[Federal Register Volume 64, Number 57 (Thursday, March 25, 1999)]
[Rules and Regulations]
[Pages 14538-14553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6862]



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Part III





Department of Labor





_______________________________________________________________________



Office of the Secretary



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29 CFR Parts 96 and 99



Audit Requirement: Grants, Contacts and Other Agreements and States, 
Local Governments, and Non-Profit Organizations; Interim Final Rules

  Federal Register / Vol. 64, No. 57 / Thursday, March 25, 1999 / Rules 
and Regulations  

[[Page 14538]]



DEPARTMENT OF LABOR

Office of the Secretary

29 CFR Parts 96 and 99

RIN 1291-AA26 and 1291-AA27


Audit Requirements: Grants, Contracts, and Other Agreements and 
States, Local Governments, and Non-Profit Organizations

AGENCY: Office of the Secretary, Labor.

ACTION: Interim final rules; request for comment.

-----------------------------------------------------------------------

SUMMARY: The Department of Labor hereby revises its regulation on 
``Audit Requirements For Grants, Contracts, and Other Agreements,'' to 
ensure consistency with previously published amendments to ``Grants and 
Agreements with Institutions of Higher Education, Hospitals, and Other 
Non-Profit Organizations, and with Commercial Organizations, Foreign 
Governments, Organizations Under the Jurisdiction of Foreign 
Governments and International Organizations'' and ``Uniform 
Administrative Requirements for Grants, and Cooperative Agreements to 
State and Local Governments.'' In addition, ``Audits of States, Local 
Governments, and Non-Profit Organizations,'' is published as a new 
regulation which codifies in (DOL) regulations the revised Office of 
Management and Budget (OMB) Circular A-133 in its entirety.

DATES: This rule will be effective on March 25, 1999. Written or 
electronic comments are invited on this Interim Final Rule. All written 
or electronic comments submitted on or before May 24, 1999 will be 
considered. Appropriate changes to the regulations will be made when 
the Final Rule is published, which adopts this interim rule as final.

ADDRESSES: Send written comments to Al Stewart, Director, Office of the 
Acquisition Advocate, U.S. Department of Labor, 200 Constitution 
Avenue, N.W., Room S-1522, Washington, D.C. 20210. Send electronic 
comments to: Stewart-M[email protected].

FOR FURTHER INFORMATION CONTACT: Al Stewart, Director, Office of the 
Acquisition Advocate, telephone number (202) 693-4025, facsimile (202) 
693-4019.

SUPPLEMENTARY INFORMATION: The Single Audit Act Amendments of 1996, 
(Public Law 104-156, 110 Stat. 1396), and the June 24, 1997, revision 
of OMB Circular A-133, ``Audits of States, Local Governments, and Non-
Profit Organizations'' (62 FR 35278, June 30, 1997), required agencies 
to adopt in codified regulations the standards in the revised Circular 
A-133 by August 29, 1997, so that they will apply to audits of fiscal 
years beginning after June 30, 1996. The revised Circular A-133 co-
located audit requirements for States, local governments, and non-
profit organizations. As a consequence, OMB rescinded OMB Circular A-
128, ``Audits of State and Local Governments.'' On August 29, 1997, the 
Department of Labor amended its grants common rules at 29 CFR 95 and 29 
CFR 97 in accordance with OMB guidance. Amendments to 29 CFR 96 are 
required to ensure continuity and ameliorate conflicts with provisions 
of 29 CFR Parts 95 and 97.

EFFECTIVE DATE AND ABSENCE OF NOTICE AND COMMENT: The Office of the 
Assistant Secretary for Administration and Management (OASAM) has 
determined that pursuant to the Administrative Procedure Act, the 
Single Audit Act Amendments of 1996, and the revised OMB Circular A-
133, which provide standards applicable to non-Federal entities, are 
effective for audits of fiscal years beginning after June 30, 1996, 
provides good cause for waiving the customary requirement to delay the 
effective date of a final rule for 30 days following its publication. 
Accordingly, the issuance of a proposed rule, which would delay the 
effective date of a final rule for 30 days, would be contrary to the 
public interest. This Interim Final Rule sets a comment period to 
elicit any concerns raised by the Rule. OASAM has limited the comment 
period to 60 days so that input is received in time for the Agency to 
develop any revisions and promulgate a final rule to allow for the 
expeditious incorporation of the grants common rules at CFR Parts 95 
and 97 and the new regulation at CFR Part 99.

I. Regulatory Procedures

Executive Order 12866

    Executive Order 12866 requires that a regulatory impact analysis be 
prepared for ``major'' rules, which are defined in the Order as any 
rule that has an annual effect on the national economy of $100 million 
or more, or certain other specified effects. This modification will not 
have an annual impact of $100 million or more or the other effects 
listed in the Order. However, the interim final rule would result in 
some savings to organizations administering grants or subgrants, 
primarily due to the increase in the threshold (from $25,000 to 
$300,000) that triggers an audit requirement. In addition, the due date 
for submission of the audit report by auditors has been reduced from 13 
to 9 months. For these reasons, the participating agencies have 
determined that this interim final rule would not create a major rule 
within the meaning of the Order.

Regulatory Flexibility Act of 1980

    The Regulatory Flexibility Act (5 U.S.C. 605(b)) requires that, for 
each rule with a ``significant economic impact on a substantial number 
of small entities,'' an analysis must be prepared describing the rule's 
impact on small entities and identifying any significant alternatives 
to the rule that would minimize the economic impact on small entities. 
This interim final rule will not have a significant economic impact on 
a substantial number of small entities. The interim final rule does not 
affect the amount of funds provided in the covered programs, but rather 
increases the threshold for non-Federal entities subject to audit, 
thereby reducing burden on some small entities. The Assistant Secretary 
of the Office for Administration and Management has certified to this 
effect to the Chief Counsel for the Advocacy of the Small Business 
Administration.

Unfunded Mandates Act of 1995

    The Unfunded Mandates Act of 1995 (Pub. L. 104-4) requires agencies 
to prepare several analytic statements before proposing any rule that 
may result in annual expenditures of $100 million of State, local, and 
Indian tribal governments or the private sector. Since this interim 
final rule will not result in expenditures of this magnitude, such 
statements are not necessary.

Paperwork Reduction Act

    This interim final rule will impose additional reporting or 
recordkeeping requirements under the Paperwork Reduction Act of 1995 
(44 U.S.C. Chapter 35) after OMB finalizes the new SF-SAC, ``Data 
Collection Form for Reporting on Audits of States, Local Governments, 
and Non-Profit Organizations.'' On June 30, 1997, OMB requested public 
comments on the proposed SF-SAC (62 FR 35302).

Small Business Regulatory Enforcement Fairness Act of 1996

    This rule is not a major rule as defined by section 804 of the 
Small Business Regulatory Enforcement Fairness Act of 1996. This rule 
will not result in an annual effect on the economy of $100,000,000 or 
more; a major increase in costs or prices; or significant adverse 
effects on competition, employment, investment, productivity, 
innovation, or on the ability of the United States-based companies to 
compete with foreign-based companies in domestic and export markets.

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II. Congressional Notification

    Consistent with the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Department will submit to Congress a report regarding 
the issuance of the final rule prior to the Effective Date set forth in 
the outset of this document. The report will note the Office of 
Management and Budget's determination that this rule does not 
constitute a ``major rule'' under the Act. 5 U.S.C. 801, 805.

List of Subjects

29 CFR Part 96

    Accounting, Audit requirements, Contract programs, Grant programs, 
Reporting and recordkeeping.

29 CFR Part 99

    Accounting, Audit requirements, Contract programs, Grant programs, 
Reporting and recordkeeping requirements.

    For the reasons delineated in the preamble, Subtitle A of Title 29 
of the Code of Federal Regulations is amended by revising Part 96 and 
by adding Part 99, as follows:

PART 96--AUDIT REQUIREMENTS FOR GRANTS, CONTRACTS, AND OTHER 
AGREEMENTS

Sec.
96.0  Purpose and scope of part.
96.1  Terminology.

Subpart A--Audits of States, Local Governments, and Non-profit 
Organizations

96.11  Purpose and scope of subpart.
96.12  Audits requirements.

Subpart B--[Reserved]

Subpart C--Audits of Entities Not Covered by Subpart A

96.31  Purpose and scope of subpart.
96.32  Audit requirement.

Subpart D--Access to Records, Audit Standards, and Relation of 
Organization-wide Audits to Other Audit Requirements

96.41  Access to records.
96.42  Audit standards.
96.43  Relation of organization-wide audits to other audit 
requirements.

Subpart E--Audit Resolution

96.51  Purpose and scope of subpart.
96.52  Pre-resolution phase activities.
96.53  Audit resolution generally.
96.54  Responsibility for subrecipient audits.

Subpart F--Appeals

96.61  Purpose and scope of subpart.
96.62  Contracts.
96.63  Federal financial assistance.

    Authority: 31 U.S.C. 7500 et seq.; and OMB Circular No. A-133.


Sec. 96.0  Purpose and scope of part.

    This part identifies the audit requirements for recipients and 
subrecipients of Department of Labor (DOL) awards and contains DOL's 
procedures for the resolution of audits. It applies to all grants and 
contracts and other Federal awards provided by or on behalf of the DOL.


Sec. 96.1  Terminology.

    As used in this part, the terms ``Federal award,'' ``Federal 
financial assistance,'' ``recipient,'' and ``subrecipient'' have the 
same meanings as the definitions in 29 CFR 99.105 of this title.

Subpart A--Audits of States, Local Governments, and Non-profit 
Organizations


Sec. 96.11  Purpose and scope of subpart.

    The regulations in this subpart and in 29 CFR part 99 implement 
Office of Management and Budget (OMB) Circular A-133, ``Audits of 
States, Local Governments, and Non-Profit Organizations,'' which was 
issued pursuant to The Single Audit Act Amendments of 1996 (Act). The 
Act builds upon earlier efforts to improve audits of Federal financial 
assistance programs. This subpart establishes uniform audit 
requirements and policy for recipients and subrecipients that receive 
Federal financial assistance from DOL.


Sec. 96.12  Audit requirements.

    (a) Organizations covered by this subpart are responsible for 
arranging for independent audits that meet the requirements of this 
section.
    (b) The audit requirements contained in 29 CFR part 99 shall be 
followed for audits of all fiscal years beginning after June 30, 1996.
    (c) Except as provided in paragraph (d) of this section, the audit 
requirements applicable to earlier fiscal years under regulations and 
award conditions in force when the awards were made shall continue in 
force.
    (d) The Secretary or his/her designee may provide written notice to 
recipients/subrecipients subject to paragraph (c) of this section 
directing them to follow the requirements of 29 CFR 99.320, which 
provides for submission of audit data collection forms and reporting 
packages to a Federal clearinghouse designated by OMB.

Subpart B--[Reserved]

Subpart C--Audits of Entities Not Covered by Subpart A


Sec. 96.31  Purpose and scope of subpart.

    This subpart prescribes the requirement for audits of recipients, 
subrecipients, contractors, and subcontractors that receive funds from 
the DOL and are not covered by subpart A.


Sec. 96.32  Audit requirement.

    The Secretary of Labor is responsible for the survey, audit or 
examination of recipients, subrecipients, contractors, and 
subcontractors covered by this subpart. Such surveys, audits, or 
examinations shall be conducted at the Secretary's discretion.

Subpart D--Access to Records, Audit Standards and Relation of 
Organization-wide Audits to Other Audit Requirements


Sec. 96.41  Access to records.

    The Secretary of Labor, the DOL Inspector General, the Comptroller 
General of the United States, or any of their duly authorized 
representatives (including certified public accountants under 
contract), shall have access to any books, documents, papers, and 
records (manual and automated) of the entity receiving funds from DOL 
and its subrecipients/subcontractors for the purpose of making surveys, 
audits, examinations, excerpts, and transcripts.


Sec. 96.42  Audit standards.

    Surveys, audits, and examinations will conform to the Government 
auditing standards, issued by the Comptroller General of the United 
States, and guides issued by the Secretary. For purposes of meeting 
audit requirements under subparts A and C, only the standards for 
financial and compliance audits need apply.


Sec. 96.43  Relation of organization-wide audits to other audit 
requirements.

    To the extent that audits conducted in accordance with subpart A 
provide DOL officials with the information needed to carry out their 
responsibilities under Federal law or DOL regulations, the Secretary 
shall rely upon and use the information. Additional audit efforts are 
not precluded, but such efforts must build upon the organization-wide 
audit and not duplicate it. The provisions of subpart A do not 
authorize a covered entity, after having complied with those 
requirements, to constrain, in any manner, the Secretary from carrying 
out additional surveys, audits, or examinations as deemed necessary.

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Subpart E--Audit Resolution


Sec. 96.51  Purpose and scope of subpart.

    This subpart prescribes standards for resolution of audit findings, 
including, but not limited to, questioned costs and administrative 
deficiencies, identified as a result of the audit of grant agreements, 
contracts, and other agreements awarded by or on behalf of DOL. In 
cases where these standards conflict with statutes or other DOL 
regulations, the latter shall be controlling. The DOL Office of 
Inspector General (OIG) is available to assist agencies in the audit 
resolution process.


Sec. 96.52  Pre-resolution phase activities.

    (a) Submission of reports. Recipients and subrecipients of DOL 
funds that are audited in accordance with the requirements of subpart A 
shall comply in all respects with the report submission requirements of 
29 CFR part 99. Failure to submit a complete audit package will result 
in the return of the submitted package by the Clearinghouse, which will 
assign a delinquency classification until the completed package is 
submitted.
    (b) Quality control. The Office of Inspector General, in 
conjunction with other Federal agencies, will implement an audit 
quality program which may include random, planned, or directed reviews 
of audits submitted in compliance with OMB Circular A-133. When audits 
are found not to be performed in compliance with the requirements, the 
OIG may share the findings with the auditor, the auditee, and the 
funding agencies, and may work with the local licensing authorities to 
achieve corrective action.


Sec. 96.53  Audit resolution generally.

    The DOL official(s) responsible for audit resolution shall promptly 
evaluate findings and recommendations reported by auditors and the 
corrective action plan developed by the recipient to determine proper 
actions in response to audit findings and recommendations. The process 
of audit resolution includes at a minimum an initial determination, an 
informal resolution period, and a final determination.
    (a) Initial determination. After the conclusion of any comment 
period for audits provided the recipient/contractor, the responsible 
DOL official(s) shall make an initial determination on the allowability 
of questioned costs or activities, administrative or systemic findings, 
and the corrective actions outlined by the recipient. Such 
determination shall be based on applicable statutes, regulations, 
administrative directives, or terms and conditions of the grant/
contract award instrument.
    (b) Informal resolution. The recipient/contractor shall have a 
reasonable period of time (as determined by the DOL official(s) 
responsible for audit resolution) from the date of issuance of the 
initial determination to informally resolve those matters in which the 
recipient/contractor disagrees with the decisions of the responsible 
DOL official(s).
    (c) Final determination. After the conclusion of the informal 
resolution period, the responsible DOL official(s) shall issue a final 
determination that:
    (1) As appropriate, indicate that efforts to informally resolve 
matters contained in the initial determination have either been 
successful or unsuccessful;
    (2) Lists those matters upon which the parties continue to 
disagree;
    (3) Lists any modifications to the factual findings and conclusions 
set forth in the initial determination;
    (4) Lists any sanctions and required corrective actions; and
    (5) Sets forth any appeal rights.
    (d) Time limit. Insofar as possible, the requirements of this 
section should be met within 180 days of the date the final approved 
audit report is received by the DOL official(s) responsible for audit 
resolution.


Sec. 96.54  Responsibility for subrecipient audits.

    Recipients of Federal assistance from DOL are responsible for 
ensuring that subrecipient organizations who expend $300,000 or more in 
a fiscal year are audited and that any audit findings are resolved in 
accordance with this part. The recipient shall:
    (a) Determine whether appropriate audit requirements outlined in 
subpart A have been met;
    (b) Determine whether the subrecipient spent Federal assistance 
funds provided in accordance with applicable laws and regulations;
    (c) Ensure that appropriate corrective action is taken within six 
months after receipt of the audit report in instances of non-compliance 
with Federal law and regulations;
    (d) Consider whether subrecipient audits necessitate adjustment of 
the recipient's own records; and
    (e) Require that each subrecipient permit independent auditors to 
have access to the records and financial statements necessary to comply 
with this part.

Subpart F--Appeals


Sec. 96.61  Purpose and scope of subpart.

    (a) The purpose of this subpart is to set forth procedures by which 
recipients and contractors may appeal final determinations by the DOL 
officials responsible for audit resolution as a result of audits.
    (b) Subrecipients and subcontractors shall have only such appeal 
rights as may exist in subgrants or subcontracts with the respective 
recipients or contractors.


Sec. 96.62  Contracts.

    (a) For the purpose of this subpart, the term ``contract'' includes 
all agreements described in sec. 602(a) of the Contract Disputes Act 
(Applicability of Law--Executive agency contracts) (41 U.S.C. 602(a)).
    (b) Upon a contractor's receipt of the DOL contracting officer's 
final determination as a result of an audit, the contractor may appeal 
the final determination to the DOL Board of Contract Appeals, pursuant 
to 41 CFR part 29-60 and 48 CFR part 2933 or pursue such other remedies 
as may be available under the Contract Disputes Act.


Sec. 96.63  Federal financial assistance.

    The DOL grantor agencies shall determine which of the two appeal 
options set forth in paragraphs (a) and (b) of this section the 
recipient may use to appeal the final determination of the grant 
officer. All awards within the same Federal financial assistance 
program shall follow the same appeal procedure.
    (a) Appeal to the head of the grantor agency, or his/her designee, 
for which the audit was conducted.
    (1) Jurisdiction. (i) Request for hearing. Within 21 days of 
receipt of the grant officer's final determination, the recipient may 
transmit, by certified mail, return receipt requested, a request for 
hearing to the head of the grantor agency, or his/her designee, as 
noted in the final determination. A copy must also be sent to the grant 
officer who signed the final determination.
    (ii) Statement of issues. The request for a hearing shall be 
accompanied by a copy of the final determination, if issued, and shall 
specifically state those portions of the final determination upon which 
review is requested. Those portions of the final determination not 
specified for review shall be considered resolved and not subject to 
further review.
    (iii) Failure to request review. When no timely request for a 
hearing is made, the final determination shall constitute final action 
by the Secretary of Labor and shall not be subject to further review.
    (2) Conduct of hearings. The grantor agency shall establish 
procedures for the

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conduct of hearings by the head of the grantor agency, or his/her 
designee.
    (3) Decision of the head of the grantor agency, or his/her 
designee. The head of the grantor agency, or his/her designee, should 
render a written decision no later than 90 days after the closing of 
the record. This decision constitutes final action of the Secretary.
    (b) Appeal to the DOL Office of Administrative Law Judges.
    (1) Jurisdiction. (i) Request for hearing. Within 21 days of 
receipt of the grant officer's final determination, the recipient may 
transmit by certified mail, return receipt requested, a request for 
hearing to the Chief Administrative Law Judge, United States Department 
of Labor, 800 K Street NW, Suite 400, Washington, DC 20001, with a copy 
to the grant officer who signed the final determination. The Chief 
Administrative Law Judge shall designate an administrative law judge to 
hear the appeal.
    (ii) Statement of issues. The request for a hearing shall be 
accompanied by a copy of the final determination, if issued, and shall 
specifically state those portions of the final determination upon which 
review is requested. Those portions of the final determination not 
specified for review shall be considered resolved and not subject to 
further review.
    (iii) Failure to request review. When no timely request for a 
hearing is made, the final determination shall constitute final action 
by the Secretary and shall not be subject to further review.
    (2) Conduct of hearings. The DOL Rules of Practice and Procedure 
for Administrative Hearings Before the Office of Administrative Law 
Judges, set forth at 29 CFR part 18, shall govern the conduct of 
hearings under paragraph (b) of this section.
    (3) Decision of the administrative law judge. The administrative 
law judge should render a written decision no later than 90 days after 
the closing of the record.
    (4) Filing exceptions to decision. The decision of the 
administrative law judge shall constitute final action by the Secretary 
of Labor, unless, within 21 days after receipt of the decision of the 
administrative law judge, a party dissatisfied with the decision or any 
part thereof has filed exceptions with the Secretary, specifically 
identifying the procedure or finding of fact, law, or policy with which 
exception is taken. Any exceptions not specifically urged shall be 
deemed to have been waived. Thereafter, the decision of the 
administrative law judge shall become the decision of the Secretary, 
unless the Secretary, within 30 days of such filing, has notified the 
parties that the case has been accepted for review.
    (5) Review by the Secretary of Labor. Any case accepted for review 
by the Secretary shall be decided within 180 days of such acceptance. 
If not so decided, the decision of the administrative law judge shall 
become the final decision of the Secretary.

PART 99--AUDITS OF STATES, LOCAL GOVERNMENTS, AND NON-PROFIT 
ORGANIZATIONS

Subpart A--General

Sec.
99.100  Purpose.
99.105  Definitions.

Subpart B--Audits

99.200  Audit requirements.
99.205  Basis for determining Federal awards expended.
99.210  Subrecipient and vendor determinations.
99.215  Relation to other audit requirements.
99.220  Frequency of audits.
99.225  Sanctions.
99.230  Audit costs.
99.235  Program-specific audits.

Subpart C--Auditees

99.300  Auditee responsibilities.
99.305  Auditor selection.
99.310  Financial statements.
99.315  Audit findings follow-up.
99.320  Report submission.

Subpart D--Federal Agencies and Pass-through Entities

99.400  Responsibilities.
99.405  Management decision.

Subpart E--Auditors

99.500  Scope of audit.
99.505  Audit reporting.
99.510  Audit findings.
99.515  Audit working papers.
99.520  Major program determination.
99.525  Criteria for Federal program risk.
99.530  Criteria for a low-risk auditee.

    Authority: Public Law 104-156, 110 Stat. 1396 (31 U.S.C. 7500 et 
seq.), and OMB Circular A-133 revised June 24, 1997.

Subpart A--General


Sec. 99.100  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. 99.105  Definitions.

    Audit finding means deficiencies which the auditor is required by 
Sec. 99.510(a) to report in the schedule of findings and questioned 
costs.
    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.
    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. 99.400(d)(1) and Sec. 99.400(d)(2), respectively. A cluster of 
programs shall be considered as one program for determining major 
programs, as described in Sec. 99.520, and, with the exception of R&D 
as described in Sec. 99.200(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. 99.400(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

[[Page 14542]]

terms and conditions of the contract. Contracts to operate Federal 
Government-owned, contractor-operated (GOCOs) facilities 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. 99.205(h) and Sec. 99.205(i).
    Federal program means: (1) All Federal awards to a non-Federal 
entity assigned a single number in the CFDA. (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.)
    (2) Notwithstanding paragraph (1) 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. 99.520 or a program 
identified as a major program by a Federal agency or pass-through 
entity in accordance with Sec. 99.215(c).
    Management decision means the evaluation by the Federal awarding 
agency or pass-through entity of the audit findings and corrective 
action plan and the issuance of a written decision as to what 
corrective action is necessary.
    Non-Federal entity means a State, local government, or non-profit 
organization.
    Non-profit organization means:
    (1) Any corporation, trust, association, cooperative, or other 
organization that:
    (i) Is operated primarily for scientific, educational, service, 
charitable, or similar purposes in the public interest;
    (ii) Is not organized primarily for profit; and
    (iii) Uses its net proceeds to maintain, improve, or expand its 
operations; and
    (2) The term non-profit organization includes non-profit 
institutions of higher education and hospitals.
    OMB means the Executive Office of the President, Office of 
Management and Budget.
    Oversight agency for audit means the Federal awarding agency that 
provides the predominant amount of direct funding to a recipient not 
assigned a cognizant agency for audit. When there is no direct funding, 
the Federal agency with the predominant indirect funding shall assume 
the oversight responsibilities. The duties of the oversight agency for 
audit are described in Sec. 99.400(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. 99.200(c) and Sec. 99.235.
    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. 99.500.

[[Page 14543]]

    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. 99.210.
    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. 99.210.

Subpart B--Audits


Sec. 99.200  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. 99.205.
    (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. 99.500 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. 99.235. 
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. 99.215(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. 99.205  Basis for determining Federal awards expended.

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

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    (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. 99.210  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. 99.215  Relation to other audit requirements.

    (a) Audit under this part in lieu of other audits. An audit made in 
accordance with this part shall be in lieu of any financial audit 
required under individual Federal awards. To the extent this audit 
meets a Federal agency's needs, it shall rely upon and use such audits. 
The provisions of this part neither limit the authority of Federal 
agencies, including their Inspectors General, or GAO to conduct or 
arrange for additional audits (e.g., financial audits, performance 
audits, evaluations, inspections, or reviews) nor authorize any auditee 
to constrain Federal agencies from carrying out additional audits. Any 
additional audits shall be planned and performed in such a way as to 
build upon work performed by other auditors.
    (b) Federal agency to pay for additional audits. A Federal agency 
that conducts or contracts for additional audits shall, consistent with 
other applicable laws and regulations, arrange for funding the full 
cost of such additional audits.
    (c) Request for a program to be audited as a major program. A 
Federal agency may request an auditee to have a particular Federal 
program audited as a major program in lieu of the Federal agency 
conducting or arranging for the additional audits. To allow for 
planning, such requests should be made at least 180 days prior to the 
end of the fiscal year to be audited. The auditee, after consultation 
with its auditor, should promptly respond to such request by informing 
the Federal agency whether the program would otherwise be audited as a 
major program using the risk-based audit approach described in 
Sec. 99.520 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. 99.220  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. 99.225  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

[[Page 14545]]

    (d) Terminating the Federal award.


Sec. 99.230  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. 99.200(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. 99.400(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. 99.235  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. 99.315(b), and a corrective action plan consistent 
with the requirements of Sec. 99.315(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. 99.500(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. 99.500(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. 99.500(e).
    (4) The auditor's report(s) may be in the form of either combined 
or separate reports and may be organized differently from the manner 
presented in this section. The auditor's report(s) shall state that the 
audit was conducted in accordance with this part and include the 
following:
    (i) An opinion (or disclaimer of opinion) as to whether the 
financial statement(s) of the Federal program is presented fairly in 
all material respects in 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. 99.505(d)(1), and 
findings and questioned costs consistent with the requirements of 
Sec. 99.505(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 the OMB, the 
data collection form prepared in accordance with Sec. 99.320(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. 99.320(b), as applicable to a program-specific 
audit, and one copy of this reporting package shall be submitted to the 
Federal clearinghouse designated by the 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

[[Page 14546]]

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. 99.320(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. 99.100 through Sec. 99.215(b), Sec. 99.220 through 
Sec. 99.230, Sec. 99.300 through Sec. 99.305, Sec. 99.315, 
Sec. 99.320(f) through Sec. 99.320(j), Sec. 99.400 through Sec. 99.405, 
Sec. 99.510 through Sec. 99.515, 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. 99.300  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. 99.310.
    (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. 99.320(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. 99.315(b) and 
Sec. 99.315(c), respectively.


Sec. 99.305  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; 29 CFR 
part 97, Uniform Administrative Requirements for Grants and Cooperative 
Agreements to State and Local Governments; 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 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. 99.310  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. 99.500(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.

[[Page 14547]]

Sec. 99.315  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. 99.510(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. 99.320  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 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. 99.320(d)(2).
    (vii) A yes or no statement as to whether the auditee qualified as 
a low-risk auditee under Sec. 99.530.
    (viii) The dollar threshold used to distinguish between Type A and 
Type B programs as defined in Sec. 99.520(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.

[[Page 14548]]

    (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. 99.400(a) and Sec. 99.400(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. 99.310(a) and Sec. 99.310(b), respectively;
    (2) Summary schedule of prior audit findings discussed in 
Sec. 99.315(b);
    (3) Auditor's report(s) discussed in Sec. 99.505; and
    (4) Corrective action plan discussed in Sec. 99.315(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 
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. 99.235(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. 99.400  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 applicable 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. 99.320(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.

[[Page 14549]]

    (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. 99.220, consider 
auditee requests to qualify as a low-risk auditee under Sec. 99.530(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. 99.105. 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.
    (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. 99.405  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. 99.400(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. 99.400(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. 99.400(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. 99.510(c).

Subpart E--Auditors


Sec. 99.500  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

[[Page 14550]]

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. 99.510, 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. 99.315(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. 99.320(b)(3), the 
auditor shall complete and sign specified sections of the data 
collection form.


Sec. 99.505  Audit reporting.

    The auditor's report(s) may be in the form of either combined or 
separate reports and may be organized differently from the manner 
presented in this section. The auditor's report(s) shall state that the 
audit was conducted in accordance with this part and include the 
following:
    (a) An opinion (or disclaimer of opinion) as to whether the 
financial statements are presented fairly in all material respects in 
conformity with generally accepted accounting principles and an opinion 
(or disclaimer of opinion) as to whether the schedule of expenditures 
of Federal awards is presented fairly in all material respects in 
relation to the financial statements taken as a whole.
    (b) A report on internal control related to the financial 
statements 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. 99.510(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. 99.520(b); and
    (ix) A statement as to whether the auditee qualified as a low-risk 
auditee under Sec. 99.530.
    (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. 99.510(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

[[Page 14551]]

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. 99.510  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. 99.315(b) materially misrepresents 
the status of any prior audit finding.
    (b) Audit finding detail. Audit findings shall be presented in 
sufficient detail for the auditee to prepare a corrective action plan 
and take corrective action and for Federal agencies and pass-through 
entities to arrive at a management decision. The following specific 
information shall be included, as applicable, in audit findings:
    (1) Federal program and specific Federal award identification 
including the CFDA title and number, Federal award number and year, 
name of Federal agency, and name of the applicable pass-through entity. 
When information, such as the CFDA title and number or Federal award 
number, is not available, the auditor shall provide the best 
information available to describe the Federal award.
    (2) The criteria or specific requirement upon which the audit 
finding is based, including statutory, regulatory, or other citation.
    (3) The condition found, including facts that support the 
deficiency identified in the audit finding.
    (4) Identification of questioned costs and how they were computed.
    (5) Information to provide proper perspective for judging the 
prevalence and consequences of the audit findings, such as whether the 
audit findings represent an isolated instance or a systemic problem. 
Where appropriate, instances identified shall be related to the 
universe and the number of cases examined and be quantified in terms of 
dollar value.
    (6) The possible asserted effect to provide sufficient information 
to the auditee and Federal agency, or pass-through entity in the case 
of a subrecipient, to permit them to determine the cause and effect to 
facilitate prompt and proper corrective action.
    (7) Recommendations to prevent future occurrences of the deficiency 
identified in the audit finding.
    (8) Views of responsible officials of the auditee when there is 
disagreement with the audit findings, to the extent practical.
    (c) Reference numbers. Each audit finding in the schedule of 
findings and questioned costs shall include a reference number to allow 
for easy referencing of the audit findings during follow-up.


Sec. 99.515  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. 99.520  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,

[[Page 14552]]

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. 99.220, 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. 99.510(a). However, the auditor may 
use judgment and consider that audit findings from questioned costs 
under Sec. 99.510(a)(3) and Sec. 99.510(a)(4), fraud under 
Sec. 99.510(a)(6), and audit follow-up for the summary schedule of 
prior audit findings under Sec. 99.510(a)(7) do not preclude the Type A 
program from being low-risk. The auditor shall consider: the criteria 
in Sec. 99.525(c), Sec. 99.525(d)(1), Sec. 99.525(d)(2), and 
Sec. 99.525(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. 99.525. 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. 99.525(b)(1), 
Sec. 99.525(b)(2), and Sec. 99.525(c)(1), a single criteria in 
Sec. 99.525 would seldom cause a Type B program to be considered high-
risk.
    (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), 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. 99.530 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.

[[Page 14553]]

Sec. 99.525  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. The 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 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. 99.530  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. 99.520:
    (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.

    Signed at Washington, D.C. this 11th day of March, 1999.
Alexis M. Herman,
Secretary of Labor.
[FR Doc. 99-6862 Filed 3-24-99; 8:45 am]
BILLING CODE 4510-23-P