GAQC Alert No. 168 


    GAQC Alert #168 - OMB Releases 2011 Compliance Supplement
     
    OMB Releases 2011 Compliance Supplement
           
      AICPA
    June 2, 2011
    GAQC Alert #168
     
     
    In This Alert
       
    GAQC Web Event
    Key Changes to the Supplement
    Other Key Supplement Guidance
    How to Access the 2011 Supplement
    GAQC Supplement Practice Tips
    Importance of the Supplement
       
    Additional Resources
       
    GAQC Alerts

    Archived GAQC Web Events

    Audit Practice Aids and Tools

    HUD Information
     
    Dear Center Members

    The purpose of this Governmental Audit Quality Center (GAQC) Alert is to provide you with important information about yesterday's release of the Office of Management (OMB) 2011 OMB Circular A-133 Compliance Supplement (the Supplement). After reading this GAQC Alert you will be aware of the following important information:

    A "save the date" notice for a June 29, 2011, GAQC member Web event on the Supplement;
    Key changes to the Supplement that you should be aware of for your audits performed in accordance with OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations (Circular A-133);
    A few reminders regarding important guidance added to the 2010 Supplement that continue to be relevant in this year's Supplement;
    How to access the Supplement;
    Best practices when using the Supplement; and
    A Reminder on the importance of the Supplement.
    GAQC Supplement Web Event June 29th – Save the Date
    Because of the importance of the Supplement for the purpose of planning and performing your 2011 single audits, the GAQC will hold a Web event titled, An Overview of the 2011 OMB Compliance Supplement, on Wednesday, June 29, 2011, from 1:00PM – 3:00PM (Eastern Time). Please mark your calendars and watch for a future GAQC Alert with registration details. This is sure to be a very informative event and will cover, in more detail, many of the items described in this GAQC Alert. This event will be offered with both a CPE Credit Option (with a fee) and a No-CPE Option (with no fee).
    Key Changes to the Supplement

    The first thing you should do is to review Appendix 5, List of Changes for the 2011 Compliance Supplement, to identify the major change areas for this edition of the Supplement. While we describe below many of the broader changes to the Supplement, there are also a number of specific programmatic changes that are very important. Appendix 5 summarizes these programmatic changes by Catalog of Federal Domestic Assistance (CFDA) number. You should check Appendix 5 for the programs you typically audit to identify what, if anything, has changed.

    Part 4, Agency Program Requirements, of the Supplement also includes 19 new programs. Note that 2 programs were also deleted from Part 4. Further, Part 5, Clusters of Programs, includes 5 new programs added to the Student Financial Assistance (SFA) cluster. You can learn more about all of these changes in Appendix 5.

    The Supplement is effective for audits of fiscal years beginning after June 30, 2010, and it supersedes the 2010 Supplement.

    The following summarizes some of the more significant changes to the Supplement that you should be aware of:

    New Requirements for the Federal Funding Accountability and Transparency Act. One of the biggest changes in the Supplement is in Part 3, Compliance Requirements, under the "Reporting" type of compliance requirement. This section has been modified to incorporate new compliance requirements and suggested auditor procedures relating to the Federal Funding Accountability and Transparency Act of 2006 (FFATA), and subsequent 2008 amendments (see GAQC Alert #156 for additional background information on FFATA). FFATA put into place a new federal reporting system for direct recipients of non-Recovery Act federal awards to report certain subawards. (Note that awards made under the American Recovery and Reinvestment Act of 2009 (Recovery Act) continue to be subject to separate reporting requirements as described further in Part 3.) For this purpose, a subaward is defined as a legal instrument to provide support for the performance of any portion of the substantive project or program for which a recipient received a grant or cooperative agreement award and that is awarded to an eligible subrecipient. A subaward may also be provided through any legal agreement, including an agreement that the recipient considers a contract.

    For grants and cooperative agreements, the effective date was October 1, 2010, for all discretionary and mandatory awards equal to or exceeding $25,000 made with a new Federal Assistance Identification Number (FAIN) on or after that date. Once the requirement applies, the recipient must report, for any subaward under that award with a value of $25,000 or more, each obligating action of $25,000 or more in Federal funds. For contracts, implementation was phased in based on their total dollar value. Grant and cooperative agreement recipients and contractors must report information related to a subaward by the end of the month following the month in which the subaward or obligation of $25,000 or greater was made and, for contracts, the month in which a modification was issued that changed previously reported information.

    The FFATA Subaward Reporting System (FSRS) collects the required subaward data. Information required to be reported in the FSRS include the date of the subaward, the subaward amount, the subaward number, and more. Suggested audit procedures have been added that would have the auditor, among other things, select a sample of recipient payments for first-tier subawards to determine whether certain key data elements were accurately reported and are supported by the source documentation, and that the action was reported in FSRS no later than the last day of the month following the month in which the award or the modification was signed.

    Comparison of ARRA and Transparency Act Requirements. The "Reporting" type of compliance requirement in Part 3 also includes a new table that is intended to assist auditors in distinguishing, for purposes of the Circular A-133 audit, the requirements that apply to reporting by recipients under the Recovery Act and those that apply to reporting under FFATA. This is bound to be an area of confusion so it would be prudent to focus your attention on this table.

    Clarifications in Part 4 Regarding Applicability of FFATA Reporting Requirements. In order to assist auditors in determining whether reporting under FFATA applies, a new section titled, "Subaward Reporting under the Transparency Act," has been added to each program supplement/cluster in Part 4. This new section indicates whether FFATA reporting is "Applicable" or "Not Applicable." Note that FFATA reporting at the program level may be "Not Applicable" for several different reasons: (1) there are no subawards under the program; (2) the program is exempt from this requirement because it is Recovery Act funded; or (3) the program is other than a grant or cooperative agreement program. Because programs/awards with Recovery funding are exempt from FFATA subaward reporting requirements, OMB has noted that for those programs or clusters with both Recovery Act and non-Recovery Act funding, that FFATA reporting only applies to non-Recovery Act funds.

    Clarification Regarding Recovery Act Section 1512 Reporting. The "Reporting" type of compliance requirement in Part 3 has also been updated to respond to practice questions relating to the Recovery Act quarterly reporting requirement for recipients under Section 1512 of the Recovery Act (i.e., section 1512 reporting). During the past year, some recipients used a lag methodology to prepare the section 1512 reporting because they did not have "final" actual expenditure amounts within the 10 days allowed for the section 1512 reporting period (for example, they used finalized data for two months of the current quarter and then did not include the final month of the quarter, instead using the finalized data from the last month of the previous quarter). These auditees believed this was an appropriate method for reporting. However, many auditors disagreed and reported findings relating to the use of such an approach.

    OMB clarifies in the new Supplement that this lag methodology is not appropriate and that if used, would be considered a noncompliance finding (although OMB states that it would not be reported with questioned costs and generally not considered to be a material weakness or affect the compliance opinion). Further, when recipients do not have the actual expenditure amounts within the 10 days allowed for the entire 1512 reporting period the Supplement states that they can use "best available data" for the full quarter which can include estimates. For example, if a recipient has two months of finalized data and the third month can only be estimated due to the timing of closing the monthly financial data, the Supplement states that using this estimation approach is acceptable. However, the recipient should have a process in place to review the submitted reports (after the reports have been submitted), and determine if there are any material differences that would require the report to be corrected during the continuous correction period. If there are no material differences, there is no need for the recipient to correct a submitted report.

    Recovery Act Programs Not Subject to Single Audit. A new section was added to Appendix 7, Other OMB Circular A-133 Advisories, to identify programs funded by the Recovery Act but that are not covered by single audit requirements (that is, they are not required to be included in the schedule of expenditures of federal awards (SEFA) or in the determination of major programs).

    Recovery Act Programs Not Included in the Supplement with Single Audit Implications. Appendix 7 has also been revised to include a table of federal programs by agency that includes the CFDA number for, and names of, programs not included in the Supplement that are funded by the Recovery Act and that could be subject to single audit requirements.

    Recovery Act Program Findings Need to Explicitly Identify Applicable Recovery Act Programs. A brief new paragraph was added to Appendix 7 regarding the appropriate audit finding detail to be provided relating to Recovery Act programs. It states that in addition to the required finding detail described in section .510(b)(1) of Circular A-133, the finding detail should include explicit identification of applicable Recovery Act programs.

    Clarification to the Buy American Act Requirements. The "Procurement and Suspension and Debarment" type of compliance requirement in Part 3 has been modified to include additional information related to international agreements and the Buy American Act. It clarifies that with respect to international agreements, the Buy-American requirement set out in 2 CFR section 176.70 may not be applied where the iron, steel or manufactured goods used in the project are from a party to an international agreement. In these cases, the goods and services of the applicable party are to be treated in the same manner as domestic goods and services. Part 3 provides further information and detailed regulatory citations.

    Transitional Guidance for Superseded Reporting Forms. Agencies were required to transition from the use of the SF-269, Financial Status Report, and SF-272, Federal Cash Transactions Report, to use of the SF-425, Federal Financial Report, by October 1, 2009. While most agencies, programs, or awards have fully transitioned to the new form, references to the SF-269 and SF-272 have been retained in the Supplement (in each program in Part 4) to inform the auditor if for some part of the audit period the prior form may have been submitted. For those programs that have completed the transition, changes have been made to reflect that. Therefore, in most cases, the superseded reports are shown as "Not Applicable." The "Reporting" type of compliance requirement in Part 3 also further discusses this reporting transition.

    New Listing for Federal Program Contacts. Appendix 3, Federal Agency Contacts for A-133 Audits, was revised to add additional federal contacts. Previously, the Supplement only included contact information for one individual at each federal agency (generally the federal agency single audit coordinator). In the new Supplement, a table has been added, by CFDA number, to provide federal agency contact information for each federal program included in the Supplement. The GAQC recommends that members use the new federal program contacts listing only to obtain specific information about a particular federal program or its requirements (note that in addition to these federal contacts, there may also be appropriate state contacts that should be consulted for pass-through awards). However, because the federal program contacts listed in the new table have a programmatic background and may not be familiar with the nuances of performing a single audit, members having specific auditing questions should continue to direct those questions to the overall federal agency contacts (i.e., the federal agency single audit coordinators).

    Reminders Regarding Other Key Supplement Guidance

    Impact of Recovery Act Programs on Major Program Determination and Related Presentation Requirements. Appendix 7 continues the guidance from the previous year on the effect of Recovery Act expenditures on the major program determination process. Appendix 7 also discusses the appropriate presentation of Recovery Act awards in both the SEFA and the Data Collection Form. If your auditees have expended Recovery Act funds, it is imperative that you refer to this section of the Supplement.

    Clarification of Low Risk Auditee Criteria. Appendix 7 continues the guidance applicable to all auditees from the prior year regarding low-risk auditee status. The appendix states that in order to meet the low-risk auditee criteria in section .530 of Circular A-133 in the current year, the prior two years audits must have met the requirements of OMB Circular A-133, including report submission to the FAC by the due date (based on the nine-month due date criteria or other revised due date if a properly approved extension was received from the cognizant or oversight agency). The Supplement also contains suggested procedures that the auditor performs to assist in determining whether the auditee met the FAC submission due date. This issue is a key consideration when planning an audit performed under Circular A-133 since it will impact the scope of the audit.

    Elimination of Granting Extensions. Appendix 7 also continues to state that OMB has advised federal agencies that they should not grant any single audit extension requests to grantees for fiscal years 2009 - 2011.

    Safe Harbor for Treatment of a Large Loan and Loan Guarantee Program in Type A Program Determination. Appendix 7 continues the guidance on consideration of loans and loan guarantees in the Type A program determination process. This guidance states that in order to promote consistency of practice, auditors may consider the following as a safe harbor for treatment of large loans and loan guarantee programs in determining Type A programs when planning audits:

    Each individual program that includes loans or loan guarantees (as described in Section .205(b) of Circular A-133) that does not exceed four times the largest non-loan program (a cluster of programs is treated as one program) is not considered to be large. The presumption is that only changes in the number or size of Type A programs that result from the exclusion of individual loan and loan guarantee programs that are in excess of four times that of the largest non-loan program are significant.
    Auditors are only required to perform the recalculation of the Type A threshold described in Section .520(b)(3) of Circular A-133 when the expenditures for a loan or loan guarantee program are more than four times that of the largest non-loan program (a cluster of programs is treated as one program).
    The recalculation is performed after removing the total of all large loan and loan guarantee programs.
    In addition, this section of Appendix 7 includes a number of detailed examples to illustrate how it would be operationalized in various circumstances. These illustrations are useful to assist you in understanding how to address loan and loan guarantee programs in the Type A program determination process, especially when loan or loan guarantee programs are part of a cluster. Further, auditors with auditees that participate in the SFA program may find the illustrations particularly helpful in understanding the complexities of how this safe harbor is applied when the SFA cluster is involved.
    How to Access the 2011 Supplement
    You can find the Supplement on the grants management section of the OMB's Web site under the "Grant Management Circulars" link. You can access that page directly by clicking here (scroll down to the "Audit Requirements" section). To access the new Supplement directly, click here.
    GAQC Supplement Practice Tips

    We believe that these practice tips are worth your consideration in light of the fact that the Supplement is one of the most important pieces of guidance that you use in performing single audits. Here are a few tips for you to consider as you begin your 2011 audit season.

    This year you should continue your focus on the guidance in Appendix 7 on Recovery Act implications if your clients have or will be receiving Recovery Act funds.
    Look for GAQC Alerts with any relevant updates or clarifications regarding the Supplement.
    It is important for your engagement teams to be using the correct version of the Supplement both for purposes of planning and performing single audits. Bookmark the 2011 Supplement to ensure that you are using the correct year.
    As part of your single audit preparation, hold a planning meeting to review the 2011 Supplement with your audit engagement team. Focus the review on the programs to be audited and any significant changes made to the Supplement from the prior year. Appendix 5 of the Supplement is particularly useful in identifying the changes made each year. Appendix 7 should continue to be a key part of the discussion this year as well.
    Part 2, Matrix of Compliance Requirements, identifies the compliance requirements that are applicable to the programs included in the Supplement. Many issues with using this Matrix 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 auditee. 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. 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.
    If you happen to be engaged to audit a prior audit period, you can find several of the prior year Supplements by clicking here. You should use the version of the Supplement in effect at the time of the period you are auditing.
    A Reminder About the Importance of the Supplement
    The Supplement identifies the existing important compliance requirements that the federal government expects to be considered as part of a single audit and is one of the most important pieces of guidance that you use in performing single audits. It provides a key source of information for the purpose of understanding federal program objectives, procedures, and compliance requirements, as well as audit objectives and suggested audit procedures for determining compliance with these requirements. As the designated audit quality partner for your firm or designated audit quality leader for your state audit organization, you should give the Supplement your immediate attention and ensure that your staff has the information they need to help ensure single audit quality. This GAQC Alert is another important piece of information you might consider sharing with your staff.

    The GAQC will be covering much of what is in this GAQC Alert in our upcoming GAQC Web event on June 29th (see above). Additionally, as time progresses and members begin using the Supplement, we will monitor its implementation and to the extent we receive common questions on particular areas, will communicate information that might be helpful to ensuring an appropriate understanding of the Supplement. If you have any questions or clarifications that you think need to be addressed, please e-mail us at gaqc@aicpa.org so that we are aware of any issues or problems that you are facing.
    *   *   *   *   *
    Sincerely,
    AICPA Governmental Audit Quality Center

    Stay Informed
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