[Federal Register Volume 72, Number 122 (Tuesday, June 26, 2007)]
[Notices]
[Pages 35080-35081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-12320]


=======================================================================
-----------------------------------------------------------------------

OFFICE OF MANAGEMENT AND BUDGET


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

AGENCY: Office of Management and Budget.

ACTION: Revisions to OMB Circular A-133.

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

SUMMARY: This Notice revises Office of Management and Budget (OMB) 
Circular A-133, ``Audits of States, Local Governments, and Non-Profit 
Organizations,'' by (1) Updating the internal control terminology and 
related definitions used in the Circular; and (2) simplifying the 
auditee reporting package submission requirement to the Federal Audit 
Clearinghouse (FAC).

DATES: All comments on this revision should be in writing, and must be 
received by August 27, 2007. The revisions shall apply to audits of 
fiscal years ending on or after December 15, 2006.

ADDRESSES: Due to potential delays in OMB's receipt and processing of 
mail sent through the U.S. Postal Service, we encourage respondents to 
submit comments electronically to ensure timely receipt. We cannot 
guarantee that comments mailed will be received before the comment 
closing date.
    Electronic mail comments may be submitted to: [email protected]. Please include ``A-133 Comments'' in the subject line 
and the full body of your comments in the text of the electronic 
message and as an attachment. Please include your name, title, 
organization, postal address, telephone number, and e-mail address in 
the text of the message. Comments may also be submitted via facsimile 
to 202-395-4915.
    Comments may be mailed to Gilbert Tran, Office of Federal Financial 
Management, Office of Management and Budget, Room 6025, New Executive 
Office Building, Washington, DC 20503.
    A copy of the current Circular A-133 published in the Federal 
Register on June 27, 2003 is available on the Internet at http://www.whitehouse.gov/omb/circulars/a133/a133.pdf.

FOR FURTHER INFORMATION CONTACT: Gilbert Tran, Office of Federal 
Financial Management, Office of Management and Budget, telephone 202-
395-3052 (direct) or 202-395-3993 (main office) and e-mail: [email protected].

SUPPLEMENTARY INFORMATION:

A. Revisions of Internal Control Definitions and Related Matters

    OMB Circular A-133 includes guidelines for the reporting of 
``reportable conditions'' and ``material weaknesses'' in internal 
control in several places. These terms and/or their related definitions 
have become outdated and need updating due to recently issued standards 
by both the American Institute of Certified Public Accountants (AICPA) 
and the Government Accountability Office (GAO). The AICPA issued 
Statement on Auditing Standards (SAS) No. 112, Communicating Internal 
Control Related Matters Identified in an Audit (AICPA, Professional 
Standards, vol. 1, AU 325), which became effective for audits of 
periods ending on or after December 15, 2006. With regard to internal 
control over financial reporting, the SAS introduced and defined the 
term ``control deficiency;'' replaced the term ``reportable condition'' 
with ``significant deficiency'' and redefined that term; and also 
revised the definition of the term ``material weakness.'' Recently, the 
GAO issued a revision to Government Auditing Standards (GAS) and posted 
a related notice to its Web site that requires the new internal control 
terminology and definitions to be used in all financial audits 
performed under GAS as of the effective date of SAS 112. Therefore, to 
be consistent with the recent revisions to professional auditing 
standards, references to ``reportable condition'' and ``material 
weakness'' in internal control over financial reporting related to the 
audit of the financial statements in Circular A-133 are replaced by the 
terms ``significant deficiency'' and ``material weakness'' as those 
terms are defined in SAS 112 and GAS. This change is effective for 
single audits of periods ending on or after December 15, 2006.
    As noted above, SAS 112 and GAS define control deficiencies in 
internal control over financial reporting. Because Circular A-133 also 
requires the auditor to report on internal control over compliance 
related to major federal programs, similar definitions had to be 
developed for control deficiencies in internal control over compliance. 
The AICPA, working with OMB and other federal agency staff, is issuing 
AICPA Auditing Interpretation No. 1, ``Communicating Deficiencies in 
Internal Control Over Compliance in an Office of Management and Budget 
Circular A-133 Audit'' of SAS No. 112 (AICPA, Professional Standards, 
vol. 1, AU 9325.01-.02), which can be found at the following link 
(http://www.aicpa.org/Professional+Resources/Accounting+and+Auditing/Audit+and+Attest+Standards/Authoritative+Standards+and+Related+Guidance+for+Non-Issuers/Recently+Issued+Audit+and+Attestation+Interpretations.htm). That 
interpretation includes the following definitions which should be used 
in single audits of periods ending on or after December 15, 2006:

    A control deficiency exists when the design or operation of a 
control does not allow management or employees, in the normal course 
of performing their assigned functions, to prevent or detect on a 
timely basis noncompliance with a type of compliance requirement of 
a Federal program.\1\
---------------------------------------------------------------------------

    \1\ This reference to ``type of compliance requirement'' refers 
to the first 13 types of compliance requirements (that is, types of 
compliance requirements identified as ``A'' through ``M'') described 
in Part 3 of the OMB Circular A-133 Compliance Supplement (the 
Compliance Supplement) and each individual special test and 
provision identified in Part 4 of the Compliance Supplement for each 
federal program. When a federal program is not included in the 
Compliance Supplement, the identification of types of compliance 
requirements that apply and are material to a federal program 
(including special tests and provisions) is made through a review of 
the program's contract and grant agreements and referenced laws and 
regulations.
---------------------------------------------------------------------------

    A significant deficiency \2\ is a control deficiency, or 
combination of control deficiencies, that adversely affects the 
entity's ability to administer a Federal program such that there is 
more than a remote likelihood \3\ that noncompliance with a type of 
compliance requirement \4\ of a Federal program that is more than 
inconsequential \5\ will not be prevented or detected.
---------------------------------------------------------------------------

    \2\ The term significant deficiency replaces the term reportable 
condition currently used in Circular A-133.
    \3\ The term remote likelihood as used in the definitions of the 
terms significant deficiency and material weakness has the same 
meaning as the term remote as used in Financial Accounting Standards 
Board Statement of Financial Accounting Standards No. 5, Accounting 
for Contingencies, found at the following link (http://www.aicpa.org/download/members/div/auditstd/AU-00325.PDF). 
Therefore, the likelihood of an event is ``more than remote'' when 
it is at least reasonably possible.
    \4\ See footnote 1.
    \5\ Noncompliance with a type of compliance requirement is 
inconsequential if a reasonable person would conclude, after 
considering the possibility of further undetected noncompliance, 
that the noncompliance, either individually or when aggregated with 
other noncompliance related to the same type of compliance 
requirement, would clearly be immaterial to a federal program. If a 
reasonable person would not reach such a conclusion regarding a 
particular noncompliance, that noncompliance is more than 
inconsequential.

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

[[Page 35081]]

    A material weakness is a significant deficiency, or combination 
of significant deficiencies, that results in more than a remote 
likelihood that material noncompliance with a type of compliance 
requirement \6\ of a Federal program will not be prevented or 
detected.
---------------------------------------------------------------------------

    \6\ See footnote 1.

    In addition to the Interpretation, the AICPA has issued updated 
illustrative Circular A-133 audit reports that can be accessed on the 
AICPA Governmental Audit Quality Center Web site at the following link 
(http://gaqc.aicpa.org/Resources/Illustrative+Auditors+Reports/). 
Further, updated illustrative reporting for financial statement audits 
performed under GAS can also be found at the same Web site link.
    This change in terminology and related definitions may result in 
the reporting of additional internal control matters than had been 
reported using the previous terminology and definitions. The reporting 
of such additional matters may affect the scope of single audits, 
particularly as it relates to the determination of major programs and 
the auditee's low-risk status.
    Auditees submitting single audits of periods ending between 
December 15, 2006 and December 31, 2006, should use the approved Data 
Collection Form (Form SF-SAC) for fiscal years ending 2004, 2005 and 
2006 when filing with the Federal Audit Clearinghouse. Since this Form 
SF-SAC has not yet been updated for the new internal control 
terminology, any ``significant deficiency'' should be recorded under 
the term ``reportable condition'' on the following items: Part II--
items 3 and 4, Part III--items 4 and 5, and Part 3, item 10(a). The 
Form SF-SAC terminology will be updated in the next SF-SAC form 
scheduled for January 1, 2008.
    The Form SF-SAC approved for audits with fiscal period end dates in 
2004, 2005, and 2006, is extended to apply to audits with fiscal period 
end dates in 2007. All submissions with fiscal period end dates in 2007 
must use the 2004-2006 version of Form SF-SAC.

B. Streamlined Submission of Reporting Package to the Federal Audit 
Clearinghouse (FAC)

    We are also streamlining the auditee's submission of the reporting 
package to the FAC. Due to technology advances, starting January 1, 
2007, the auditee is no longer required to submit multiple copies of 
the reporting package to the FAC, in accordance with section 320(d) of 
Circular A-133. Instead, only one copy of the reporting package is 
necessary. However, Part III, item 8, of the Form SF-SAC should 
continue to be completed noting all agencies required to receive a copy 
of the reporting package.

Rob Portman,
Director.

    Circular A-133 is revised as follows:
    1. In the following sections, replace ``reportable conditions'' 
with ``significant deficiencies'': Sec.  --.320(b)(2)(ii); Sec.  
--.320(b)(2)(iv); Sec.  --.500(c)(3); Sec.  --.505(d)(1)(ii); Sec.  
--.505(d)(1)(iv); Sec.  --.510(a)(1), and Sec.  --.520(d)(1).
    2. Replace Sec.  --.320(d) with the following:
    (d) Submission to clearinghouse. All auditees shall submit to the 
Federal clearinghouse designated by OMB a single copy of the data 
collection form described in paragraph (b) of this section and the 
reporting package described in paragraph (c) of this section.

 [FR Doc. E7-12320 Filed 6-25-07; 8:45 am]
BILLING CODE 3110-01-P