Federal Audit Update
Association of Government Accountants
April 22, 2014
Our presenters
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John Good, Executive Director, EY- Americas
Professional Practice-Auditing
Steve Baloga, Partner , Mitchell & Titus – Market
Segment Leader – State and Local Government
© 2013 EYGM Limited.
Slide 1
2014 Public Sector Update
Lesson objectives
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Illustrate the background that led to the development of
OMB’s new uniform grant guidance
Illustrate the impact of OMB’s new uniform grant
guidance on federal grant grant-making agencies,
recipients, subrecipients and auditors with respect to:
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revised administrative requirements,
combined and rationalized cost principles,
audit requirements.
Uniform guidance background
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OMB created the Council on Financial Assistance Reform
(COFAR) in 2011
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Co-chaired by the OMB-it includes the eight largest federal grant
making agencies as well as one rotating member
In late 2011, COFAR developed potential reforms to
streamline and improve policies for federal grant funds
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Uniform guidance background (cont.)
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OMB issued Advanced Notice of Proposed Guidance on
February 24, 2012
OMB issued Proposed OMB Uniform Guidance: Cost
Principles, Audit, and Administrative Requirements for
Federal Awards
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Over 300 comment letters were received in the aggregate
OMB Revisions to its Grant Guidance
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2 CFR Chapter I and Chapter II Parts 200, 215, 220, 225
and 230, Uniform Administrative Requirements, Cost
Principles and Audit Requirements for Federal Awards
(Uniform Guidance)
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Issued on December 26, 2013
Streamlines and consolidates eight existing OMB Circulars into
one document
COFAR Q and A document
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FAQ #1 for New Uniform Guidance at 2 CFR 200 issued
in February 2014
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Should is not a presumptively mandatory requirement like it is in
audit guidance but a “best practice” in the context of the Uniform
Guidance
OMB uniform guidance objectives
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Streamline guidance for federal awards to ease
administrative burden
Strengthen oversight over federal funds to reduce risks of
waste, fraud and abuse
Focus grant policies on areas that emphasize the
achievement of better grant outcomes at a lower cost
while ensuring the financial integrity of taxpayer dollars
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Effective dates
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Effective for awards or increments of awards issued after
December 26, 2014
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Could be challenging for auditees that will have awards within a
particular fiscal year that are subject to the existing guidance and
the new uniform guidance
The audit requirements in Subpart F are effective for fiscal
years beginning on or after December 26, 2014
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Early implementation is not permitted!
OMB uniform guidance — streamlining of related
circulars and guidance
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A-21,Cost Principles for Educational Institutions
A-87, Cost Principles for State, Local and Indian Tribal Governments
A -89, Federal Domestic Assistance Program Information
A-102, Awards and Cooperative Agreements with State and Local
Governments
A-110, Uniform Administrative Requirements for the Awards and Other
Agreements with Institutions of Higher Education, Hospitals and Other
Nonprofit Organizations
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OMB uniform guidance — streamlining of related
circulars and guidance (cont.)
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A-122, Cost Principles for Non-Profit Organizations
A-133, Audits of States, Local Governments and NonProfit Organizations
A-50, Audit Follow Up, related to single audits
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Organization of Uniform Guidance by subpart
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A: Acronyms and Definitions
B: General Provisions
C: Pre-Federal Award Requirements and Contents of Federal Awards
D: Post Federal Award Requirements
E: Cost Principles
F : Audit Requirements
Appendices
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Key Changes Subpart C – Pre-Federal Award
Requirements and Contents of Federal Awards
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Administrative requirements
► The Uniform Guidance consolidates administrative
requirements of OMB Circulars A-102 and A-110 into a
uniform set of administrative requirements for all federal
award recipients
► A-110 appears to have been adopted except for procurement
which originates from A-102 and which is less flexible
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Pass-through entity responsibilities
► While many of these responsibilities are implicit today or
contained in the current OMB Circular A-133 audit
requirements the OMB grant guidance more clearly
enumerates them
► Expansion of pass-through entity responsibilities
► Must provide certain information in sub awards at the time of the
federal award and with each annual continuation of the sub award
► Must provide for indirect costs of recipient
► Either negotiated or a flat rate of 10%
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Pass-through entity responsibilities
► Pass-through entities are expected to refocus their efforts,
particularly in documenting risk assessments of
subrecipients for purposes of determining the nature,
timing and extent of monitoring procedures
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Extent and results of federal awarding agency monitoring
Prior experience with similar sub awards
Results of previous audits
Whether subrecipient has new personnel or systems
Key changes for grant recipients — administrative
requirements
► Must have effective internal controls over compliance with federal
awards
► Should comply with the internal control requirements issued by the
Governmental Accountability Office (GAO) in Standards for Internal
Control in the Federal Government also known as the “Green Book” and
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in the Internal Control Integrated Framework
► Internal controls over compliance requirements moved from OMB
Circular A-133
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Internal controls over compliance with federal awards
► Part 6 of the OMB Circular A-133 Compliance Supplement contains a
framework for internal control over compliance with federal awards
that include suggested internal controls for each of the five elements
of the COSO framework for each of the A-N compliance requirements
► However, this compliance supplement has historically been
considered a document that helps auditors as opposed to explicit
internal control criteria for recipients
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COFAR FAQ #1— internal controls clarification
► There is no expectation or requirement that the recipient
document or evaluate internal controls prescriptively in
accordance with COSO or the Green Book or that the
recipient or auditor reconcile technical differences
between them
► COSO and Green Book are provided solely to alert
recipients to source documents for best practices
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Green Book
► The Green Book comment period ended on February 15,
2014
► The Green Book is essentially an adaptation of the 5
components and 17 principles of COSO to the federal
government and now the potentially broader recipient
community as a best practice document for internal
controls over compliance
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Key changes for grant recipients — administrative
requirements
► Agency review of the merits of proposals and risk
proposed by applicants
► Announcement of funding opportunities
► Generally made available for at least 60 days
► Standard format to be used
► Interest earned on advances
► Threshold to remit interest increased to $500, can be remitted
annually and to only one federal agency-HHS
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Key changes for grant recipients — administrative
requirements (cont’d)
► Property standards
► Equipment no longer needed for the federal program it was
purchased for can be used to support other programs
► The term contractors replaces vendors
► Could cause confusion in subrecipient relationships that use a
“contract “ to pass funds down
► Look at nature of the relationship and not the name of the
document
► Using a contract does not make someone a contractor
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Key Changes Subpart E – Cost Principles
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Cost principles
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OMB Circulars A-21, A-87 and A-122 consolidated into
one.
United States Department of Health and Human Services
Cost Principles for Hospitals at 45 CFR Part 74 Appendix
E-not incorporated in the Uniform Guidance
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OMB will conduct further review of the cost principles for hospitals
to determine whether they should be added
Key changes for grant recipients — cost principles
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Indirect costs
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Entities are given the option of extending the negotiated rate for up to four
years with the approval of the appropriate indirect cost cognizant agency
A minimum rate of 10% of modified total direct costs is established to
ensure that entities that are not able to negotiate receive a minimum
reimbursement
Pass-through entities will have to honor the indirect cost rates negotiated
at the federal level, negotiate a rate in accordance with federal guidelines
or provide a minimum flat rate
Compensation for personal services — current state
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Significant differences in time and effort documentation
requirements under the three existing cost circulars
A-21 is based on estimates that produce a reasonable
estimation of actual activity
A-87 and A-122 are based on periodic (at least monthly)
time and effort reporting of employees
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Compensation for personal services
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Uniform guidance provides less prescriptive guidance on
documentation and increases emphasis on internal
controls
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Compensation for personal services (cont.)
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Time and effort reporting
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Focus is on broad principles of how an entity may establish internal
controls to validate personnel related costs
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Less prescriptive guidance on documentation
Entities will be allowed to document personnel costs by using
performance-based reporting based on milestones rather than time and
effort reports
This new option could significantly reduce the administrative burden of
documenting positions funded by multiple grants that essentially serve the
same population of program participants
Time and effort reporting
► Charges to federal awards for salaries and wages must
be based on records that accurately reflect the work
► Certification periods up to 12 months must be established
to provide oversight of federal awards
► Budget estimates made before services are performed do
not qualify as support but may be used for interim
accounting purposes in certain circumstances
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Key changes for grant recipients — cost principles
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Collection of improper payments
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Contingency provisions
Cost accounting disclosure statement
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Allowed to keep amounts collected to cover the expense of collection
efforts
Increase in threshold to file to $50,000,000
Depreciation
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Restrictions on recovery of indirect costs for depreciation or use allowance
Key changes for grant recipients — cost principles
(cont.)
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Idle facilities and idle capacity
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Costs associated with excess or idle capacity will be allowable
costs
Intangible assets
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Updates cost principles to treat intangible assets such as computer
software capitalized in accordance with US GAAP similar to other
fixed assets
Key changes for grant recipients — cost principles
(cont.)
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Material and supply costs
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Cost of computing devices not otherwise subject to inventory
controls will be considered allowable direct cost supplies
Guidance sets a threshold of the lesser of $5,000 or the grantees
capitalization policy minimum
Utility costs
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Allows a utility cost adjustment of up to 1.3% to be included in the
negotiated indirect cost rate for all institutions of higher education
in accordance with two options for utility cost reimbursement
OMB uniform grant guidance — next steps for recipients
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Read the uniform grant guidance
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Including Q and A document
Develop an internal implementation and training plan
Identify changes to policies and procedures and internal
controls to comply
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Familiarize yourself with COSO and the Green Book
Key Changes Subpart F – Audit
Requirements
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Strengthening Oversight
► Several significant changes were made to single audits
which will be covered on the next several slides
► OMB’s goal was to ensure that single audit efforts are focused on
the largest impact and highest risk grants and grantees
► These changes should serve to reduce the overall number of
programs covered by Single Audits
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Single Audit Report Standardization– Findings
► Emphasis on proper perspective information in findings
► Information on audit sampling in the body of the finding when
findings involve items identified in auditor samples
► Indicate whether sampling used was statistically valid
► Indicate whether current year finding was a repeat of a
prior year finding and the prior year finding number
► Threshold for reporting questioned costs findings
increases from $10,000 to $25,000
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OMB uniform guidance– Schedule of Expenditures of
Federal Awards
► Amounts provided to subrecipients by federal program required on the
face of the Schedule of Expenditures of Federal Awards (SEFA)
► Currently it is provided on the face or the notes of the SEFA, to the extent practical
► The notes to the SEFA will have to disclose whether the entity used
the flat 10% indirect cost rate
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OMB uniform guidance– Schedule of
Expenditures of Federal Awards
► The face of the SEFA must now include all federal awards expended
including:
► Noncash assistance
► Loan guarantee programs
► Loan programs►
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Beginning balance of outstanding loans plus loans disbursed during the period plus interest
subsidy, cash, or administrative cost allowance
Uniform Guidance-other reporting package
items
► Financial statement findings, not just federal award
findings are required in the Summary Schedule of Prior
Audit Findings
► More clearly articulates that the Corrective Action Plan is
a separate auditee document outside and apart from the
management’s response and planned corrective actions
section of the respective current year findings in the
Schedule of Findings and Questioned Costs
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Audit Finding Follow-ups
► As provided in §200.513 Responsibilities, paragraph (a)(7), the
cognizant agency for audit must be responsible for coordinating
a management decision for audit findings that affect the
programs of more than one Federal agency.
► As provided in §200.331 Requirements for pass-through
entities, paragraph (d), the pass-through entity must be
responsible for issuing a management decision for audit
findings that relate to Federal awards it makes to subrecipients.
► The Federal awarding agency or pass-through entity
responsible for issuing a management decision must do so
within six months of acceptance of the audit report by the FAC.
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OMB uniform guidance — single audit thresholds
► Raises the threshold of annual federal expenditures that
triggers an A-133 audit from $500,000 to $750,000
► Will provide audit relief for approximately 6,000 entities while
approximately 99% of the federal expenditures subject to audit will
still be covered under the increased threshold
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OMB uniform guidance — changes to the major program
determination process
► Minimum Type A program threshold increased from
$300,000 to $750,000 for entities with annual
expenditures less than $25 million
► Change in the tiered scale to determine Type A programs
for entities with annual federal expenditures exceeding
$25 million
► If total federal awards expended are between $25 million and $100
million then the Type A program threshold is .03 of federal awards
expended
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Changes in Type A program threshold
► If total federal awards expended are between $100 million and $1
billion then the Type A program threshold is $3 million
► If total federal awards expended are between $1 billion and $10 billion
then the Type A program threshold is .003 of total federal awards
expended
► If total federal awards expended are between $10 and $20 billion then
the Type A program threshold is $ 30 million
► If total federal awards expended are $ 20 billion or more then the
Type A program threshold is .0015 of total federal awards expended
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Effect of loan programs on Type A program threshold
► Incorporates the guidance on large loans/loan guarantee
programs that is currently in the OMB Circular A-133
Compliance Supplement
► However, modifies the guidance as it relates to a cluster
of programs
► When loan program is less than 50% of the cluster that the loan
program is included in, the cluster is not considered a loan
program, so all amounts would be included in the Type A program
threshold calculation
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Effect of loan programs on Type A threshold —
part of a cluster
► Community colleges or entities where Pell and Work
Study dominate the Student Financial Assistance Cluster
such that the loan component of the cluster is less than
50%, will see an increase in the Type A threshold and
likely less major programs will have to audited
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Type A high risk programs
► The criteria for prior-year findings that make a Type A
program high risk in the current year have been narrowed
to only findings that either:
► Caused the program to not receive an unmodified compliance
opinion
► Were material weaknesses in internal control over compliance
► Represented known or likely questioned costs exceeding 5% of
the program’s expenditures
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Type A high risk programs (cont.)
► If a Type A program has not been audited as a major
program in 1 of the 2 most recent audit periods, it will still
be a high-risk program and have to be audited as major
► A Type A program that had a significant deficiency in the prior year
is no longer an automatic high risk program
► A Type A program that had a reportable compliance finding in the
prior year that did not result in a modified compliance opinion nor
known or likely question costs that exceeded 5% of the
expenditures of the program is no longer an automatic high risk
program
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Change in default criteria for a Type A high - risk
program
► This change focuses risk assessment on whether the
program received a modified opinion on compliance, had
material known or likely questioned costs or a material
weakness rather than virtually all types of findings,
including those that are less significant
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Type A program risk assessment changes
► A Type A program that has been audited once in the 2
previous years that has no prescribed audit findings in the
prior year is a required low risk Type A program
► Can not use auditor judgment and say it is a high risk program
because program is inherently risky or complex, etc. (SFA & R&D)
► Exceptions for risk indicated by results of audit follow-up on federal
or pass through entity audit findings or any changes in personnel
or systems affecting the program that indicate significant increased
risk to preclude low risk designation
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OMB uniform guidance — changes to Type B program
risk assessment process
► Eliminates the two Type B program risk assessment
options in the current Circular A-133
► Instead, we will perform risk assessments on Type B
programs until high risk Type B programs have been
identified up to 25% of the low risk Type A programs
► Should result in fewer Type B program risk assessments
► May result in fewer Type B programs subject to audit
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OMB uniform guidance — changes to Type B program
risk assessment process (cont.)
► Reduce the number of high risk Type B programs that
must be tested as major programs from at least one-half
to at least one-fourth of the number of low risk Type A
programs
► Small Type B programs that would not be subject to Type
B program risk assessment would be increased to a flat
25% of the Type A program threshold
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Minimum percentage of coverage changes
► Percentage of coverage requirement reduced from 50% to
40% for an entity that is not a low risk auditee
► Percentage of coverage requirement reduced from 25% to
20% for a low risk auditee
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Changes to low - risk auditee criteria
► The criteria for low-risk auditee now more clearly includes
data collection form submission within required time
frames (as enumerated in the current OMB Circular A-133
Compliance Supplement) as a criteria
► Adds a criteria that the auditor did not report a substantial
doubt about the auditee’s ability to continue as a going
concern
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Changes to low - risk auditee criteria (cont.)
► Adds a criteria that the financial statements reported on
have to be prepared in accordance with GAAP or another
basis of accounting if required by state law
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Changes to major program determinations
► OMB believes that the changes will result in more targeted
audit coverage of programs with material weaknesses and
material noncompliance and:
► Burden relief for entities that materially comply as evidenced by
an unmodified audit opinion, no material weaknesses in internal
controls over compliance and no material questioned costs
► Incentive for entities to focus on correcting material
weaknesses and material noncompliance
Page 54
Changes to major program determinations (cont.)
► Entities that are dominated by one large program may not realize
burden relief because that program has to be audited each year as
major to achieve minimum percentage coverage
► We may see situations where there are fewer Type A programs and
we are selecting additional programs (the current Type A programs)
to achieve minimum percentage coverage with minimal impact on
number of major programs
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Changes to 2015 Supplement to be considered
► Whether the types of compliance requirements which
require the auditor to test beyond the normal financial
system (e.g., performance reporting, special reporting,
and certain special tests and provisions) can be reduced
► Updates to Part 6 – Internal Control to be consistent with
the GAO’s “Green Book” (when its revisions are finalized)
and the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
► Whether certain compliance requirements can be merged,
streamlined or eliminated consistent with initial Circular
comment document
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Uniform Guidance — other reporting package items
► Financial statement findings, not just federal award
findings are required in the Summary Schedule of Prior
Audit Findings
► More clearly articulates that the Corrective Action Plan is
a separate auditee document outside and apart from the
management’s response and planned corrective actions
section of the respective current year findings in the
Schedule of Findings and Questioned Costs
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OMB uniform guidance — other
► Next business day is the due date for the data collection
form and related reporting package when nine month
Circular A-133 deadline falls on a weekend
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OMB uniform guidance — other areas
► Full Circular A-133 reporting packages, including the audited financial
statements will be publicly available
► Processes with respect to preventing Protected Personally Identifiable
Information (PII) and other confidential information from being included in
the reporting package will need to be developed
► Senior level representative of the audited entity is to make a certification of
such in the data collection form
► A national Circular 133 audit quality study is required to be
performed every six years beginning in 2018
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Effective Dates
► Effective for awards or increments of awards issued after
December 26, 2014
► The audit requirements in Subpart F are effective for fiscal
years beginning on or after December 26, 2014
► Early implementation is not permitted!
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Transition Audit Issues
► For example, Audits for fiscal years ending on June 30,
2015 and December 31, 2015-will be auditing against
recipient criteria under current OMB Circulars for part of
the fiscal year and the Uniform Guidance for another part
of the fiscal year
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Resources
► EY Technical Line, Federal grant policies for recipients
are streamlined and changed, January 9, 2014
► OMB Uniform Guidance and related crosswalks located at
► http://www/whitehouse.gov/omb/grants_docs#final
► COFAR FAQ document at https://cfo.gov/cofar
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