GAQC Alert No. 112 

    May 26, 2009 

    OMB Issues 2009 Compliance Supplement

    Which Includes Additional Recovery Act Guidance

    DEAR CENTER MEMBERS

    Today, the Office of Management and Budget (OMB) released the 2009 OMB Circular A-133 Compliance Supplement (the Supplement) on its Web site. It is effective for audits of fiscal years beginning after June 30, 2008, and supersedes the 2008 OMB Circular A-133 Compliance Supplement dated March 2008. OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations(Circular A-133), provides for the issuance of the Supplement to assist auditors in planning and performing the required audits. The Supplement identifies important compliance requirements that the federal government expects to be considered as part of an audit in accordance with the Single Audit Act and Circular A-133.

    The 2009 Supplement contains the normal updates for new programs, deleted programs, and modified program requirements. You will also find a few additional changes this year that resulted from an enhanced federal agency review process to identify areas of the Supplement that could be revised to improve understandability and promote more consistent application. This additional review was undertaken by the agencies in response to the results of the federal study on single audit quality. Additionally, the 2009 Supplement introduces a new Appendix which includes information and guidance for auditors on the American Recovery and Reinvestment Act of 2009 (Recovery Act) and its implications on audits performed under Circular A-133, as well as a discussion of the common audit deficiencies noted in the federal study on single audit quality.

    After reading this GAQC Alert you will:

    • Have a high-level understanding of the programmatic changes that were made to the Supplement;
    • Gain insight on the latest guidance from OMB on the impact of the Recovery Act on your single audits;
    • Learn a few practice tips to help you and your staff use the Supplement more effectively.

    Background

    The Supplement is one of the most important pieces of guidance that you use in performing single audits. The Supplement is updated annually and contains specific audit guidance relating to individual federal programs. It provides a source of information for auditors to understand federal program objectives, procedures, and compliance requirements, as well as audit objectives and suggested audit procedures for determining compliance with these requirements. Appendix V of the Supplement titled, List of Changes for the 2009 Compliance Supplement, is a key piece of guidance to help you identify all of the changes that OMB has made. As the designated audit quality partner for your firm, you should give the 2009 revisions immediate attention and ensure that your staff has the information they need to help ensure your single audit quality. This is particularly important in light of the new Recovery Act guidance that was added this year

    Programmatic Changes and Updates to the Supplement

    Some of the more significant changes in the 2009 Supplement are highlighted as follows:

    • Added 5 new programs:
      • Catalog of Federal Domestic Assistance (CFDA) 10.582, Fresh Fruit and Vegetable Program
      • CFDA 15.623, North American Wetlands Conservation Fund
      • CFDA 15.635, Neotropical Migratory Bird Conservation
      • CFDA 20.000, Transit Cross-Cutting Section
      • CFDA 20.219, Recreational Trails Program, as part of the Highway Planning and Construction Cluster
    • Deleted 6 programs:
      • CFDA 14.219, Community Development Block Grants/Small Cities Program
      • CFDA 17.263, Youth Opportunity Grants
      • CFDA 84.288, Bilingual Education—Program Development and Implementation Grants
      • CFDA 84.290, Bilingual Education— Comprehensive School Grants
      • CFDA 84.291, Bilingual Education—Systemwide Improvement Grants
      • CFDA 97.008, Urban Areas Security Initiative
    • Modified 10 program titles to make them consistent with the name as it appears in the CFDA. See the Table of Contents section of the Supplement for the program titles affected.
    • Revised the "Purpose and Applicability – Applicability – Safe Harbor Status" section of Part 1, Background, Purpose, and Applicability, and the "Overview of this Supplement" section of Part 3, Compliance Requirements to clarify that the auditor is responsible for achieving the stated audit objectives for the applicable compliance requirements and the suggested audit procedures are, as the name implies, only suggested.
    • Revised Part 2, Matrix of Compliance Requirements, to include updates to the matrix to add and remove programs to make it consistent with the Table of Contents and Part 4, Program Compliance Requirements . For existing programs that added or removed compliance requirements, the matrix was updated based on the program supplement in Part 4. The following list includes programs whose compliance requirements were modified in the 2009 Supplement:
      • CFDA 15.042, Indian School Equalization Program – added applicability of "Reporting."
      • CFDA 15.426, Coastal Impact Assistance Program (CIAP) – added applicability of "Matching, Level of Effort, Earmarking."
      • CFDA 15.614, Coastal Wetlands Planning, Protection and Restoration Act – added applicability of "Real Property Acquisition/Relocation Assistance."
      • CFDA 93.210, Tribal Self-Governance Program: IHS Compacts/Funding Agreements – added applicability of "Cash Management."
      • CFDA 93.268, Immunization Grants – deleted applicability of "Eligibility."
      • Student Financial Aid (SFA) – deleted applicability of "Subrecipient Monitoring."

    The matrix was also updated to correct compliance requirements that are not applicable for particular CFDAs by correcting cells where shading indicating that a compliance requirement is not applicable was inadvertently omitted (CFDAs 10.566, 14.169, 84.002, 84.011, 93.153, and 97.109).

    • Revised Part 3, Compliance Requirements, as follows:
      • Updated "Introduction," including coverage of the Recovery Act
      • Modified each section—A through M—to include a subsection entitled "Source of Governing Requirements" that includes references to 2 CFR part 215, the OMB Circular A-102 Common Rule, and other potentially applicable requirements.
      • Corrected citations in B, "Allowable Costs/Cost Principles;" under OMB Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments, added Web site for major local government and cognizant agency listings; and under OMB Circular A-21, Cost Principles for Educational Institutions, added clarifying language regarding cognizant agencies.
      • Updated C, "Cash Management," to clarify applicability and make it consistent with 31 CFR part 205, the Department of the Treasury's regulatory implementation of the Cash Management Improvement Act.
      • Updated H, "Period of Availability of Federal Funds," to clarify testing under the Suggested Audit Procedures.
      • Updated I, "Procurement and Suspension and Debarment," to clarify suspension and debarment requirements.
      • Updated L, "Reporting," to reflect changes in reporting requirements and to revise suggested audit procedures.
      • Updated M, "Subrecipient Monitoring," to reflect requirements in Circular A-133.
      • Made other miscellaneous changes throughout for clarity.
    • Revised Part 4, Agency Program Requirements, to address over 75 programs with major and minor changes. Numerous programs were revised to add new guidance, remove outdated guidance, make clarifications, etc. Members are strongly encouraged to review Appendix V of the Supplement to identify the relevant program changes made.
    • Revised Part 5, Cluster of Programs, for multiple major and minor changes to the SFA Cluster, including the addition of CFDA 84.379, Teacher Education Assistance For College and Higher Education Grants (TEACH Grants) and corrected the title of CFDA 93.342 where applicable. Also, updated the list of other clusters to reflect changes in program names and programs deleted from the Supplement.
    • Modified Appendix VI, Disaster Waivers and Special Provisions Affecting Single Audits, to delete coverage for programs for which waivers or special provisions have expired.
    • Added Appendix VII, Other OMB Circular A-133 Advisories, to include coverage of the effect of the Recovery Act on single audits based on currently available information (see further discussion in the next section of this Alert). Also, OMB is using this Appendix to describe the common audit deficiencies cited in the federal study on single audit quality to assist auditors in ensuring audit quality consistent with the requirements of Circular A-133 and the Supplement. The practice tips included at the end of this Alert can also be used by member firms to help avoid quality deficiencies in single audits.

    New Recovery Act Guidance in Appendix VII

    With the release of the 2009 Supplement, OMB provides additional information and guidance in Appendix VII, Other OMB Circular A-133 Advisories, intended to highlight some areas of the Recovery Act impacting single audits. We strongly recommend that you read Appendix VII in its entirety. We have provided a brief description of certain important aspects of the Appendix below. For additional background on the Recovery Act and discussion of the various other guidance documents that have been issued to date, you can refer to GAQC Alert #106 and GAQC Alert #111.

    • Auditors Should Look for Addenda to the Supplement. Due to the limited time between the enactment of the Recovery Act and the issuance of the Supplement, OMB was not able to more fully revise the Supplement for needed Recovery Act revisions. Therefore, Appendix VII is just a first step and we expect OMB to develop addenda to the Supplement as time progresses to add new programs or modify certain sections (e.g., Part 3 will likely be modified to address certain compliance requirement considerations of the Recovery Act). Such additions to the Supplement will include effective dates. The guidance states that auditors should look first to Appendix VII and then to the OMB Web site for additional Supplement addenda.
    • Auditors Should Be Alert for Recovery Act Awards. The Appendix states that OMB expects the effects of the Recovery Act on single audits to increase significantly during calendar year 2009 and that auditors should be alert to determine whether auditees (both recipients and subrecipients) have properly identified Recovery Act awards.
    • Impact on CFDA Numbers. The Appendix states that federal agencies are required to specifically identify Recovery Act awards, regardless of whether the funding is provided under a new or existing CFDA number. The CFDA number should be included in the grant award documents. Agencies will use new CFDA numbers for new Recovery Act programs or for existing programs for which the Recovery Act provides for compliance requirements that are significantly different for the Recovery Act funding. For existing programs, agencies may or may not use a new CFDA number for Recovery Act awards to existing Federal programs. 
    • Cluster Guidance to be Updated Monthly. OMB states that it will need to update the clustering guidance in Part 5 of the Supplement since many of the Recovery Act awards will have new CFDA numbers (even though they are additions to and share common compliance requirements with the existing program). This will be accomplished through addenda to the Supplement that will be posted as of the end of each month beginning June 2009. The Appendix states that the auditor is responsible for using the cluster list that matches the auditee's fiscal year end. For example, OMB plans to post an addendum for changes to clusters applicable to an audit of the fiscal period ending June 30, 2009, to be dated June 30, 2009, and posted on the OMB Web site by that date. Auditors would use that list for their June 30, 2009, single audits.
    • Major Program Determination. The Appendix also describes the impact on major program determination. There are two scenarios that could arise. The first is where one CFDA number is being used for both non-Recovery Act and Recovery Act funds. In this case the Appendix states that the auditor should consider all Federal programs with expenditures of Recovery Act funds to be programs of higher risk in accordance with sections .525(c)(2) and .525(d) of OMB Circular A-133. The Appendix also states that when performing the risk-based approach under section .520(c)(1), Type A programs with expenditures of Recovery Act funds should not be considered low-risk except when the auditor determines, and clearly documents the reasons, that the expenditures of Recovery Act funds is low-risk for the program. The second scenario is where a new CFDA number is used for the Recovery Act funds. The guidance states that for situations where a Recovery Act CFDA number has been added to a cluster, the Recovery Act CFDA number should be considered a new program and the cluster would not qualify as a low-risk Type A program. This means that the cluster will not meet the requirement of having been audited in one of the last two audit periods and will therefore have to be audited as a major program (assuming it is a Type A program). Keep in mind, as noted above, that the OMB will be posting, before June 30, 2009, an addenda to the Supplement identifying cluster changes resulting from Recovery Act additions.
    • Auditors May Have to Use Multiple Sources to Determine Compliance Requirements. This section of the Appendix emphasizes that compliance requirements unique to the Recovery Act are not included in this Supplement. Therefore, it states that auditors should: (1) review the award documents, including the terms and conditions; (2) check the OMB Web site for any addenda to the Supplement, and (3) use the framework provided by the Supplement (e.g., in Parts 3, 4, 5, and 7) as guidance to identify Recovery Act compliance requirements material to the federal program and to determine the appropriate audit procedures.
    • Schedule of Expenditures of Federal Awards (SEFA)and Data Collection Form (DCF) Need to Identify Recovery Act Expenditures Separately. This section states that federal agencies are including specific Recovery Act requirements in their terms and conditions for Recovery Act awards to ensure separate identification in both the SEFA and the DCF. This separate identification should also include the Research and Development cluster regardless of the accommodation made in section .310(b)(1) of Circular A-133. Generally, Recovery Act award terms and conditions are requiring recipients to accomplish this by identifying Recovery Act expenditures separately on the SEFA, and as separate rows under Item 9 of Part III of the DCF by CFDA number, and inclusion of the prefix "ARRA-" in identifying the name of the federal program on the SEFA and as the first characters in Item 9d of Part III on the DCF. Terms and conditions are also requiring that recipients agree to separately identify to each subrecipient, and document at the time of subaward and at the time of disbursement of funds, the federal award number, CFDA number, and amount of Recovery Act funds. When ARRA funds are subawarded for an existing program, the information furnished to subrecipients will have to distinguish the subawards of incremental Recovery Act funds from regular subawards under the existing program. Recipients will also have to agree to require their subrecipients to include on their SEFA information to specifically identify Recovery Act funding similar to the requirements for the recipient SEFA described above.

    GAQC Compliance Supplement Practice Tips for Members

    Because the Supplement is one of the most important pieces of guidance that you use in performing single audits, it is important that you use it properly. Here are a few tips for you to consider as you begin your 2009 audit season.

    • You should focus in on the guidance in Appendix VII on Recovery Act implications if your clients have or will be receiving Recovery Act funds. Because OMB will be following up the issuance of the 2009 Supplement with various addenda, it is critical for your firm to periodically check the OMB Web site to track updates to the Supplement for Recovery Act matters that could affect your 2009 single audits. The GAQC will also be providing you periodic GAQC Alerts as we become aware of addenda that have been posted so watch your e-mailbox for our communications.
    • It is important for your engagement teams to be using the correct version of the Supplement. Bookmark the 2009 Supplement on the OMB Web site to ensure that you are using the correct year. Click here to find the 2009 Supplement. If you have engagement teams that are auditing previous years (that is, audits of fiscal years ending before June 30, 2009), be sure that they are using the version of the Supplement that was in effect at that time. The OMB Web site includes previous years' versions of the Supplement as well.
    • As part of your single audit engagement team preparation, hold a planning meeting to review the 2009 Supplement with your audit team. Focus the review on the programs to be audited and any significant changes made to the Supplement from the prior year. Appendix V of the Supplement is particularly useful in identifying the changes made each year. Appendix VII should be a key part of the discussion this year as well.
    • The Matrix of Compliance Requirements in Part 2 identifies the compliance requirements that are applicable to the programs included in this Supplement. Many issues with using this Part of the Supplement have been noted in single audit quality reviews and it is important that you use it correctly. Remember that even though a "Y" within the Matrix indicates that a compliance requirement applies to a federal program, it may not apply at a particular entity, either because that entity does not have activity subject to that type of compliance requirement or the activity could not have a material effect on a major program. Therefore, you need to exercise professional judgment when determining which compliance requirements marked "Y" need to be tested at a particular non-Federal entity. Use Part 2 appropriately by:
      • Using professional judgment;
      • Assessing each compliance requirement individually;
      • Considering both quantitative and qualitative materiality when deciding whether an "applicable" compliance requirement is material to a major program;
      • DOCUMENTING the determination of why an applicable requirement is NOT deemed direct & material. Just using an "N/A" or "Not Direct and Material" tickmark is not enough. You need to document your logic for making the decision.
    • Because Part 4 and Part 5 of the Supplement do not include guidance for all types of compliance requirements that pertain to a program (see introduction to Part 4 for additional information), you should use those Parts in conjunction with Parts 2 and 3.
    • Refrain from using the Supplement as a defacto audit program. Remember that the Supplement includes "suggested" audit procedures. Auditor judgment is necessary to determine whether the suggested audit procedures are sufficient to achieve the stated audit objectives or whether additional or alternative audit procedures are needed. Therefore, you should not consider the Supplement to be a "safe harbor" for identifying the audit procedures to apply in a particular engagement. Note that this is an area of the Supplement that was enhanced by OMB this year (see the description of changes to Part I of the Supplement above). A good understanding of your client is necessary to be sure you are performing the correct procedures for your client's facts and circumstances. Also, you should understand the various federal programs that your client receives to determine whether modifications to the audit approach are necessary.

    Following the above tips will help you use the Supplement more successfully and help ensure that you do not encounter quality issues associated with misuse of the Supplement.

    Sincerely,

    AICPA Governmental Audit Quality Center

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