  Federal Register / Vol. 62, No. 125 / Monday, June 30, 1997 / 
Notices  

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OFFICE OF MANAGEMENT AND BUDGET


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

AGENCY: Office of Management and Budget.

ACTION: Final revision of OMB Circular No. A-133, final rescission of 
OMB Circular No. A-128, and notice of document availability of the 
Provisional Circular A-133 Compliance Supplement.

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SUMMARY: This revision of Office of Management and Budget (OMB) 
Circular No. A-133, re-titled ``Audits of States, Local Governments, 
and Non-Profit Organizations,'' establishes uniform audit requirements 
for non-Federal entities that administer Federal awards and implements 
the Single Audit Act Amendments of 1996, which were signed into law on 
July 5, 1996 (Public Law 104-156). OMB Circular No. A-128, ``Audits of 
States and Local Governments,'' issued in 1985, is rescinded, as a 
result of the consolidation of audit requirements under Circular A-133.
    One of the more significant revisions is that the threshold for 
when an entity is required to have an audit is raised from $25,000 to 
$300,000. This will significantly reduce audit costs for many small 
entities. Other significant changes are: a report submission due date 
which is shortened from 13 to 9 months and a report submission process 
that includes a data collection form and streamlined filing 
requirements (Sec. ____.320); a new risk-based approach for major 
program determination (Sec. ____.520); and, additional guidance for 
program-specific audits (Sec. ____.235), audit findings 
(Sec. ____.510), and audit findings follow-up (Sec. ____.315).
    This Notice also offers interested parties an opportunity to 
comment on the provisional ``Circular A-133 Compliance Supplement,'' 
provided as Appendix B to Circular A-133. However, due to its length, 
the provisional ``Circular A-133 Compliance Supplement'' is not 
included in this Notice. See ADDRESSES for information about how to 
obtain a copy.

DATES: The revised Circular is effective July 30, 1997. Federal 
agencies shall adopt the standards set forth in this revised Circular 
in codified regulations not later than August 29, 1997.
    The standards set forth in Sec. ____.400, which apply directly to 
Federal agencies, shall apply to audits of fiscal years beginning after 
June 30, 1996, except as otherwise specified in Sec. ____.400(a).
    The standards set forth in this Circular which Federal agencies 
shall apply to non-Federal entities shall apply to audits of fiscal 
years beginning after June 30, 1996, with the exception that 
Sec. ____.305(b) applies to audits of fiscal years beginning after June 
30, 1998. The requirements of Circular A-128, although the Circular is 
rescinded, and the 1990 version of Circular A-133 continue to apply for 
audits of fiscal years beginning on or before June 30, 1996.
    All comments on the provisional ``Circular A-133 Compliance 
Supplement'' should be in writing, and must be received by November 30, 
1997. Late comments will be considered to the extent practicable.

ADDRESSES: A copy of the Circular may be obtained from the OMB fax 
information line, 202-395-9068, document number 1133; OMB home page on 
the Internet which is currently located at http://www.whitehouse.gov/
WH/EOP/omb, under the captions ``OMB Documents,'' and then ``Grants 
Management;'' or by writing or calling the Office of Administration, 
Publications Office, room 2200, New Executive Office Building, 
Washington, DC 20503, telephone (202) 395-7332. A single copy of the 
provisional ``Circular A-133 Compliance Supplement'' may be obtained 
from EOP Publications, Office of Administration, 2200 NEOB, Washington, 
DC 20503 (telephone 202-395-7332). The provisional ``Circular A-133 
Compliance Supplement'' is also available from the OMB home page.
    Comments on the provisional ``Circular A-133 Compliance 
Supplement'' should be mailed to the 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 the applicable page 
numbers. When comments of five pages or less are sent in by facsimile 
(fax), they should be faxed to (202) 395-4915. Electronic mail comments 
may be submitted via the 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 would send a copy of 
comments on either a 3.5 or 5.25 inch diskette in either WordPerfect 
5.1 or 6.0, 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.

FOR FURTHER INFORMATION CONTACT: Recipients should contact their 
cognizant or oversight agency for audit, or Federal awarding agency, as 
may be appropriate in the circumstances. Subrecipients should contact 
their pass-through entity. Federal agencies should contact Sheila O. 
Conley, Office of Management and Budget, Office of Federal Financial 
Management, Financial Standards and Reporting Branch, telephone (202) 
395-3993.

SUPPLEMENTARY INFORMATION:

A. Background

    The Office of Management and Budget (OMB) received approximately 80 
letters providing approximately 600 individual comments in response to 
its Federal Register proposal of November 5, 1996 (61 FR 57232-57249). 
Letters came from Federal agencies (including Offices of Inspectors 
General), State governments (including State auditors), certified 
public accountants (CPAs), internal auditors, non-profit organizations 
(including colleges and universities), professional organizations, and 
others. All comments were considered in developing this final revision.
    The November 5, 1996, Federal Register notice, requested public 
comment on the proposed revision and retitling of Circular A-133, 
``Audits of States, Local Governments, and Non-Profit Organizations,'' 
and proposed rescission of Circular A-128, ``Audits of States and Local 
Governments.'' Section B presents a summary of the major public 
comments grouped by subject and a response to each comment. Other 
technical amendments were made to conform to professional auditing 
standards and to increase clarity and readability.
    The November 5, 1996, Federal Register notice also requested 
comment on two proposed information collection requirements contained 
in the proposed revision to Circular A-133. A summary of the comments 
received relating to the proposed information collection requirements 
and response to each comment is published in a companion Notice in this 
Part in today's Federal Register.
    Interested parties may wish to refer to this Notice for a detailed 
discussion of the following information collection

[[Page 35279]]

matters: estimates of reporting burden; necessity of the data 
collection form; data collection form duplicates other reported 
information; data elements in the data collection form; suggested 
additional data elements for inclusion in the form; who should sign the 
data collection form for the auditee; level of form's specificity 
provided in the Circular and supplemental forms; data collection form 
sent only to the Federal clearinghouse; applicability of Freedom of 
Information Act and other Federal laws; report copies; report 
submission and distribution; Federal clearinghouse responsibilities; 
requirement for the auditor to prepare and sign the data collection 
form; increased costs for auditors to prepare and sign form; retention 
of audit workpapers; schedule of expenditures of Federal awards; 
summary schedule of prior audit findings; summary of the auditor's 
results; auditor's schedule of findings and questioned costs; report 
due date; and effective date for the data collection form requirement.
    Readers of this Notice should especially note the discussion of the 
requirement for the auditor to prepare and sign the data collection 
form due to its impact on the text of the Circular. Other matters 
addressed in the accompanying Notice also resulted in revisions to the 
text of the Circular but are not repeated in this Notice.

B. Public Comments and Responses

Overall Reaction to the Proposed Revision to Circular A-133

Comment
    Most commenters overwhelmingly supported the proposed revisions and 
believe that the revisions will greatly increase the efficiency and 
effectiveness of the single audit process. Several State auditors 
commented that the proposed revision to Circular A-133 was similar to 
what they expected, particularly in light of the changes included in 
the Single Audit Act Amendments of 1996 (1996 Amendments), which were 
signed into law on July 5, 1996 (Public Law 104-156). Many commenters 
were pleased with some of the most significant changes, such as: (a) 
the increased threshold that triggers an audit requirement from $25,000 
to $300,000; (b) the risk-based approach to determining major programs; 
(c) the uniformity of audit requirements for States, local governments, 
and non-profit organizations; and, (d) the removal of the current 
requirement to report virtually all audit findings and questioned 
costs. A few commenters requested that the audit threshold remain at 
$25,000. Although most commenters supported these significant 
revisions, many commenters expressed concern about other proposals 
included in the proposed revision, on which OMB specifically requested 
public comment, such as the audit coverage for the allowability of 
charges to cost pools, and whether the auditor should prepare and sign 
the data collection form.
    Response: The most significant provisions included in the proposed 
revision to Circular A-133 that commenters strongly supported are 
included in the final revision to Circular A-133. Several proposals, 
such as the audit threshold of $300,000, are based in the 1996 
Amendments and, therefore, are adopted in the final Circular. Each of 
the proposals on which OMB requested public comment are addressed in 
the following sections or accompanying Notice. Some of the comments 
resulted in changes to the final revision.

Consolidation of Circular A-128 Into Circular A-133

Comment
    All but one commenter strongly supported the proposal to 
consolidate Circular A-128 into Circular A-133, and rescind Circular A-
128. Reasons cited include less confusion for auditees and auditors, 
uniformity of audit requirements for non-Federal entities that 
administer Federal awards, and consistency with concepts included in 
the 1996 Amendments. One Federal agency that oversees Indian tribal 
governments expressed concern about rescinding Circular A-128 because 
many Indian tribal governments have not yet submitted audit reports 
required by Circular A-128 for audits of fiscal years beginning on or 
before June 30, 1996.
    Response: Pursuant to the 1996 Amendments, which establish uniform 
audit requirements for non-Federal entities that administer Federal 
awards, the final revision to Circular A-133 extends its coverage to 
include State and local governments. In response to the Federal 
agency's concern about Indian tribal governments, it should be noted 
that States, including Indian tribal governments for purposes of the 
Circular, and local governments are subject to the requirements of 
Circular A-128, issued April 12, 1985, for audits of fiscal years 
beginning on or before June 30, 1996. Sanctions are provided in 
Circular A-128 and are available for use by Federal agencies, as 
considered necessary, in instances of continued inability or 
unwillingness to comply with the requirements of Circular A-128. The 
rescission of Circular A-128 applies to audits of State and local 
governments for fiscal years beginning after June 30, 1996.
Comment
    In light of the proposed rescission of Circular A-128, several 
commenters requested that the title of Circular A-133 be expanded to 
also include Indian tribal governments.
    Response: No change was made as a result of these comments. For 
single audit purposes, Indian tribal governments are included under the 
definition of ``State'' in Circular A-133 based on the statutory 
definition of ``State'' in the Single Audit Act of 1984 and the 1996 
Amendments.

Effective Date

Comment
    Several Federal agencies questioned which audit requirements are 
effective prior to codification of the revised Circular in a Federal 
agency's regulations. Paragraph ten of the proposed revision states 
that the standards set forth in the revised Circular shall be adopted 
by Federal agencies in codified regulations not later than six months 
after publication ``in the Federal Register, so that they apply to 
audits of fiscal years beginning after June 30, 1996 * * * 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.'' Several Federal agencies also requested clarification about 
how the requirements of Circular A-133 should be codified in Federal 
agency regulations.
    Response: The sentence regarding the interim period was removed 
from the revised Circular. The 1996 Amendments (31 U.S.C. 7505(a)) 
require that ``each Federal agency shall promulgate such amendments to 
its regulations as may be necessary to conform such regulations to the 
requirements of this chapter and of such guidance [provided by the 
Director of OMB to implement the 1996 Amendments].'' Federal agencies 
shall adopt the provisions of the revised Circular not later than 60 
days after publication of the revised Circular in the Federal Register. 
OMB is coordinating an effort to facilitate Federal agency compliance 
with this adoption requirement.

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Limited Scope Audits for Subrecipients With Federal Awards Expended of 
Less Than $300,000 Annually

Comment
    Many commenters requested that further guidance be provided in the 
Circular to assist in determining what types of procedures would 
qualify as ``limited scope audits to monitor subrecipients.''
    Response: The 1996 Amendments (31 U.S.C. 7505(b)(1)(A)(ii)) 
prohibit a non-Federal entity from charging to a Federal award the cost 
of a Circular A-133 audit when the amount of Federal awards expended is 
less than $300,000 per year, except that OMB may allow the cost of 
limited scope audits to monitor subrecipients. A sentence was added to 
the final revision of Circular A-133 (Sec. ____.230(b)(2)) which 
defines limited scope audits to include only agreed-upon procedures 
engagements conducted in accordance with either the American Institute 
of Certified Public Accountants' (AICPA) generally accepted auditing 
standards (GAAS) or attestation standards, that are paid for and 
arranged by a pass-through entity and only address one or more of the 
following types of compliance requirements: activities allowed or 
unallowed; allowable costs/cost principles; eligibility; matching, 
level of effort, earmarking; and, reporting.
    For subrecipients that expend less than $300,000 in Federal awards 
annually, the cost of any audits or attestation engagements, other than 
limited scope audits described in the previous paragraph, are not 
allowable costs and, therefore, cannot be charged to any Federal award. 
This provision would prohibit the cost of a financial statement audit 
conducted in accordance with GAAS or generally accepted government 
auditing standards (GAGAS) issued by the Comptroller General of the 
United States from being charged (by either a pass-through entity or 
subrecipient) to Federal awards for a subrecipient that expends less 
than $300,000 in Federal awards annually.

Subrecipient Monitoring

Comment
    One State agency recommended that pass-through entities no longer 
be required to monitor subrecipients expending less than $300,000 in 
Federal awards. Some pass-through entities expressed concern that they 
might be expected to perform audit procedures for each of their 
subrecipients not covered by Circular A-133. Some subrecipients stated 
concern that the requirement to monitor subrecipients expending under 
$300,000 in Federal awards could result in a return to grant-by-grant 
auditing of such entities.
    Response: The 1996 Amendments (31 U.S.C. 7502(f)(2)(B)) require 
pass-through entities to monitor a subrecipient's use of Federal awards 
through site visits, limited scope audits, or other means. In light of 
the increased threshold that triggers an audit requirement under the 
Circular to $300,000 or more in Federal awards expended per year, pass-
through entities will need to make appropriate changes in their 
agreements with subrecipients to reflect that Circular A-133 audits 
will no longer be required for non-Federal entities with total Federal 
awards expended of less than $300,000 annually.
    Since pass-through entities are held accountable for Federal awards 
administered by their subrecipients, they will also 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, such as on-site visits, 
reviews of documentation supporting requests for reimbursement, and 
limited scope audits (e.g., agreed-upon procedures performed over 
eligibility determinations made by subrecipients), can be more targeted 
and less costly than a full Circular A-133 audit. OMB expects pass-
through entities to consider various risk factors in developing 
subrecipient monitoring procedures, such as the relative size and 
complexity of the Federal awards administered by subrecipients, prior 
experience with each subrecipient, and the cost-effectiveness of 
various monitoring procedures.
    For example, if a pass-through entity provides a large percentage 
of the only Federal award it expends to 10 subrecipients that each 
expend less than $300,000 in Federal awards annually, then the pass-
through entity should carefully consider the most cost-effective method 
of monitoring these Federal awards. Perhaps the majority of this 
Federal award is provided to two subrecipients. The pass-through entity 
might consider conducting site visits at these two subrecipients and 
simply reviewing the documentation supporting requests for 
reimbursement from the other eight subrecipients. Conversely, if a 
small percentage of a Federal award is provided to subrecipients that 
each expend less than $300,000 in Federal awards, the risk to the pass-
through entity is most likely low and, therefore, the monitoring 
procedures could be minimal.
    OMB believes that this approach to designing subrecipient 
monitoring procedures should result in cost-effective monitoring and 
minimize the return to grant-by-grant auditing. This is a matter of 
particular importance to OMB and small recipients of Federal awards. 
Over the next few years, OMB and Federal agencies will review 
implementation of subrecipient monitoring procedures by pass-through 
entities to determine whether additional guidance or subsequent 
revisions to the Circular is warranted in this area.

Audit Coverage for the Allowability of Charges to Cost Pools

Comment:
    Several Federal auditors and Federal agencies supported the 
proposed treatment 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 (CAP). Most State auditors, State 
agencies, CPAs, and college and university commenters strongly opposed 
the proposal stating that the proposed revision appears to: (1) elevate 
coverage of indirect costs and CAPs to major program status, which 
would exceed the requirements of the 1996 Amendments; (2) require 
coverage regardless of materiality; (3) violate the risk-based approach 
to determining major programs; and, (4) single out indirect costs for 
extensive coverage beyond other elements of cost charged to Federal 
awards. Some commenters noted logistical difficulties that may result 
from the timing differences between when costs are charged to pools 
used to support an indirect cost rate or CAP; when the plans are 
submitted and negotiated; and when indirect costs are actually charged 
to Federal awards. Several college and university commenters opposed 
any additional requirements in this area because they believe that 
Federal cost negotiators perform some sort of audit of costs charged to 
cost pools under Circular A-21, ``Cost Principles for Educational 
Institutions.'' Most commenters requested that additional guidance, 
either in the Circular or the compliance supplement, be provided to 
assist auditors in this area.
    Response: The proposed revision included certain phrases that were 
intended 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 CAP (as fully described in Appendix C of 
Circular A-87, ``Cost

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Principles for State, Local and Indian Tribal Governments,'' issued May 
4, 1995 (60 FR 26484)). The suggested language was included in the 
proposed revision to address the timing of when costs charged to cost 
pools used to support an indirect cost rate or allocated through a CAP 
should be audited. This area presents unique timing considerations due 
to the manner in which indirect cost rates and CAPs are developed. 
Indirect cost rates are usually based on costs incurred in a base 
period and applied prospectively. Costs allocated through a CAP are 
typically based on the actual costs incurred in the current year and 
also previous years.
    OMB did not intend for costs charged to cost pools used to support 
an indirect cost rate or allocated through a CAP to be audited every 
year as a major program regardless of materiality. As a result of the 
comments received, the suggested language relating to the treatment of 
indirect costs and costs allocated through a CAP was removed from 
Sec. ____.500, Sec. ____.505, and Sec. ____.510 of the final revision 
of Circular A-133.
    Although specific mention of indirect costs and costs allocated 
through a CAP was removed from the Circular, this removal does not 
diminish the auditor's responsibility for such costs. Accordingly, when 
indirect costs or allocated costs have a direct and material effect on 
any major program, the auditor is responsible for determining the 
propriety of costs charged to cost pools that are used to calculate an 
indirect cost rate or allocated through a CAP in the year in which the 
charges affect a major program. Because it may not be practical to 
perform such tests retroactively (e.g., when there is a change in 
auditors), OMB encourages the auditor to perform tests of costs charged 
to cost pools during the period when the actual costs were incurred or 
during the period when the proposal or plan is finalized, rather than 
waiting until the period when the rate was applied or in which the 
costs were allocated. Further guidance relating to audit coverage of 
indirect costs is provided in the provisional ``Circular A-133 
Compliance Supplement.''
    To illustrate the unique timing considerations relating to indirect 
costs and the impact on the audit process, assume that the actual costs 
charged to cost pools for 1997 form the basis for the indirect cost 
proposal to be submitted in 1998, and the final negotiated indirect 
cost rate that will be applied in 1999. Also, assume that indirect 
costs charged to a major program in 1999 are material. In this 
situation, the auditor is strongly encouraged to test actual costs 
charged to cost pools during 1997 as part of the 1997 audit, since 1997 
is the base year, or as part of the 1998 audit, since 1998 is the year 
when the proposal will be finalized, submitted, and negotiated. If the 
auditor tests the actual costs charged to the cost pools as part of 
either the 1997 or 1998 audit (or can appropriately rely on the work 
performed by other auditors in these years), then the auditor's 
responsibility in 1999 will relate primarily to determining whether the 
appropriate rate was applied in 1999. However, if no prior audit work 
was done relating to the actual costs charged to cost pools used to 
support the rate used to charge a major program in 1999, then the 
auditor conducting the 1999 audit would be expected to test such costs, 
in addition to determining whether the appropriate rate was applied in 
1999.
    This area is of particular concern to OMB and Federal cost 
negotiators. Contrary to the views expressed by several commenters, 
Federal cost negotiators do not typically audit costs charged to cost 
pools used to support an indirect cost rate or allocated through a CAP. 
In the next few years, OMB and Federal agencies will monitor the 
coverage of indirect costs under Circular A-133 audits to determine 
whether additional guidance or subsequent revisions to the Circular are 
warranted. OMB may also consider if the coverage of indirect costs 
should be addressed separately from Circular A-133 audits in the 
future, possibly as separate engagements using the AICPA's attestation 
standards.

Audit Cognizance

Comment
    One Federal auditor requested that OMB delay the effective date for 
the new method of determining the cognizant agency for audit for State 
and local governments because guidance relating to changing from one 
cognizant agency to another has not yet been provided. Another Federal 
auditor requested that the Circular name that agency as the cognizant 
agency for audit for every State based on the large amount of Federal 
funding provided by that Federal agency to States. Another Federal 
auditor opposed having one Federal agency responsible for audit 
cognizance for all States. Several State auditors and State agencies 
requested that they be permitted to retain their current cognizant 
agency for audit, and that they have input into future changes, if any, 
in audit cognizance.
    Response: The primary reason for revising the approach to 
determining audit cognizance is to provide a straightforward method 
that can be used by the majority of auditees without the involvement of 
OMB. The previous policy whereby OMB was responsible for assigning 
audit cognizance did not work well, particularly for non-profit 
organizations. The proposed revision includes an approach whereby the 
auditee could readily determine its cognizant or oversight agency for 
audit based on which Federal agency provided the predominance of 
funding. However, several commenters noted that the proposal may have 
unintended consequences on some State and local governments that, under 
Circular A-128, were previously assigned cognizant agencies for audit 
by OMB in 1986 and have developed strong working relationships with 
their cognizant agencies.
    In response to the comments received, the Circular was modified to 
reflect that current cognizant agency assignments shall continue in 
effect for States (including Indian tribal governments) and local 
governments that expend more than $25 million a year in Federal awards 
until fiscal years beginning after June 30, 2000. Thereafter, the 
method prescribed in Sec. 400(a) shall be used by State and local 
governments for determining audit cognizance. This delay should provide 
sufficient time to smoothly transition from one Federal agency to 
another, or to request that OMB designate a specific cognizant agency 
for audit assignment, as circumstances warrant. However, for State and 
local governments that expend more than $25 million a year in Federal 
awards but do not have a currently assigned cognizant agency for audit, 
Sec. ____.400(a) shall be used to determine audit cognizance upon the 
effective date of the Circular.
    OMB expects to designate specific audit cognizance assignments for 
only a limited number of entities. However, if a change in audit 
cognizance is desired, then auditees are expected to first work through 
their Federal awarding agencies to obtain a reassignment. If the 
request cannot be adequately resolved among the Federal agencies, then 
the Federal agencies may contact OMB to resolve the matter. In response 
to several commenters, this process will permit auditees to be involved 
in future changes in audit cognizance.
    The proposal indicates that, in instances in which OMB makes a 
specific cognizant agency for audit assignment, the assignment would be 
published in the Federal Register. OMB reconsidered the necessity of

[[Page 35282]]

performing this procedure and removed this provision from the final 
Circular. However, when specific assignments are made by OMB, OMB will 
inform the parties involved (e.g., the auditee and the Federal agencies 
involved) of the assignment.
Comment
    Several Federal agencies and numerous college and university 
commenters expressed strong concern that the cognizant agency 
determination included in Circular A-133 is not consistent with 
Circular A-21, ``Cost Principles for Educational Institutions,'' and 
could result in an entity having one cognizant agency for audit 
purposes and another for indirect cost negotiation.
    Response: No change was made as a result of these comments. Under 
Circular A-21, cost negotiation cognizance for the majority of colleges 
and universities is currently assigned to either the Department of 
Health and Human Services (HHS) or the Office of Naval Research (ONR) 
in the Department of Defense. OMB believes that it is unnecessary to 
require these two Federal agencies to also assume responsibility for 
audit cognizance for each of the colleges and universities for which 
they serve as cost negotiation cognizance. This additional 
responsibility for audit cognizance may impede HHS' or ONR's ability to 
fulfill their cost negotiation duties. Cost negotiation cognizance 
requires a high degree of specialized skills. However, any Federal 
agency is capable of performing audit cognizance duties. The 
responsibilities for audit cognizance (Sec. ____.400(a)) and indirect 
cost negotiation are different and, therefore, the same Federal agency 
need not be cognizant for both. While OMB expects that the Federal 
agency responsible for audit cognizance and cost negotiation cognizance 
will be the same in many instances, when they are different, the 
Federal agencies involved will be expected to coordinate their efforts 
to avoid duplication and disruption to the auditee.
Comment
    Clarification was requested by many commenters on how to determine 
the predominant amount of direct funding for purposes of determining 
the cognizant agency for audit. One Federal auditor questioned whether 
loans and loan guarantees should be considered in the calculation. 
Several college and university commenters expressed concern that the 
term ``direct funding'' could be misinterpreted to mean the amount of 
``awards,'' rather than ``expenditures.''
    Response: No change was made as a result of these comments. The 
Circular states that the predominant amount of direct funding shall be 
based upon direct ``Federal awards expended'' in the recipient's fiscal 
year. Sec. ____.205 of the final revision addresses the basis for 
determining the amount of Federal awards expended and specifically 
discusses the treatment of loans and loan guarantees. Sec. ____.205 
shall also be followed for purposes of determining the cognizant agency 
for audit.

Required Level of Internal Control Testing

Comment
    Four State auditors and one CPA commenter opposed the proposed 
requirement for the auditor to plan the testing of internal control 
over major programs to support a low assessed level of control risk. 
One commenter stated that the Circular assumes that control risk is 
always either low or high and that it ``does not recognize that control 
risk may be anywhere on a continuum from low to high (with ``high'' 
indicating ineffective control). When an auditor gains an understanding 
of an entity's internal control and determines that the controls are 
not ineffective, but are also not sufficient to support a low assessed 
level of control risk, then no amount of planning or testing will 
support a low assessed level of control risk.'' Two commenters 
recommended that OMB allow the assessment of control risk at a moderate 
level, unless internal control is determined to be ineffective.
    Response: No change was made as a result of these comments. Many 
Federal agencies are concerned that not enough testing of internal 
control over major programs is performed as part of single audits. The 
President's Council on Integrity and Efficiency's (PCIE) ``Study on 
Improving the Single Audit Process,'' issued in September 1993, 
highlighted the disparity between Federal agencies' expectations 
relating to the extent of internal control testing and the actual 
testing of internal control performed by auditors. The study identified 
the lack of clear requirements as a cause for this deficiency. The 
study recommended that the Circular ``Require the auditor to plan the 
internal control testing to perform sufficient tests to support an 
assessed level of control risk of low for each program tested as 
major.'' OMB believes that the Circular clearly describes the Federal 
Government's expectations relating to the coverage of internal control 
under single audits, in terminology that is consistent with 
professional auditing standards.
    It has been a longstanding Federal policy that the recipient of 
Federal funds is required to establish a system of internal control to 
provide reasonable assurance that it is managing Federal funds in 
compliance with applicable laws and regulations. Also, the 1996 
Amendments (31 U.S.C. 7502(e)(3)) require the auditor to test controls 
unless they are deemed to be ineffective. Therefore, it is reasonable 
to require the auditor to plan the audit consistent with the level of 
internal control which the recipient of Federal funds is required to 
maintain. Also, the Circular permits the auditor to not test internal 
controls which are inadequate and, instead, disclose a reportable 
condition (including whether any such condition is a material weakness) 
and perform additional tests of compliance as necessary in the 
auditor's judgment.

Compliance Supplement

Comment
    Several State auditors and CPA commenters stated that, while 
significant progress was made to improve the single audit process, it 
is critically important for OMB to move swiftly to issue a revised 
compliance supplement, which is needed to conduct single audits. They 
emphasized the importance of finalizing and publishing this document as 
quickly as possible to facilitate audits of fiscal years beginning 
after June 30, 1996 (i.e., the first audits to be conducted using the 
revised Circular).
    Response: OMB agrees that the compliance supplement is vital to 
successful implementation. In response to these comments, OMB is 
including a provisional compliance supplement as Appendix B to the 
final revision to Circular A-133. It is being issued at this time in 
provisional form so that it can be used as part of the first audits 
conducted in accordance with the revised Circular A-133. However, the 
provisional status also provides interested parties with the 
opportunity to comment on the document and permits OMB to include 
additional Federal programs in the document in the coming months.
    The provisional ``Circular A-133 Compliance Supplement'' is 
effective for audits of fiscal years beginning after June 30, 1996, and 
supersedes the previously issued compliance supplements entitled 
``Compliance Supplement for Single Audits of State and Local 
Governments,'' issued in 1990, and ``Compliance Supplement for Audits 
of Institutions of Higher Learning and Other Non-Profit Institutions,'' 
issued in 1991. The

[[Page 35283]]

definition of the term ``compliance supplement'' in Sec. ____.105 of 
the final revision was revised to reflect the compliance supplement 
included as Appendix B to this revised Circular.
Comment
    Several State auditors and one CPA requested removal of the 
requirement for the auditor to determine the current compliance 
requirements when changes were made to the compliance requirements and 
the changes are not yet reflected in the compliance supplement.
    Response: No change was made as a result of these comments. 
However, minor modifications were made to Sec. ____.500(d) to conform 
the language used in the Circular to the compliance supplement.
    The requirement in Sec. ____.500(d)(3) for auditors to consider 
whether changes were made in the compliance requirements included in 
the compliance supplement reflects current practice, which is based on 
two documents: (1) the PCIE's Position Statement No. 6, titled 
``Questions and Answers on Circular A-133,'' and (2) the AICPA's Audit 
and Accounting Guide, entitled, ``Audits of State and Local 
Governmental Units,'' dated May 1, 1995.
    The PCIE document includes a statement that ``If there have been 
changes [to the compliance requirements included in the compliance 
supplement], then the auditor should follow the provisions of the 
compliance supplements as modified by the changes'' (page 14). The 
AICPA's Accounting and Auditing Guide (paragraph 23.37) alerts auditors 
to the fact that compliance requirements may change over time and that 
this should be considered in planning tests of compliance. The 
provisional ``Circular A-133 Compliance Supplement'' provides guidance 
to auditors regarding the Federal Government's expectations for 
auditors to perform reasonable procedures (e.g., inquiry of auditee 
management, review of applicable contract and grant agreements) to 
determine currency of the compliance requirements included in the 
compliance supplement.

Transitional Guidance to Implementing the Risk-Based Approach to 
Determining Major Programs

Comment
    OMB received several inquiries about whether a Type A program may 
be considered low-risk when it was audited as a major program in 
accordance with the prior Circular A-133, issued March 8, 1990, or 
Circular A-128, issued April 12, 1985, and otherwise met the 
requirements in Sec. ____.520(c) to be considered as low-risk. Similar 
inquiries were received regarding whether single audits performed in 
accordance with the prior Circular A-133 or Circular A-128 would 
satisfy the requirements of Sec. ____.530 for an auditee to qualify as 
a low-risk auditee.
    Response: The reference in Sec. ____.520(c)(1) to the two most 
recent audit periods includes audit periods in which the audit was 
performed under either Circular A-128 or the 1990 version of Circular 
A-133. Therefore, a Type A program which meets the criteria for low-
risk under Sec. ____.520(c)(1), based on the results of an audit 
performed under Circular A-128 or the 1990 version of Circular A-133, 
may be considered low-risk. Similarly, the requirement in Sec. ____.530 
that an auditee meet specified criteria for the preceding two years to 
be considered a low-risk auditee applies to audits performed under 
Circular A-128 or the 1990 version of Circular A-133.
    Also, to provide a transition into the risk-based approach, the 
provision for deviation from use of risk criteria provided in 
Sec. ____.520(i) applies to the first year this revision is applicable 
and permits auditors to defer implementation of the risk-based approach 
for one year.

Risk-Based Approach to Determining Major Programs

Comment
    Several State auditors and one State agency requested clarification 
of the requirements for performing risk assessments of Type B programs 
under Sec. ____.520(d) and Sec. ____.520(e)(2). Many commenters 
questioned if the Circular requires the auditor to perform annual risk 
assessments of each Type B program (above an amount specified in the 
Circular) and expressed concern that such a requirement would 
significantly increase audit costs.
    Response: Minor modifications were made to the Circular. Reference 
to the percentage of coverage rule was removed from Sec. ____.520(d)(2) 
of the final revision because, as two commenters noted, program risk is 
not a consideration in selecting programs to meet the percentage of 
coverage rule described in Sec. ____.520(f). Also, editorial changes 
were made to Sec. ____.520(d)(2) to emphasize when risk assessments 
should be performed.
    The final revision (Sec. ____.520(d)) requires the auditor to 
identify Type B programs that are high-risk and Sec. ____.520(e)(2) 
provides two options for identifying high-risk Type B programs.
    Under Option 1, the auditor would be expected to perform risk 
assessments of all Type B programs that exceed the amount specified in 
Sec. ____.520(d)(2), and audit at least one half of these high-risk 
Type B programs as major, unless this number exceeds the number of low-
risk Type A programs identified under Sec. ____.520(c) (i.e., the 
``cap''). In this case, the auditor would be required to audit as major 
the same number of high-risk Type B programs as the cap. For example, a 
State has ten low-risk Type A programs, and 50 Type B programs above 
the amount specified in Sec. ____.520(d)(2). Under Option 1, the 
auditor would be required to perform risk assessments of the 50 Type B 
programs. Assume that the auditor determines that there are 25 high-
risk Type B programs. One half of the 25 high-risk Type B programs is 
12.5, or 13, programs. Under Option 1, the auditor would audit 13 of 
the high-risk Type B programs as major; however, the cap in this 
example is ten (i.e., the number of low-risk Type A programs); 
therefore, the auditor is only required to audit as major 10 high-risk 
Type B programs.
    Under Option 2, the auditor is only required to audit as major one 
high-risk Type B program for each Type A program identified as low-risk 
under Sec. ____.520(c). Under this option, the auditor would not be 
required to perform risk assessments for any Type B programs when there 
are no low-risk Type A programs (i.e., the cap is zero). Continuing 
with the previous example, under Option 2, the auditor would perform 
risk assessments of Type B programs until ten high-risk Type B programs 
are identified. The auditor would be required to audit ten high-risk 
Type B programs as major in this example. Depending on the order in 
which risk assessments on Type B programs are performed, the auditor 
might only need to perform risk assessments of ten Type B programs 
determined to be high-risk, or the auditor may need to perform risk 
assessments until ten high-risk programs are identified.
    The auditor may choose either Option 1 or 2. There is no 
requirement to justify the reasons for selecting either option. The 
results under Options 1 and 2 may vary significantly, depending on the 
number of low-risk Type A programs and high-risk Type B programs. 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.

[[Page 35284]]

Comment
    OMB received several inquiries about whether large loan and loan 
guarantee programs (that affect the determination of other Type A 
programs under Sec. ____.520(b)(3)) audited as major programs may be 
used for purposes of meeting the percentage of coverage rule 
(Sec. ____.520(f)).
    Response: The amount of Federal awards expended under such loan and 
loan guarantee programs that are audited as major may be used for 
purposes of meeting the percentage of coverage rule. In a related 
matter, programs audited as major under Sec. ____.215(c), in which a 
Federal agency or pass-through entity requests and pays for a program 
to be audited as major, may also be used for purposes of meeting the 
percentage of coverage rule (Sec. ____.520(f)).
Comment
    Several commenters questioned the difference in the number of days 
of advance notice a Federal agency shall provide an auditee when a 
particular program: (1) cannot be considered a low-risk Type A program 
(at least 120 days prior to the auditee's fiscal year end under 
Sec. ____.520(c)(2)), and (2) must be audited as major (at least 180 
days prior to the auditee's fiscal year end under Sec. ____.215(c)).
    Response: For consistency, a change was made to Sec. ____.520(c)(2) 
of the final revision to require a Federal agency to inform an auditee 
at least 180 days prior to the auditee's fiscal year end when a Federal 
program cannot be considered a low-risk Type A program.

Biennial Audits

Comment
    All State auditors that commented on the proposal relating to 
biennial audits strongly opposed the provision included in 
Sec. ____.530(a) of the proposed revision that prohibits non-Federal 
entities that have biennial audits from qualifying as low-risk 
auditees. Commenters stated that this prohibition was not included in 
the 1996 Amendments and that the frequency of the audit has no bearing 
on the administration of Federal awards. One commenter suggested that, 
at a minimum, the cognizant or oversight agency for audit be authorized 
to permit, on a case-by-case basis, non-Federal entities that conduct 
biennial audits to qualify as low-risk auditees.
    Response: A change was made to Sec. ____.530(a) to permit non-
Federal entities to qualify, on a case-by-case basis, as low-risk 
auditees with the approval of the cognizant or oversight agency for 
audit. A change was also made to Sec. ____.400(a) of the final revision 
to add this responsibility to the list of cognizant agency for audit 
responsibilities.
Comment
    One commenter inquired about the effective date of the Circular for 
biennial periods.
    Response: 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 previously applicable Circulars are in 
effect until this final revision is effective. Therefore, an auditee 
that conducts biennial audits and has a biennial period beginning on or 
before June 30, 1996, should apply the provisions of Circular A-128 
(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 Circular apply to any biennial periods beginning after June 30, 
1996.

Credit Union Loans

Comment
    OMB received inquiries about whether loans provided by the National 
Credit Union Administration (NCUA) should be considered Federal awards 
subject to the requirements of Circular A-133.
    Response: A new paragraph (Sec. ____.205(j)) was added to the 
Circular to address certain loans provided by the NCUA. Specifically, 
loans made from the National Credit Union Share Insurance Fund and the 
Central Liquidity Facility are funded by contributions from insured 
institutions and are not considered Federal awards expended under 
Circular A-133. However, the NCUA provides loans under other programs, 
such as the Community Development Revolving Loan Programs for Credit 
Unions, which are considered Federal awards for purposes of applying 
Circular A-133.

Auditor Communication Regarding Report Distribution

Comment
    Several commenters stated that, if the auditor prepares the data 
collection form, then the communication required by Sec. ____.500(f) of 
the proposed revision, whereby the auditor is required to notify the 
auditee of which Federal agencies and pass-through entities are 
required to receive a copy of the reporting package, will no longer be 
necessary.
    Response: The proposed revision of Circular A-133 included a 
requirement for the auditor to 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. This 
requirement was removed. This separate communication is unnecessary 
because the final Circular (Sec. ____.320(b)(3)) requires the auditor 
to prepare and sign the portion of the data collection form that 
identifies which Federal agencies are required to receive a copy of the 
reporting package.

Basis of Accounting

Comment
    One State auditor requested that Sec. ____.310(a) and 
Sec. ____.500(b) of the Circular be revised to include a statement, 
similar to a provision (paragraph 2.4(a)) included in GAGAS, that 
``Financial statement audits also include audits of financial 
statements prepared in conformity with any of several other bases of 
accounting discussed in the auditing standards issued by the AICPA.'' 
One Federal auditor requested that the Circular require the auditee to 
use the same basis of accounting in preparing the schedule of 
expenditures of Federal awards that is used to prepare the auditee's 
financial statements, and noted that this omission has resulted in 
significant unreconciled differences on the schedule of expenditures of 
Federal awards.
    Response: No changes were made as a result of these comments. 
Circular A-133 does not prescribe the basis of accounting that must be 
used by auditees to prepare their financial statements and schedule of 
expenditures of Federal awards. However, auditees are required to 
disclose the basis of accounting and significant accounting policies 
used in preparing the financial statements and schedule of expenditures 
of Federal awards. The auditor is required to report (Sec. ____.500(b)) 
whether the financial statements are prepared in accordance with 
generally accepted accounting principles (GAAP), and 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. The auditee must be able to reconcile amounts 
presented in the financial statements to related amounts included in 
the schedule of expenditures of Federal awards.

[[Page 35285]]

Financial Statements

Comment
    Several CPAs commented that Sec. ____.310(a) of the Circular should 
be modified to recognize that financial statements should reflect the 
results of operations or changes in net assets. Financial statements 
prepared in accordance with GAAP for certain types of non-Federal 
entities reflect changes in net assets rather than results of 
operations. The commenters suggested that some auditees and auditors 
may interpret this section as imposing a requirement that is not 
consistent with GAAP.
    Response: The Circular (Sec. ____.310(a)) was revised to state that 
financial statements should reflect either the results of operations or 
changes in net assets.
Comment
    Several CPAs commented that the requirement included in 
Sec. ____.310(a) of the Circular that the financial statements shall be 
for the same organizational unit that is chosen to meet the 
requirements of the Circular, considered in conjunction with 
Sec. ____.500(a), could be problematic for certain auditees and may 
have unintended consequences. The commenters interpreted the Circular 
as requiring a direct match between the reporting entity included in 
the financial statements and the reporting entity covered by the 
Circular A-133 audit. The commenters questioned whether an auditee, 
that chooses to meet the Circular's requirements through a series of 
audits that cover separate departments, agencies, and other 
organizational units which expended Federal awards, would be required 
to issue non-GAAP financial statements that omitted the portions of the 
reporting entity which were separately audited. One commenter requested 
guidance in a situation where a local government has its school 
districts separately audited. If the local government's financial 
statements exclude the school districts (which is what the commenters 
believe the Circular requires), then the auditor may need to issue a 
qualified or adverse opinion on the local government's financial 
statements, which could raise unnecessary red flags and prohibit the 
auditee from qualifying as a low-risk auditee (Sec. ____.530). One 
State manager noted that considerably more public entities are included 
in that State's financial statement audit than in its state-wide single 
audit, and that, if the Circular requires such entities to be included 
in the state-wide single audit, this would result in additional audit 
costs and complicate the audit process.
    Response: Sec. ____.310(a) was revised to clarify OMB's 
expectations in this area. The revised Circular provides non-Federal 
entities an option to meet the audit requirements of the Circular 
through a series of audits that cover the non-Federal entity's 
departments, agencies, and other organizational units which expended or 
otherwise administered Federal awards during such fiscal year. If a 
non-Federal entity elects this option, then separate financial 
statements and a schedule of expenditures of Federal awards shall be 
prepared for each such department, agency, or other organizational 
unit. In these circumstances, a non-Federal entity's organization-wide 
financial statements may also include departments, agencies, or other 
organizational units that have separate audits and prepare separate 
financial statements.
    In the example provided by the commenter, it would be acceptable 
for the local government's financial statements to include the school 
districts, even though the school districts were not included in the 
local government's Circular A-133 audit because a separate Circular A-
133 audit is conducted of the school districts. However, if separate 
financial statements were not prepared for the school districts, it 
would be unacceptable for a separate Circular A-133 audit to be 
conducted of the school districts (i.e., the local government's 
organization-wide financial statements could not be used as a 
substitute for separate financial statements for the school districts).

Schedule of Expenditures of Federal Awards

Comment
    One State auditor and one State manager commented that the Circular 
should not prescribe requirements for the schedule of expenditures of 
Federal awards beyond the current guidance.
    Response: The ``current guidance'' for presenting the schedule of 
expenditures of Federal awards information was developed and 
promulgated by the AICPA, and was not specifically prescribed in 
Circulars A-128 and A-133 (1990 original issuance). OMB believes that 
the minimum requirements for the schedule should be specified in the 
Circular (Sec. ____.310(b)). Most respondents to the April 1996 
revision of Circular A-133 supported the level of detail reflected in 
that revision. A few modifications of the requirements were made in 
this final revision of Circular A-133, in response to specific comments 
received, as described in the following sections.
Comment
    Several CPAs and one State auditor commented that the Circular 
requires the auditor to be responsible for determining major programs 
and the threshold used to distinguish between Type A and Type B 
programs. However, these items are required to be presented in the 
schedule of expenditures of Federal awards prepared by the auditee and 
this requirement may blur the distinction between information that is 
the responsibility of the auditor versus the auditee.
    Response: The proposed requirements for the schedule of 
expenditures of Federal awards to identify major programs and identify 
the threshold to distinguish between Type A and Type B programs 
(Sec. ____.310 (b)(3) and (b)(4) of the proposed revision) were 
removed. However, the requirement to report this information was added 
to Sec. ____.505(d) so that this information is now required to be 
included in the auditor's report(s). While not required, some auditees 
may find it useful to present this information in the schedule of 
expenditures of Federal awards.
Comment
    Several CPAs recommended that the value of non-cash assistance, 
insurance in effect, and loans and loans guarantees outstanding be 
required to be included in the schedule of expenditures of Federal 
awards. They stated that the option to present this information in a 
note to the schedule should be eliminated and that the consistency 
achieved will improve the usefulness of the schedule and facilitate 
OMB's data collection efforts. One college and university commenter 
stated that the requirement to provide this information (either in a 
note or in the schedule) was excessive, and that the same information 
could be obtained from existing Federal data banks.
    Response: A change was made to Sec. ____.310(b)(6) as a result of 
these comments. The Circular permits the option of presenting this 
information either in the schedule of expenditures of Federal awards or 
in a note to the schedule; however, an additional sentence was included 
indicating that it is preferable to present this information in the 
schedule. It is important to note that, regardless of whether this 
information is presented in a note or in the schedule, this information 
must be included in the data collection form. While the requirement to 
provide such information is not new, the Federal

[[Page 35286]]

Government does not currently collect and account for this information 
in a systematic manner or data bank (i.e., some Federal agencies track 
this information and others do not). A minor addition was made to 
Sec. ____.310(b)(6) to clarify that the amount of insurance in effect 
during the year should be disclosed.

Report Due Date

Comment
    Two Federal auditors commented that the requirement included in the 
1996 Amendments to submit the reporting package to the Federal 
clearinghouse ``within the earlier of: 30 days after receipt of the 
auditor's report(s), or * * *'' is not clearly specified in the 
proposed revision.
    Response: Sec. ____.235(c) and Sec. ____.320(a) were modified to 
incorporate the report due date requirements specified in the 1996 
Amendments.

Summary Schedule of Prior Audit Findings

Comment
    Several State auditors requested guidance on the auditor's 
responsibility for deficiencies noted in prior audit findings for which 
a management decision was not issued and which the auditee believes is 
no longer valid. Specifically, the commenters asked whether the lack of 
a timely management decision is evidence that the Federal awarding 
agency or pass-through entity is not concerned about the finding and 
whether future audits may exclude coverage of the deficiency that 
resulted in an audit finding. One State auditor also commented that 
auditees should not be given the authority to determine when an audit 
finding is no longer valid or does not warrant further action.
    Response: Sec. ____.315(b) permits an auditee to determine whether 
a prior audit finding is no longer valid or does not warrant further 
action. A valid reason for such a determination is that all of the 
following have occurred: (1) two years have passed since the audit 
report in which the finding occurred was submitted to the Federal 
clearinghouse, (2) the Federal agency or pass-through entity is not 
currently following up with the auditee on the audit finding, and (3) a 
management decision was not issued. OMB believes that it is appropriate 
for the auditee to make this determination. In addition, the auditor is 
required by Sec. ____.500(e) of the Circular to assess the fairness of 
management's representations in the schedule.
    The lack of a management decision for a prior audit finding may 
provide a basis for the auditee to indicate in the summary schedule of 
prior audit findings that the finding is no longer valid or does not 
warrant further action (provided the two other conditions previously 
listed are met). However, the lack of a management decision does not 
change the scope of audit work or the auditor's reporting requirements. 
As an example, if the same deficiency that resulted in a prior audit 
finding (for which a management decision was not issued) is discovered 
by the auditor in the current period, the auditor would be required to 
determine whether the matter met the criteria provided in 
Sec. ____.510(a) for reporting an audit finding in the auditor's 
schedule of findings and questioned costs.
    For the first year a non-Federal entity is audited under this 
revised Circular, the prior year report may not have included the 
equivalent of a summary schedule of prior audit findings. In these 
cases, the auditee may exercise judgment and only include, to the 
extent practical, audit findings from before the prior year. Also, the 
auditee is not expected to include prior findings that would not have 
been reported under the criteria provided in Sec. ____.510(a).

Auditor's Schedule of Findings and Questioned Costs

Comment
    Several State auditors and CPA commenters noted that GAGAS does not 
use the term ``findings and questioned costs,'' and the concept of 
questioned costs is not discussed in GAGAS. Commenters requested that 
OMB clarify the requirement included in Sec. ____.505(d)(2) of the 
proposed revision.
    Response: A change was made to Sec. ____.505(d)(2) to replace the 
term ``findings and questioned costs'' with ``findings'' so that the 
final revision requires the auditor's schedule of findings and 
questioned costs to include a section that reports any findings 
relating to the financial statements which are required to be reported 
in accordance with GAGAS.
Comment
    One State auditor requested that Sec. ____.505(a) of the proposed 
revision be revised to permit unqualified opinions on financial 
statements prepared in accordance with an other comprehensive basis of 
accounting.
    Response: No change was made as a result of this comment. The 1996 
Amendments (31 U.S.C. 7502(e)(1)) require the auditor to ``* * * 
determine whether the financial statements are presented fairly in all 
material respects in conformity with generally accepted accounting 
principles.'' However, it should be noted that neither the 1996 
Amendments nor Circular A-133 prescribe the basis of accounting that 
must be used by auditees to prepare their financial statements and 
schedule of expenditures of Federal awards (i.e., non-GAAP statements 
are acceptable).
Comment
    Two CPAs indicated that the reference to Sec. ____.505(d)(2) and 
(3) that was included in Sec. ____.505(d)(3)(ii) of the proposed 
revision is confusing because it refers to certain schedules that are 
supposed to be included as part of the schedule of findings and 
questioned costs.
    Response: A change was made to Sec. ____.505(d)(3)(ii) to reflect 
that the schedule of findings and questioned costs is comprised of 
several sections, rather than multiple schedules.

Audit Findings

Comment
    Several Federal auditors, State auditors, and CPAs commented on the 
requirement included in Sec. ____.510(a) (1) and (2) of the proposed 
revision that, for reporting purposes, audit findings must be evaluated 
in relation to a ``type of compliance requirement'' for a major program 
or an audit objective identified in the compliance supplement. Some 
commenters opposed requiring the evaluation of an audit finding in 
relation to an audit objective because they believe this to be a more 
constrictive requirement than the currently-used measurement standard, 
and others requested clarification of the requirement. Two commenters 
suggested that OMB revise this requirement to allow the auditor to make 
the determination of reportable conditions and material noncompliance 
based on the significance of the compliance requirement and the effect 
on the program as a whole.
    Response: No change was made as a result of these comments. The 
scope of the auditor's work described in Sec. ____.500 (c) and (d) is 
required at the major program level. However, for audit reporting 
purposes, the results of the auditor's work must be evaluated against a 
lower measure. Specifically, the revised Circular requires the auditor 
to consider an audit finding in relation to a type of compliance 
requirement for a major program or an audit objective identified in the 
compliance supplement. The types of compliance

[[Page 35287]]

requirements and related audit objectives are included in the 
provisional ``Circular A-133 Compliance Supplement.'' The auditor is 
expected to determine the types of compliance requirements that could 
have a direct and material effect on each major program, and to design 
and conduct tests necessary to render an opinion on compliance with 
respect to each major program. Clearly, auditor judgment must be used 
in determining the nature, timing, and extent of audit work to be 
performed, and in evaluating the audit results. The purpose of the 
requirement included in Sec. ____.510(a) (1) and (2) is to advise the 
auditor of the criteria against which to measure or evaluate the impact 
of findings for reporting purposes.
    It is important to note that, under the existing requirements of 
Circular A-128, the auditor is required to report all instances of 
noncompliance and, under the 1990 version of Circular A-133, the 
auditor is required to report all but nonmaterial instances of 
noncompliance. The requirements for reporting audit findings included 
in the revised Circular are less burdensome than the existing 
requirements with respect to instances of noncompliance.
Comment
    Several commenters requested clarification of the requirement in 
Sec. ____.510(a)(3) of the proposed revision to report as an audit 
finding known questioned costs which are greater than $10,000 for a 
type of compliance requirement, particularly with respect to 
determining the impact of multiple instances of noncompliance relating 
to a type of compliance requirement.
    Response: No change was made as a result of these comments. 
However, the following example is provided to illustrate the 
requirements of this provision. Suppose an auditor: (1) determines that 
eligibility (which is one of the types of compliance requirements 
listed in the compliance supplement) could have a direct and material 
effect on a major program; (2) designs and conducts tests over 
eligibility relative to this major program; and, (3) discovers two 
separate instances of noncompliance, in the amount of $9000 each, 
relating to eligibility. The findings involve two different audit 
objectives relating to eligibility (which are listed in the compliance 
supplement): one finding relates to an individual participant's 
eligibility, and the other finding relates to the eligibility of a 
subrecipient. Since Sec. ____.510(a)(3) requires the auditor to report 
known questioned costs which are greater than $10,000 for a type of 
compliance requirement (which is eligibility in this case), the auditor 
would be expected to report these questioned costs of $18,000 as an 
audit finding. The auditor would also be expected to consider the 
impact of these instances of noncompliance when reporting on compliance 
on each major program.
Comment
    Some Federal agencies strongly object to not requiring known 
questioned costs of $10,000 or less to be reported. Conversely, one 
State auditor commented that the requirement to report known questioned 
costs greater than $10,000 could result in auditors' reporting matters 
that are minimal in relation to the size of a particular Federal 
program (e.g., a very large State program in which questioned costs of 
$11,000 is considered immaterial).
    Response: No change was made as a result of these comments. OMB 
believes that the $10,000 threshold for reporting questioned costs 
provides an appropriate balance between reporting all questioned costs 
(which was previously required for State and local governments) and 
only reporting substantial questioned costs.
Comment
    One Federal auditor requested that OMB require auditors to report 
an estimate of likely questioned costs when a known or likely 
questioned cost exceeds $10,000. The commenter stated that capturing 
the amount of likely questioned costs should better enable Federal 
agencies to assess the nature and magnitude of questioned costs on 
particular Federal awards and assist in prioritizing the resolution of 
audit findings. The commenter also suggested that OMB encourage 
auditors to use statistical means to determine likely questioned costs.
    Response: No change was made as a result of this comment. 
Sec. ____.510(a)(3) requires the auditor to report known questioned 
costs which are greater than $10,000, and known questioned costs when 
likely questioned costs are greater than $10,000, for a type of 
compliance requirement. GAAS require the auditor to project the amount 
of known questioned costs identified in a sample to the items in the 
major program and to consider the best estimate of total questioned 
costs (both known and likely) in determining an opinion on compliance. 
The auditor is required to document this consideration in the audit 
working papers.
    The revised Circular does not require the auditor to report an 
exact amount or statistical projection of likely questioned costs, but 
rather to include an audit finding when the auditor's extrapolation of 
these likely questioned costs is greater than $10,000. In reporting 
likely questioned costs, it is important that the auditor follows the 
requirements of Sec. ____.510(b) and provides appropriate information 
for judging the prevalence and consequences of the finding. The use of 
statistical means of determining likely questioned costs may be 
beneficial for auditors but it is not required. During the next few 
years, OMB expects Federal agencies to monitor auditor compliance in 
this area to assist OMB in determining whether an expansion of these 
reporting requirements is necessary in subsequent revisions.
Comment
    Two CPA commenters requested guidance regarding the treatment of 
audit findings that cannot be quantified. The commenters cited as an 
example a situation where an auditor discovers that a pass-through 
entity consistently failed to provide its subrecipients with Federal 
award information, including applicable compliance requirements. The 
commenters stated that Sec. ____.510(a)(3) could be read to indicate 
that such nonmonetary findings would not need to be reported.
    Response: No change was made as a result of these comments. In the 
example provided by the commenters, this noncompliance would be 
required to be reported as an audit finding. The auditor must consider 
a finding in relation to the type of compliance requirement 
(subrecipient monitoring, in this case) or an audit objective 
identified in the compliance supplement. The pertinent audit objective 
included in the provisional ``Circular A-133 Compliance Supplement'' 
relating to this example is for the auditor to ``determine whether the 
pass-through entity identifies Federal award information and compliance 
requirements to the subrecipient.'' Because the pass-through entity 
failed to provide Federal award information to its subrecipients, this 
noncompliance is material in relation to the audit objective and, 
therefore, must be reported as an audit finding. In addition, the 
auditor must consider whether reportable conditions (and possibly 
material weaknesses in internal control) exist and require reporting 
with respect to subrecipient monitoring.

Audit Follow-up

Comment
    Several commenters requested guidance on whether the auditor is 
required to follow up on all prior

[[Page 35288]]

findings, particularly immaterial amounts that were previously required 
to be reported. Two commenters opposed the requirement for audit 
follow-up on prior audit findings, even when a finding is unrelated to 
a major program in the current year.
    Response: In the first year audited under the revised Circular, the 
auditor should use judgment in deciding which previously reported 
findings require follow-up in the current year. Auditors are not 
expected to follow up on prior year findings that are immaterial. The 
auditor should consider the criteria for reporting audit findings, 
provided in Sec. ____.510(a), in determining which prior audit findings 
require follow-up.
    No change was made to Sec. ____.500(e), which requires the auditor 
to perform follow-up procedures regardless of whether a prior audit 
finding relates to a major program in the current year. This 
requirement is consistent with the requirement for management to report 
on the status of prior findings in the summary schedule of prior audit 
findings.

Auditor Selection

Comment
    Two State auditors requested a change to recognize that some 
auditees (e.g., State and local governments) do not have the 
constitutional or legal authority to arrange for audit services.
    Response: A clarification was made to Sec. ____.305(a) to indicate 
that, in procuring (rather than arranging for) audit services, auditees 
shall follow the provisions described in Sec. ____.305(a). If an 
auditee is not authorized to procure audit services (e.g., State law 
may require that a State auditor perform all required audits for that 
State), then the provisions of Sec. ____.305(a) do not apply.
Comment
    One State agency and one CPA commenter did not support the 
restriction on auditors that perform Circular A-133 audits and also 
prepare indirect cost proposal or CAPs. These commenters stated that 
the AICPA's professional standards adequately address auditor 
independence.
    Response: No change was made as a result of these comments. 
Sec. ____.305(b) precludes the same auditor from preparing the indirect 
cost proposal or CAP when indirect costs exceeded $1 million in the 
prior year. This restriction was developed based on comments relating 
to April 1996 revision of Circular A-133, in which all Federal agencies 
that responded cited at least an appearance of a lack of independence 
when the same auditor both performed the audit and prepared the 
indirect cost proposal or
    CAP. The $1 million threshold was chosen to limit this restriction 
to a relatively small number of entities, while still protecting the 
Federal interest.
    The implementation date for this provision is delayed two years 
until audits of fiscal years beginning after June 30, 1998, to minimize 
any effect this provision could have on existing contracts for audit 
services. In the future, OMB and Federal agencies will monitor this 
area to determine whether additional guidance or further revision to 
the Circular is necessary.

Federal Awarding Agency Responsibilities

Comment
    A commenter noted that the Circular does not list as a 
responsibility of Federal awarding agencies the requirement included in 
the 1996 Amendments (31 U.S.C. 7502(f)(1)(A)) to inform recipients of 
the Federal requirements imposed on them by Federal laws, regulations, 
and the provisions of contracts or grant agreements.
    Response: A change was made to add this responsibility to the list 
included in Sec. ____.400(c) of the revised Circular.

Request for a Program to be Audited as a Major Program

Comment
    Two State auditors opposed the provision included in 
Sec. ____.215(c) in which a Federal agency or pass-through entity may 
request for a program to be audited as a major program. Reasons cited 
include: (1) that Federal agencies might use this provision 
excessively, and (2) that specifying programs to be audited as major is 
contrary to the risk-based approach to determining major programs.
    Response: No changes were made to the Circular as a result of these 
comments. This process does not significantly change the authority 
Federal agencies and pass-through entities now have to perform 
additional audits as long as they pay for them. These audits may be 
incorporated within the framework of the single audit and thereby 
eliminate duplicative audit planning and reporting. Since the Federal 
agency or pass-through entity must still pay the full incremental audit 
cost, OMB does not expect a significant increase in major programs from 
this provision.
    It should be pointed out that any Type A program selected to be 
audited under this provision must be low-risk. If it were not low-risk, 
it would have been audited as a major program under the risk-based 
approach. Therefore, this provision will not reduce the number of high-
risk Type B programs audited as major. Also, programs audited as major 
under this process count towards meeting the percentage of coverage 
rule provided in Sec. ____.520(f).

Management Decisions

Comment
    Several State auditors expressed concern about the provision 
permitting Federal agencies and pass-through entities, prior to issuing 
a management decision, to request additional information or 
documentation from an auditee, including a request that the 
documentation be audited, as a way of mitigating disallowed costs. Two 
CPAs requested that the term ``audit'' be replaced by ``auditor 
assurance'' for clarity.
    Response: A minor change was made to Sec. ____.405(a) to clarify 
that the request is for auditor assurance relating to the specified 
documentation. OMB also expects Federal agencies and pass-through 
entities to use this provision judiciously.
Comment
    One State auditor commented that it would be beneficial if auditors 
could obtain copies of management decisions and suggested that the 
Federal Government establish a centralized contact from which auditors 
could request copies.
    Response: In the next few years, OMB will consider this and other 
suggestions to improve the dissemination of management decision 
information.

Audit Working Papers

Comment
    Several auditors requested that the Circular reflect the wording 
included in the 1996 Amendments (31 U.S.C. 7503(f)) that indicates the 
purpose for which access to working papers is intended.
    Response: A change was made to Sec. ____.515(b) to reflect wording 
similar to the 1996 Amendments relating to this matter.

Additional OMB Guidance

Comment
    Several commenters requested additional information about various 
provisions in the proposed revision and asked whether OMB will publish 
a ``questions and answers'' document as implementation issues arise.
    Response: Interested parties may wish to refer to the April 30, 
1996 (61 FR

[[Page 35289]]

19134) and November 5, 1996 (61 FR 57232) Federal Register for 
discussion of various provisions included in the Circular. Useful 
information is provided in these Notices that is not necessarily 
repeated in this Notice. In the future, if there are significant 
questions concerning the revised Circular A-133, OMB will consider 
issuing a ``questions and answers'' document relating to the revised 
Circular.
Franklin D. Raines,
Director.

    1. OMB rescinds Circular A-128 July 30, 1997.
    2. OMB revises Circular A-133 to read as follows:

[Circular No. A-133 Revised]

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, P.L. 98-502, and the Single Audit Act Amendments of 1996, 
P.L. 104-156. It sets forth standards for obtaining consistency and 
uniformity among Federal agencies for the audit of States, local 
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 subsequent 
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 the Office of Management and Budget (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, except as otherwise 
specified in Sec. ____.400(a).
    The standards set forth in this Circular that Federal agencies 
shall apply to non-Federal entities shall be adopted by Federal 
agencies in codified regulations not later than 60 days after 
publication of this 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. The 
requirements of Circular A-128, although the Circular is rescinded, and 
the 1990 version of Circular A-133 remain in effect for audits of 
fiscal years beginning on or before June 30, 1996.
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.

Appendix A to Part____--Data Collection Form (Form SF-SAC)

Appendix B to Part____--Circular A-133 Compliance Supplement

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.

[[Page 35290]]

    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 supplement 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 supplement refers to the Circular A-133 Compliance 
Supplement, included as Appendix B to Circular A-133, or such documents 
as OMB or its designee may issue to replace it.
    This document is available from the Government Printing Office, 
Superintendent of Documents, Washington, DC 20402-9325.
    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-
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 supplement; 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:

[[Page 35291]]

    (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 violation or 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 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 supplement. Examples include: 
activities allowed or unallowed; allowable costs/cost principles; cash 
management; eligibility; matching, level of effort, earmarking; and, 
reporting.
    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 a 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

[[Page 35292]]

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 
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.
    (j) Certain loans provided by the National Credit Union 
Administration. For purposes of this part, loans made from the National 
Credit Union Share Insurance Fund and the Central Liquidity Facility 
that are funded by contributions from insured institutions are not 
considered Federal awards expended.


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,

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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 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. For purposes of this part, 
limited scope audits only include agreed-upon procedures engagements 
conducted in accordance with either the AICPA's generally accepted 
auditing standards or attestation standards, that are paid for and 
arranged by a pass-through entity and address only one or more of the 
following types of compliance requirements: activities allowed or 
unallowed; allowable costs/cost principles; eligibility; matching, 
level of effort, earmarking; and, reporting.


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

[[Page 35294]]

presented fairly in all material respects in conformity 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. (1) The audit 
shall be completed and the reporting required by paragraph (c)(2) or 
(c)(3) of this section submitted within the earlier of 30 days after 
receipt of the auditor's report(s), or 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, the audit shall be completed and 
the required reporting shall be submitted within the earlier of 30 days 
after receipt of the auditor's report(s), or 13 months after the end of 
the audit period, unless a different period is specified in a program-
specific audit guide.) 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 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 
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. The data collection form prepared 
in accordance with Sec. ____.320(b), as applicable to a program-
specific audit, and one copy of this reporting package shall be 
submitted to the Federal clearinghouse designated by OMB to be retained 
as an archival copy. Also, when the schedule of findings and questioned 
costs disclosed audit findings or the summary schedule of prior audit 
findings reported the status of any audit findings, the auditee shall 
submit one copy of the reporting package to the Federal clearinghouse 
on behalf of the Federal awarding agency, or directly to the pass-
through entity in the case of a subrecipient. Instead of submitting the 
reporting package to the pass-through entity, when a subrecipient is 
not required to submit a reporting package to the pass-through entity, 
the subrecipient shall provide written notification to the pass-through 
entity, consistent with the requirements of Sec. ____.320(e)(2). A 
subrecipient may submit a copy of the reporting package to the pass-
through entity to comply with this notification requirement.
    (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 procuring audit services, auditees 
shall follow the procurement standards prescribed by the Grants 
Management Common Rule (hereinafter referred to as the ``A-102 Common 
Rule'') published March 11, 1988 and amended April 19, 1995 [insert 
appropriate CFR citation], Circular A-110, ``Uniform Administrative 
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 (OMB Circulars are available from the 
Office of Administration, Publications Office, room 2200, New Executive 
Office Building, Washington, DC 20503). 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 the A-102 Common Rule, 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

[[Page 35295]]

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 
or changes in net assets, 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. However, organization-wide financial 
statements may also include departments, agencies, and other 
organizational units that have separate audits in accordance with 
Sec. ____.500(a) and prepare separate financial statements.
    (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, the auditee may choose to provide information requested by 
Federal awarding agencies and pass-through entities to make the 
schedule easier to use. For example, when a Federal program has 
multiple award years, the auditee may list the amount of Federal awards 
expended for each award year separately. At a minimum, the schedule 
shall:
    (1) List individual Federal programs by Federal agency. For Federal 
programs included in a cluster of programs, list individual Federal 
programs within a cluster of programs. For R&D, total Federal awards 
expended shall be shown either by individual award or 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.
    (2) 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.
    (3) 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.
    (4) Include notes that describe the significant accounting policies 
used in preparing the schedule.
    (5) To the extent practical, pass-through entities should identify 
in the schedule the total amount provided to subrecipients from each 
Federal program.
    (6) 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, the amount of insurance in effect during the year, and 
loans or loan guarantees outstanding at year end. While not required, 
it is preferable to present this information in the schedule.


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 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 data collection 
form described in paragraph (b) of this section and reporting package 
described in paragraph (c) of this section shall be submitted within 
the earlier of 30 days after receipt of the auditor's report(s), or 
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, the 
audit shall be completed and the data collection form and reporting 
package shall be submitted within the earlier of 30 days after receipt 
of the auditor's report(s), or 13 months after the end of the audit 
period.) Unless restricted by law or regulation, the auditee shall make 
copies available for public inspection.
    (b) Data Collection. (1) The auditee shall submit 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, and 
include data elements similar to those presented in this paragraph. A 
senior level representative of the auditee (e.g., State controller, 
director of

[[Page 35296]]

finance, chief executive officer, or chief financial officer) shall 
sign a statement to be included as part of the form certifying that: 
the auditee complied with the requirements of this part, the form was 
prepared in accordance with this part (and the instructions 
accompanying the form), and the information included in the form, in 
its entirety, are accurate and complete.
    (2) The data collection form shall include the following data 
elements:
    (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 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 (i.e., unqualified opinion, qualified opinion, adverse 
opinion, or disclaimer of opinion).
    (vi) A list of the Federal awarding agencies which will receive a 
copy of the reporting package pursuant to Sec. ____.320(d)(2).
    (vii) A yes or no statement as to whether the auditee qualified as 
a low-risk auditee under Sec. ____.530.
    (viii) The dollar threshold used to distinguish between Type A and 
Type B programs as defined in Sec. ____.520(b).
    (ix) The Catalog of Federal Domestic Assistance (CFDA) number for 
each Federal program, as applicable.
    (x) The name of each Federal program and identification of each 
major program. Individual programs 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.
    (xi) The amount of expenditures in the schedule of expenditures of 
Federal awards associated with each Federal program.
    (xii) For each Federal program, a yes or no statement as to whether 
there are audit findings in each of the following types of compliance 
requirements and the total amount of any questioned costs:
    (A) Activities allowed or unallowed.
    (B) Allowable costs/cost principles.
    (C) Cash management.
    (D) Davis-Bacon Act.
    (E) Eligibility.
    (F) Equipment and real property management.
    (G) Matching, level of effort, earmarking.
    (H) Period of availability of Federal funds.
    (I) Procurement and suspension and debarment.
    (J) Program income.
    (K) Real property acquisition and relocation assistance.
    (L) Reporting.
    (M) Subrecipient monitoring.
    (N) Special tests and provisions.
    (xiii) Auditee Name, Employer Identification Number(s), Name and 
Title of Certifying Official, Telephone Number, Signature, and Date.
    (xiv) Auditor Name, Name and Title of Contact Person, Auditor 
Address, Auditor Telephone Number, Signature, and Date.
    (xv) Whether the auditee has either a cognizant or oversight agency 
for audit.
    (xvi) The name of the cognizant or oversight agency for audit 
determined in accordance with Sec. ____.400(a) and Sec. ____.400(b), 
respectively.
    (3) Using the information included in the reporting package 
described in paragraph (c) of this section, the auditor shall complete 
the applicable sections of the form. The auditor shall sign a statement 
to be included as part of the data collection form that indicates, at a 
minimum, the source of the information included in the form, the 
auditor's responsibility for the information, that the form is not a 
substitute for the reporting package described in paragraph (c) of this 
section, and that the content of the form is limited to the data 
elements prescribed by OMB.
    (c) Reporting package. The reporting package shall include the:
    (1) Financial statements and schedule of expenditures of Federal 
awards discussed in Sec. ____.310(a) and Sec. ____.310(b), 
respectively;
    (2) Summary schedule of prior audit findings discussed in 
Sec. ____.315(b);
    (3) Auditor's report(s) discussed in Sec. ____.505; and
    (4) Corrective action plan discussed in Sec. ____.315(c).
    (d) Submission to clearinghouse. All auditees shall submit to the 
Federal clearinghouse designated by OMB the data collection form 
described in paragraph (b) of this section and 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. (1) In addition to the 
requirements discussed in paragraph (d) of this section, auditees that 
are also subrecipients shall submit to each pass-through entity one 
copy of the 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.
    (2) Instead of submitting the reporting package to a pass-through 
entity, when a subrecipient is not required to submit a reporting 
package to a pass-through entity pursuant to paragraph (e)(1) of this 
section, the subrecipient shall provide written notification to the 
pass-through entity that: an audit of the subrecipient was conducted in 
accordance with this part (including the period covered by the audit 
and the name, amount, and CFDA number of the Federal award(s) provided 
by the pass-through entity); the schedule of findings and questioned 
costs disclosed no audit findings relating to the Federal award(s) that 
the pass-through entity provided; and, the summary schedule of prior 
audit findings did not report on the status of any audit findings 
relating to the Federal award(s) that the pass-through entity provided. 
A subrecipient may submit a copy of the reporting package described in 
paragraph (c) of this section to a pass-through entity to comply with 
this notification requirement.
    (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 data collection form described in paragraph (b) of this section and 
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

[[Page 35297]]

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. 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 
1997 through 2000 will be determined based on Federal awards expended 
in 1995. (However, for States and local governments that expend more 
than $25 million a year in Federal awards and have previously assigned 
cognizant agencies for audit, the requirements of this paragraph are 
not effective until fiscal years beginning after June 30, 2000.) 
Notwithstanding the manner in which audit cognizance is determined, 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.
    (9) For biennial audits permitted under Sec. ____.220, consider 
auditee requests to qualify as a low-risk auditee under 
Sec. ____.530(a).
    (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 
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 
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) Advise recipients of requirements imposed on them by Federal 
laws, regulations, and the provisions of contracts or grant agreements.
    (3) Ensure that audits are completed and reports are received in a 
timely manner and in accordance with the requirements of this part.
    (4) Provide technical advice and counsel to auditees and auditors 
as requested.
    (5) 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.
    (6) Assign a person responsible for providing annual updates of the 
compliance supplement to OMB.
    (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.

[[Page 35298]]

    (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 for auditor assurance related to the 
documentation, 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)(5), 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 
after receipt of the audit report 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 other 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.
    (2) Except as provided in paragraph (c)(3) of this section, the 
auditor shall:
    (i) Plan the testing of internal control over major programs to 
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 are likely to be ineffective in 
preventing or detecting noncompliance, the planning and performing of 
testing described in paragraph (c)(2) of this section are not required 
for those compliance requirements. However, the auditor shall report a 
reportable condition (including whether any such condition is 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.
    (2) The principal compliance requirements applicable to most 
Federal programs and the compliance requirements of the largest Federal 
programs are included in the compliance supplement.
    (3) For the compliance requirements related to Federal programs 
contained in the compliance supplement, 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 supplement, the auditor shall determine the 
current compliance requirements and modify the audit procedures 
accordingly. For those Federal programs not covered in the compliance 
supplement, the auditor should use the types of compliance requirements 
contained in the compliance supplement 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.
    (4) The compliance testing shall include tests of transactions and 
such other auditing procedures necessary to provide the auditor 
sufficient evidence to support an opinion on compliance.
    (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 
in the current year.
    (f) Data Collection Form. As required in Sec. ____. 320(b)(3), the 
auditor shall complete and sign specified sections of the data 
collection form.


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

[[Page 35299]]

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 and major programs. This report shall describe the scope of 
testing of internal control and the results of the tests, and, where 
applicable, refer to the separate 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, 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 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 (i.e., unqualified opinion, qualified opinion, adverse 
opinion, or disclaimer of opinion);
    (vi) A statement as to whether the audit disclosed any audit 
findings which the auditor is required to report under Sec. ____. 
510(a);
    (vii) An identification of major programs;
    (viii) The dollar threshold used to distinguish between Type A and 
Type B programs, as described in Sec. ____. 520(b); and
    (ix) A statement as to whether the auditee qualified as a low-risk 
auditee under Sec. ____. 530.
    (2) Findings relating to 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 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 sections of the 
schedule. However, the reporting in one section of the schedule may be 
in summary form with a reference to a detailed reporting in the other 
section of the 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. 
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 
or an audit objective identified in the compliance supplement. 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. 
The auditor's determination of whether a noncompliance with the 
provisions of laws, regulations, contracts, or grant agreements is 
material for the purpose of reporting an audit finding is in relation 
to a type of compliance requirement for a major program or an audit 
objective identified in the compliance supplement.
    (3) Known questioned costs which are greater than $10,000 for a 
type of compliance requirement for a major program. Known questioned 
costs are those specifically identified by the auditor. In evaluating 
the effect of questioned costs on the opinion on compliance, the 
auditor considers the best estimate of total costs questioned (likely 
questioned costs), not just the questioned costs specifically 
identified (known questioned costs). The auditor shall also report 
known questioned costs when likely questioned costs are greater than 
$10,000 for a type of compliance requirement for a major program. In 
reporting questioned costs, the auditor shall include information to 
provide proper perspective for judging the prevalence and consequences 
of the questioned costs.
    (4) 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 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.

[[Page 35300]]

    (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 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, as part of a quality review, to 
resolve audit findings, or to carry out oversight responsibilities 
consistent with the purposes of this part. 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. (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. (1) The auditor shall identify Type A programs which 
are low-risk. For a Type A program to be considered low-risk, it shall 
have been audited as a major program in at least one of the two most 
recent audit periods (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 180 days prior to the end of the fiscal year to be audited of 
OMB's approval.
    (d) Step 3. (1) The auditor shall identify Type B programs which 
are high-risk using professional judgment and the criteria in 
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.

[[Page 35301]]

    (2) The auditor is not expected to perform risk assessments on 
relatively small Federal programs. Therefore, 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 (e)(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.
    (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 supplement.
    (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

[[Page 35302]]

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 (or, in the case of biennial audits, preceding 
two audit periods) shall qualify as a low-risk auditee and be eligible 
for reduced audit coverage in accordance with Sec. ____.520:
    (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, unless agreed 
to in advance by the cognizant or oversight agency for audit.
    (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 (or, in the case of 
biennial audits, preceding two audit periods) 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.

Appendix A to Part ____--Data Collection Form (Form SF-SAC)

[insert SF-SAC after finalized]

Appendix B to Part ____--Circular A-133 Compliance Supplement

    Note: Provisional OMB Circular A-133 Compliance Supplement is 
available from the Office of Administration, Publications Office, 
room 2200, New Executive Office Building, Washington, DC 20503.

[FR Doc. 97-16965 Filed 6-27-97; 8:45 am]
BILLING CODE 3110-01-P