Administrative Notes

AICPAGovernmental Audit Quality CenterMember EventSingle Audit Fundamentals Part I: Basic Background & Overview of the Single AuditFebruary 25, 2010

Administrative Notes • If you encounter any technical difficulties during this event please submit a request for help on the "Send a Question" box located on the left hand side of the screen or call Genesys at 866.283.8244 for assistance • If are unable to get assistance from Genesys for some reason, e-mail gaqc@aicpa.org or call 202.434.9207 • We encourage you to submit your technical questions about the program content to the “Send a Question” box; we will answer as many as possible • This event is being recorded and will be posted to the GAQC Web site approximately a week after the event

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Single Audit Fundamentals Series Sponsored by the GAQC • What is GAQC? • Voluntary membership Center for CPA firms and State Audit Organizations (SAOs), with approximately 1,400 members • Designed to help CPAs meet the challenges of performing quality governmental audits, including single audits • Member benefits/membership requirements • For more information, please visit the membership section at www.aicpa.org/GAQC or call Cynthia Dillon at 202-434-9207

Today’s Presenters Barbara Cevallos, CPA PricewaterhouseCoopers LLP ___ Kim McCormick, CPA Grant Thornton LLP ___ Moderator Mary Foelster, CPA AICPA Governmental Audit Quality Center (GAQC)

Single Audit Fundamentals

Single Audit Fundamentals Events • Part I – Basic Background & Overview of the Single Audit • Scope of the Single Audit • Auditee & Auditor Responsibilities • Unique Requirements & Provisions of OMB Circular A-133 • Description & Characteristics of Federal Awards • Pass-through Awards and Subrecipients • Part II – Understanding Major Program Determination (March 4, 2010, from 1:00pm – 3:00pm Eastern) • Applying the Risk-Based Approach for Determining Major Programs • Low-Risk Auditee Determination and Distinguishing from Other Risk Assessments Performed in a Single Audit • Communications with Cognizant or Oversight Agency

Single Audit Fundamentals Events • Part III - Understanding Compliance Testing & IC over Compliance Requirements (March 11, 2010, from 1:00pm – 3:00pm Eastern) • Description & Characteristics of the 14 Compliance Requirements • Description & Characteristics of Internal Control over Compliance • Substantive Tests of Applicable Compliance Requirements • Tests of Internal Control over Compliance • Documentation Requirements • Introduction to and Using the Annual OMB Compliance Supplement

Single Audit Fundamentals Events • Part IV - Reporting Requirements and an Overview of Available Circular A-133 Resources (March 18, 2010, from 1:00pm – 3:00pm Eastern) • Reporting Requirements of the Single Audit • Overview and Use of the AICPA Audit Guide, Government Auditing Standards and Circular A-133 Audits (GAS-A-133 Guide), and related Audit Risk Alert • Understanding the OMB Cost Circulars and their Applicability to Audit Procedures • Use of www.cfda.gov and Other Web Sites to Facilitate a Single Audit

TOPICS to be COVERED • Scope of the Single Audit • Auditee & Auditor Responsibilities • Unique Requirements & Provisions of OMB Circular A-133 • Description & Characteristics of Federal Awards • Pass-through Awards and Subrecipients

Scope of the Single Audit • When is a Single Audit required? • When an entity expends federal awards (either direct or indirect awards) in excess of $500,000 in their fiscal year, they are subject to the provisions of OMB Circular A-133. • What qualifies as a Federal Award? • Discussed later in this presentation • What is the basis for determining when federal awards are expended?

Scope of the Single Audit

Scope of the Single Audit • Objectives of a Single Audit • To determine if the entity has complied with direct and material compliance requirements of each major program • Used as a report card by federal funding agencies and pass-through entities • Gives comfort to readers regarding compliance and internal control over compliance

Impact of Recovery Act • In February 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was passed • Approximately $300 billion additional federal funds being passed down; much of which subject to single audits • Federal agencies looking at single audits as an important accountability mechanism to help them ascertain that ARRA funds spent appropriately • Congress is following this very closely as well; many hearings have focused on tracking ARRA funds and single audits discussed as one accountability mechanism • High quality of the audits is of utmost importance

Scope of the Single Audit • Conducted in accordance with Generally Accepted Government Auditing Standards (GAGAS) • Covers entire operations of the entity • Financial statements are presented fairly • Adequate internal control structure • Compliance with laws and regulations • Follow-up on prior audit findings

Scope of the Single Audit Circular A-133 audit is meant to be in lieu of any financial audit of federal awards that an entity is required to undergo under any other federal law or regulation. However, federal agencies may conduct or arrange for additional audits to carry out their responsibilities under federal law or regulation.

Auditee and Auditor Responsibilities • Auditee Responsibilities • Defined in OMB Circular A-133 Subpart C • Financial statements • Schedule of expenditures of federal awards • Summary schedule of prior audit findings • Management’s views and corrective action plan • Identify Federal awards received/expended; under which program

Auditee and Auditor Responsibilities • Auditee Responsibilities, con’t • Maintain IC over federal programs • Comply with laws, regulations, provisions of contracts/grants • Ensure Single Audit is performed and submitted when due • Follow up and take corrective action on audit findings

Auditee and Auditor Responsibilities • Auditor Responsibilities • Defined in OMB Circular A-133 Subpart E • Audit the financial statements in accordance with GAAS, GAGAS • Understand internal control over Federal programs to plan the audit to support low level of control risk • Test compliance with laws, regulations, provisions of contract and grant agreements that are direct and material to each major program • Report findings in A-133 report

Auditee and Auditor Responsibilities • Auditor Responsibilities, con’t • Audit of the Schedule of Expenditures of Federal Awards • In relation to the financial statements taken as a whole • As a basis for the selection of major programs

Unique Requirements & Provisions of OMB Circular A-133 Timing of the Single Audit • Audit should be annual • Biennial audits allowed under limited circumstances • Must be submitted to Federal Audit Clearinghouse (FAC) within the earlier of 30 days after receipt of the auditors reports or 9 months after year end of the auditee • This deadline may change, so stay tuned to GAQC for updates

Unique Requirements & Provisions of OMB Circular A-133 Contents of the Single Audit Submission Report on the financial statements of the entity Report on the schedule of expenditures of federal awards Audited financial statements Schedule of expenditures of federal awards Reports on internal control over financial reporting and on compliance and other matters – GAGAS

Unique Requirements & Provisions of OMB Circular A-133 Contents of the Audit Submission, con’t Reports on compliance and internal control over compliance – major programs Schedule of findings and questioned costs Summary schedule of prior audit findings Management’s views and corrective action plan All gets submitted electronically, to FAC, with Data Collection Form

Unique Requirements & Provisions of OMB Circular A-133 Data Collection Form Joint responsibility of auditee and auditor Electronic summary of the Single Audit reports Summarizes audit opinions Includes contact information for auditee and auditor Includes SEFA information, references to findings, and relevant compliance requirements Public document

Unique Requirements & Provisions of OMB Circular A-133 Schedule of Expenditures of Federal Awards • Prepared by management • Includes all federal expenditures, or in notes to SEFA • Reconciles to the general ledger • Specifies pass-through awards • Includes CFDA or identifying number for each grant • Auditor uses this document to perform risk assessments and selection of major programs • Completeness critical to avoid over testing or missed programs

Unique Requirements & Provisions of OMB Circular A-133 Risk Assessment and Major Program Determination Major programs are the programs we will audit At a high level – we audit the programs that are large, risky, and new Major program determination is a prescription for assessing the size, risk and newness of programs Basis for our budgets and thus our fees, so must be done accurately, and done early in the process Additional programs can add large chunks of time to the audit, so must keep the client informed of any changes to major program determination GAQC Web event #2 will cover major program determination in detail (March 4, 2010, from 1:00pm – 3:00pm Eastern)

Description & Characteristics of Federal Awards Federal Awards - Definition • Federal financial assistance and Federal cost-reimbursement contracts that non-Federal entities receive directly from Federal awarding agencies or indirectly from pass-through entities. • Does not include procurements under grants or contracts, used to buy goods or services. • Analysis completed by the client to determine if a vendor relationship exists.

Characteristics of Federal Awards - examples • Grants • Contracts • Cooperative Agreements • Loans • Loan Guarantees • Property • Interest Subsidies • Insurance • Direct Appropriations • Endowments • Other Non-Cash Assistance • Indirect State or Local Government Transfers of Federal Funds

Characteristics of Federal Awards: Grants vs. Contracts • Grants • Given to an entity to support an activity (research, clinical, public service) • Outcome can be uncertain • Contracts • Between two entities • Defined service to be provided

Characteristics of Federal Awards:What is a Federal Expenditure? • Based on when the activity related to the award occurs: • Expenditure/expense transactions related to grants/contracts • Other examples: disbursement of funds passed through to subrecipients; use of loan proceeds under loan and loan guarantee programs; receipt of property; receipt or use of program income; distribution or consumption of food commodities; period when insurance is in force.

Characteristics of Federal Awards:Clusters • Definition: A grouping of closely related programs that share common compliance requirements • Treated as one program for major program determination and testing • Most common: • Research and Development • Student Financial Aid • TRIO • Child Nutrition

Characteristics of Federal Awards:Clusters Part 5 of the Compliance Supplement lists each cluster and specific, unique requirements for each Research & Development is the only cluster where specific CFDA numbers are not identified in the Supplement For R&D, determination of inclusion in the cluster is a matter of auditee judgment For all other clusters, inclusion in the cluster is defined by OMB.

Pass-through Awards and Subrecipients Many nonfederal entities receiving federal awards make pass-through payments of federal awards to other entities that are considered subrecipients.

Pass-through Awards and Subrecipients:Definitions Pass-through entity—A nonfederal entity that provides a federal award to a subrecipient to carry out a federal program. Subrecipient—A nonfederal entity that expends federal awards received from a pass-through entity to carry out a federal program. Vendor—A dealer, distributor, merchant, or other seller providing goods or services that are required for the conduct of a federal program.

Pass-through Awards and Subrecipients:Applicability Circular A-133 applies to both recipients and subrecipients of federal awards. Payments received by a vendor for goods or services provided in connection with a federal program are not considered federal awards. Medicaid payments to a subrecipient for providing patient care services are not considered federal awards.

Pass-through Awards and Subrecipients:A Subrecipient… determines who is eligible to receive what federal financial assistance. has its performance measured against whether the objectives of the federal program are met. has responsibility for programmatic decision making. has responsibility for adherence to applicable federal program compliance requirements. uses the federal funds to carry out a program of the entity

Pass-through Awards and Subrecipients:A Vendor… provides the goods and services within normal business operations. provides similar goods or services to many different purchasers. operates in a competitive environment. provides goods or services that are ancillary to the operation of the federal program. is not subject to the compliance requirements of the federal program.

Pass-through Awards and Subrecipients:Subrecipient Monitoring If a pass-through entity provides federal awards to subrecipients, the pass-through entity should monitor the subrecipients' activities to provide reasonable assurance that the subrecipients administer federal awards in compliance with federal requirements.

Pass-through Awards and Subrecipients:Key Subrecipient Monitoring Requirements Inform each subrecipient of the CFDAtitle and number, the award's name, number, award year, whether the award is for research and development, and the name of the federal agency. Advise subrecipients of the requirements imposed on them Monitor the activities of subrecipients

Pass-through Awards and Subrecipients:Key Subrecipient Monitoring Requirements Ensure that subrecipients expending $500,000 or more in federal awards during the subrecipient's fiscal year have met the audit requirements of Circular A-133 for that fiscal year. Issue management decisions on audit findings within six months after receipt of subrecipients‘ audit reports See chapter 12 of GAS-A133 Audit Guide for more details

Pass-through Awards and Subrecipients:Audit Considerations • Auditors should consider subrecipient monitoring in a compliance audit of an entity that disburses to subrecipients federal awards that are material to a major program. • Does the pass-through monitor subrecipients? • Does the pass-through have internal control over compliance in place to monitor subs that are material to the pass-through’s major programs?

Recap – Topics Covered Scope of the Single Audit Auditee & Auditor Responsibilities Basic Requirements of OMB Circular A-133 Characteristics of Federal Awards Pass-through Awards and Subrecipients

Questions ?????

To Register for Additional Web Events • If you haven’t already registered for additional Web events in this GAQC series but would like to do so: • GAQC members, refer to GAQC Alert #138 • Non-GAQC members, refer to e-mail invitation you received • Any questions—e-mail gaqc@aicpa.org

Administrative Notes