OMB Circular A-133 Compliance Supplement - Provisional 6/97TABLE
OF CONTENTS
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| CFDA | Types of Compliance Requirements | |||||||||||||
| A. | B. | C. | D. | E. | F. | G. | H. | I. | J. | K. | L. | M. | N. | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 10 -- United States Department of Agriculture (USDA) | ||||||||||||||
| 10.551 10.561 |
Y | Y | Y | See Part 4 |
Y | Y | Y | Y | Y | Y | Y | |||
| 10.557 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | |||
| 14 -- Department of Housing and Urban Development (HUD) | ||||||||||||||
| 14.182 14.855 14.856 14.857 |
Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | |||
| 14.218
14.219 |
Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | |
| 14.228 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | |
| 14.231 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | ||
| 14.235 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | |
| 14.238 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y |
| 14.239 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y |
| 14.241 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y |
| 14.862 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | ||
| 17 -- Department of Labor (DOL) | ||||||||||||||
| 17.225 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | ||||
| 20 -- Department of Transportation (DOT) | ||||||||||||||
| 20.106 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | |
| 20.205 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | |
| 83 -- Federal Emergency Management Administration (FEMA) | ||||||||||||||
| 83.516 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | |
| 84 -- Department of Education (ED) | ||||||||||||||
| 84.010 | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | |||
| 84.032 | See
Part 4 |
Y | Y | |||||||||||
| 93 -- Department of Health and Human Services (HHS) | ||||||||||||||
| 93.775
93.777 93.778 |
Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | |||
| Clusters of Programs | ||||||||||||||
| R&D | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y |
| SFA | Y | Y | Y | Y | Y | Y | Y | Y | Y | Y | ||||
Legend:
-
Y -- Yes, this
type of compliance requirement may apply to the Federal program.
An empty box indicates the program normally does not have activity subject to this type of compliance requirement.
PART
3 - COMPLIANCE REQUIREMENTS
INTRODUCTION
The objectives
of most compliance requirements for Federal programs administered
by States, local governments, Indian tribal governments, and non-profit
organizations are generic in nature. For example, most programs
have eligibility requirements for individuals or organizations.
While the criteria for determining eligibility vary by program,
the objective of the compliance requirement that only eligible individuals
or organizations participate is consistent across all programs.
Rather than
repeat these compliance requirements, audit objectives, and suggested
audit procedures, for each of the programs contained in Part 4 -
Agency Program Requirements, they are provided once in this part.
For each program in this Compliance Supplement (this Supplement),
Part 4 contains additional information about the compliance requirements
that arise from laws and regulations applicable to each program,
including the requirements specific to each program that should
be tested using the guidance in this part.
Administrative
Requirements
The administrative
requirements that apply to most programs arise from two sources:
the "Uniform Administrative Requirements for Grants and Cooperative
Agreements to State and Local Governments" (also known as the "A-102
Common Rule") and OMB Circular A-110, "Uniform Administrative Requirements
for Grants and Agreements with Institutions of Higher Education,
Hospitals, and Other Non-Profit Organizations, " and the agencies'
codification of OMB Circular A-110. The applicable guidance followed
depends on the type of organization undergoing audit. Other administrative
compliance requirements unique to a single program or a cluster
of programs, are provided in the Special Tests and Provisions section
of Part 4.
State,
Local, and Indian Tribal Governments
Governmentwide
guidance for administering grants and cooperative agreements to
States, local governments, and Indian tribal governments is contained
in the A-102 Common Rule which was codified by each Federal funding
agency in its volume of the Code of Federal Regulations.
The A-102 Common Rule section numbers are referred to without the
Federal agency's part number (e.g., §____.37 would refer to
sections in all agency regulations). This allows auditors to refer
to the same section numbers when discussing administrative issues
with different Federal funding agencies.
These requirements
apply to all grants and subgrants to governments, except where they
are inconsistent with Federal statutes or with regulations authorized
in accordance with the exception provision of the A-102 Common Rule.
Block grants authorized by the Omnibus Budget Reconciliation Act
of 1981 and several other specifically identified grants or payment
programs are exempted from the A-102 Common Rule. Appendix I to
this Compliance Supplement lists legislation and programs where
exclusions exist.
In some cases
the A-102 Common Rule permits States to follow their own laws and
procedures, e.g., when addressing equipment management. These are
noted in the sections that follow. The auditor will have to refer
to an individual State's rules in those situations.
The basic cost principles applicable to State, local, and Indian tribal governments can be found in OMB Circular A-87, "Cost Principles for State, Local, and Indian Tribal Governments."
Non-Profit
Organizations
The major source
of requirements applicable to non-profit organizations is OMB Circular
A-110. The provisions of OMB Circular A-110 are codified in agency
regulations, generally following the section numbers in the circular.
The OMB Circular A-110 section numbers are referred to similar to
the A-102 Common Rule references. However, unlike the A-102 Common
Rule, agencies with OMB approval, could modify certain provisions
of A-110 to meet their special needs. OMB Circular A-110 states
"Federal agencies responsible for awarding and administering grants . . . shall
adopt the language in the circular unless different provisions are
required by Federal statute or are approved by OMB." Subpart A,
§____.4, of OMB Circular A-110 states that "Federal awarding
agencies may apply more restrictive requirements to a class of recipients
when approved by OMB." Federal awarding agencies may apply less
restrictive requirements when awarding small awards, except for
those requirements which are statutory. Exceptions on a case-by-case
basis may also be made by Federal awarding agencies.
Appendix II
to this supplement contains a list of agencies that have codified
OMB Circular A-110 and the CFR citations for these codifications.
The cost principles
applicable to non-profit organizations can be found in OMB Circulars:
A-21 "Cost
Principles for Educational Institutions"
A-122 "Cost
Principles for Non-Profit Organizations"
Subrecipients
Governmental
subrecipients are subject to the provisions of the A-102 Common
Rule. However, the A-102 Common Rule permits States to impose their
own requirements on their governmental subrecipients, e.g., equipment
management or procurement. Thus, in some circumstances, the auditor
may need to refer to State rules and regulations rather than Federal
requirements.
All non-profit
subrecipients, regardless of the type of organization making the
subaward, shall follow the provisions of OMB Circular A-110 as implemented
by the agency when awarding or administering subgrants except under
block grants authorized by the Omnibus Budget Reconciliation Act
of 1981 and the Job Training Partnership Act where State rules apply
instead.
Compliance
Requirements, Audit Objectives, and Suggested Audit Procedures
Auditors shall
consider the compliance requirements and related audit objectives
in Parts 3 and Part 4 (for programs included in this Supplement)
in every audit of non-Federal entities conducted under OMB Circular
A-133 with the exception of program-specific audits performed in
accordance with a Federal agency's program-specific audit guide.
In making a determination not to test a compliance requirement,
the auditor must conclude that the requirement either does not apply
to the particular non-Federal entity or that noncompliance with
the requirement could not have a material effect on a major program
(e.g., the auditor would not be expected to test Procurement if
the non-Federal entity charges only small amounts of purchases to
a major program).
The suggested
audit procedures are provided to assist auditors in planning and
performing tests of non-Federal entity compliance with the requirements
of Federal programs. Auditor judgment will be necessary to determine
whether the suggested audit procedures are sufficient to achieve
the stated audit objective and whether additional or alternative
audit procedures are needed.
The suggested
procedures are in lieu of specifying audit procedures for each of
the programs included in this Supplement. This approach has several
advantages. First, it provides guidelines to assist auditors in
designing audit procedures that are appropriate in the circumstance.
Second, it helps auditors develop audit procedures for programs
that are not included in this Supplement. Finally, it simplifies
future updates to this Supplement.
Internal
Control
Because of
the diversity of systems in place among non-Federal entities, Part
3 does not include suggested audit procedures to test internal control.
The auditor must determine appropriate procedures to test internal
control on a case by case basis considering factors such as the
non-Federal entity's internal control, the compliance requirements,
the audit objectives for compliance, the auditor's assessment of
control risk, and the audit requirement to test internal control
as prescribed in OMB Circular A-133.
A.
ACTIVITIES ALLOWED OR UNALLOWED
Compliance
Requirements
The specific
requirements for activities allowed or unallowed are unique to each
Federal program and are found in the laws, regulations, and the
provisions of contract or grant agreements pertaining to the program.
For programs listed in the Compliance Supplement, the specific requirements
can be found in Part 4. This type of compliance requirement specifies
the activities that can or cannot be funded under a specific program.
Audit
Objectives
Determine whether
Federal awards were expended only for allowable activities.
Suggested Audit Procedures
1. Allowability
of Specific Transactions and Activities
a. Identify
the types of activities which are either specifically allowed or
prohibited by the laws, regulations, and the provisions of contract
or grant agreements pertaining to the program.
b. When allowability
is determined based upon summary level data, perform procedures
to verify that:
1. Activities
were allowable.
2. Individual
transactions were properly classified and accumulated into the activity
total.
c. When allowability
is determined based upon individual transactions, select a sample
of transactions and perform procedures to verify that the transaction
was for an allowable activity.
d. The auditor
should be alert for large transfers of funds from program accounts
which may have been used to fund unallowable activities.
2. Allowable Activities for Subrecipients
(This requirement
only applies to pass-through entities)
Test a sample
of approved subrecipient agreements to verify that the activities
covered by the agreement were allowable.
B.
ALLOWABLE COSTS/COST PRINCIPLES
Applicability
of OMB Cost Principles Circulars
The following
OMB cost principles circulars prescribe the cost accounting policies
associated with the administration of Federal awards by non-profit
organizations, States, local governments, and Indian tribal governments.
However, for block grants authorized by the Omnibus Budget Reconciliation
Act of 1981 and the Job Training Partnership Act, State rules for
expenditures of State funds apply (Appendix 1). Federal awards include
Federal programs and cost-type contracts and may be in the form
of grants, contracts, and other agreements.
- OMB Circular
A-87, "Cost Principles for State, Local and Indian Tribal Governments"
- OMB Circular
A-21, "Cost Principles for Educational Institutions"
- OMB Circular
A-122, "Cost Principles for Non-Profit Organizations"
All institutions
of higher education are subject to the cost principles contained
in OMB Circular A-21. States, local governments, and Indian tribal
governments are subject to OMB Circular A-87. Non-profit organizations
are subject to OMB Circular A-122, except those non-profit organizations
listed in Attachment C of OMB Circular A-122. These non-profit organizations
are not subject to OMB Circular A-122 but are subject to the standards
issued by the Cost Accounting Standards Board (48 CFR part 99) and
the commercial cost principles contained in the Federal Acquisition
Regulation (FAR).
Federal awards
administered by publicly-owned hospitals and other providers of
medical care are exempt from OMB's cost principles circulars, but
are subject to requirements promulgated by the sponsoring Federal
agencies (45 CFR part 74, appendix E).
The cost principles
applicable to a non-Federal entity apply to all Federal awards received
by the entity, regardless of whether the awards are received directly
from the Federal Government or indirectly through a pass-through
entity.
The circulars
describe selected cost items, allowable and unallowable costs, and
standard methodologies for calculating indirect costs rates (e.g.,
methodologies used to recover facilities and administrative costs
(F&A) at institutions of higher education).
The cost principles
articulated in the three circulars are in most cases substantially
identical but a few differences do exist. These differences are
necessary because of the nature of the Federal/State/local/non-profit
organization relationship, programs administered, and breadth of
services offered by some grantees and not others. Exhibit 1, Selected
Cost Items Not Treated the Same Among the Circulars, lists selected
cost items for which treatment are not substantially identical among
the cost principles circulars. Exhibit 2, Selected Unallowable Cost
Items, lists selected items that are unallowable in one or more
of the cost principles circulars.
Compliance
Requirements - Allowability of Costs - General Criteria (applicable
to both direct and indirect costs)
The general
criteria affecting allowability of costs under Federal awards are:
- Costs must
be reasonable and necessary for the performance and administration
of Federal awards.
- Costs must
be allocable to the Federal awards under the provisions of OMB's
cost principles circulars. A cost is allocable to a particular cost
objective (e.g., a specific function, program, project, department,
or the like) if the goods or services involved are charged or assigned
to such cost objective in accordance with relative benefits received.
- Costs must
be given consistent treatment through application of those generally
accepted accounting principles appropriate to the circumstances.
A cost may not be assigned to a Federal award as a direct cost if
any other cost incurred for the same purpose in like circumstances
was allocated to the Federal award as an indirect cost.
- Costs must
conform to any limitations or exclusions set forth in the circulars,
Federal laws, State or local laws, sponsored agreements or other
governing regulations as to types or amounts of cost items.
- Costs must
be net of all applicable credits that result from transactions that
reduce or offset direct or indirect costs. Examples of such transactions
include purchase discounts, rebates or allowances, recoveries or
indemnities on losses, insurance refunds or rebates, and adjustments
for overpayments or erroneous charges.
- Costs must
be documented in accordance with OMB Circular A-110 for non-profit
organizations or the A-102 Common Rule for State, local and Indian
Tribal governmental units.
Compliance
Requirements - Indirect Costs
Indirect costs are those costs that benefit common activities and, therefore, cannot be readily assigned to a specific direct cost objective or project.
In order to
recover indirect costs, organizations must prepare cost allocation
plans (CAPs) which apply only to States, local and Indian tribal
governments or indirect cost rate proposals (IDCRPs) in accordance
with the guidelines provided in OMB's circulars. States, major local
governments, Indian tribal governments, institutions of higher education,
and non-profit organizations must submit CAPs or IDCRPs to the Federal
cognizant agency for indirect cost negotiation for approval. Other
organizations, such as smaller local governments, must prepare the
appropriate CAPs or IDCRPs and maintain them on file for review.
These other organizations may use the allocation methods and indirect
cost rate maintained on file for cost recovery.
At institutions
of higher education, indirect costs include the following categories:
building and equipment depreciation or use allowance, operation
and maintenance expenses, interest expenses, general administrative
expenses, departmental administration expenses, library expenses,
and student administration expenses.
At non-profit
organizations, indirect costs generally include general administrative
costs (e.g., the president's office, payroll, general accounting)
and facility costs (e.g., rental costs, operations and maintenance,
interest expense) that are not treated as direct costs.
The indirect
cost proposals prepared by institutions of higher education and
other non-profit organizations are based on the most current financial
data supported by the organization's accounting system and audited
financial statements. These indirect cost proposals can be used
to either establish predetermined or fixed indirect cost rates,
or to establish or finalize provisional rates.
There are three
types of plans/proposals submitted by States, local governments,
and Indian tribal governments:
1. State
and Local Governmentwide CAPs - These plans are used to allocate
service center costs (or Section I costs) to individual departments
and agencies and describe the methods used for charging billed costs
(or Section II costs) to individual user organizations or activities.
2. Department
or Local IDCRP - These rate proposals combine the billed and
allocated costs from the State-wide or local-wide plan with departmental
or local level indirect costs and compute an indirect cost rate
to be used in charging indirect costs to individual programs and
activities.
3. Public
Assistance CAPs - These CAPs describe the methods for allocating
State-wide or local-wide allocated and/or billed indirect costs
and departmental indirect, administrative, and operating costs of
State or local welfare or human services organizations to the Medicaid,
Food Stamps and welfare programs, etc. These plans are required
by the terms of 45 CFR part 95, which incorporates OMB Circular
A-87 by reference, and they must be revised and resubmitted to the
Federal Government whenever an organizational or programmatic change
invalidates the currently-approved allocation method.
At States,
local governments, and Indian tribal governments, indirect costs
are accumulated at two levels: the State/local-wide level and the
department/agency level. At the State/local-wide level, indirect
costs include: (1) central service costs that are allocated (referred
to as Section I costs, which typically include general accounting,
personnel, and purchasing); and ,(2) central service costs that
are billed (referred to as Section II costs, which typically include
computer services, motor pool, insurance, and fringe benefits).
Certain costs, such as facilities and operations and maintenance,
can be classified as Section I or Section II costs by State/local
governments.
At State or
local governmental departments or agencies, where Federal awards
are usually carried out, indirect costs normally include the facilities
and administrative costs of each department or agency and the allocated
central service costs distributed through the State/local-wide CAP.
Additionally, Section II costs are direct charges to these departments
or agencies. As such, these direct billings may be charged directly
to Federal awards or be included in the department or agency indirect
cost pools.
CAPs are comprised
of two parts: a narrative section that describe the service cost
center and allocation methodologies, and a mathematical allocation
of these service center costs to the user departments using the
described allocation methods. CAPs and IDCRPs prepared by States,
local governments, and Indian tribal governments usually are prepared
on a prospective basis using actual financial data for a prior year
or budget data for the current year. When the actual costs for the
year covered by the CAP (or a rate agreement with respect to a fixed
rate) are determined, the difference between the costs recovered
based on the CAP (or rate agreement) and the costs that would have
been recovered had the CAP or rate agreement been based on actual
results is either carried forward to a subsequent CAP or IDCRP or
used to adjust individual awards on a retroactive basis, with the
approval of the Federal cognizant agency for indirect cost negotiation.
Three different
types of indirect cost rates can be used by the Federal cognizant
agency for indirect cost negotiation: predetermined, fixed, and
provisional/final. Predetermined rates are established for the current
or multiple future period(s) based on current data (usually data
from the most recently ended fiscal year, known as the base period).
Predetermined rates are not subject to adjustment, except under
very unusual circumstances. Fixed rates are based on current data
in the same manner as predetermined rates, except that the difference
between the costs of the base period used to establish the rate
and the actual costs of the current period is carried forward as
an adjustment to the rate computation for a subsequent period. Provisional
rates are temporary rates used for funding and billing indirect
costs, pending the establishment of a final rate for a period.
Special
Compliance Requirements - Institutions of Higher Education
OMB Circular
A-21 requires institutions of higher education that receive more
than $25 million in Federal funding in a fiscal year to prepare
and submit a Disclosure Statement (DS-2) that describes the institution's
cost accounting practices. These institutions are required to submit
a DS-2 within six months after the end of the institution's fiscal
year that begins after May 8, 1996, unless the institution is required
to submit a DS-2 earlier due to a receipt of a cost accounting standard
(CAS) covered contract in accordance with 48 CFR section 9903.202-1.
These institutions
are responsible for maintaining an accurate DS-2 and complying with
disclosed cost accounting practices. They are also responsible for
filing amendments to the DS-2 when disclosed practices are changed
or modified.
Audit
Objectives (Direct and Indirect Costs)
Determine whether
the organization complied with the provisions of the applicable
OMB cost principles circulars (OMB Circulars A-87, A-21, A-122)
as follows:
1. Direct charges
to Federal awards were for allowable costs.
2. Charges
to cost pools used in calculating indirect cost rates were for allowable
costs.
3. For States,
local governments, and Indian tribal governments, charges to cost
pools allocated to Federal awards though CAPs were for allowable
costs.
4. The methods
of allocating the costs are in accordance with the applicable provisions
of the cost principles circulars and produce an equitable distribution
of costs (e.g., cost allocation bases include all allowable and
unallowable base costs to which allowable indirect costs are allocable
and the cost allocation methodology complies with the applicable
cost principles and provides equitable and consistent allocation
of indirect costs to benefitting cost objectives).
5. Indirect
cost rates were applied in accordance with approved rate agreements
and associated billings were the result of applying the approved
rate to the proper base amount(s).
6. For States,
local governments, and Indian tribal governments, cost allocations
were in accordance with CAPs approved by the Federal cognizant agency
for indirect cost negotiation or, in cases where such plans are
not subject to approval, in accordance with the plan on file.
7. Cost accounting
practice disclosures, described in the DS-2, represented actual
practice consistently applied (only applies to institutions of higher
education that are required to submit the DS-2).
Suggested
Audit Procedures (Direct and Indirect Costs)
General
1. The following
procedures apply to direct charges to Federal awards as well as
to charges to cost pools that are allocated wholly or partially
to Federal awards or used in formulating indirect cost rates used
for recovering indirect costs from Federal awards. If the auditor
identifies unallowable costs, the auditor should be aware that "directly
associated costs" may have been charged. Directly associated costs
are costs incurred solely as a result of incurring another cost,
and would not have been incurred if the other cost had not been
incurred. For example, fringe benefits are "directly associated"
with payroll costs. When an unallowable cost is incurred, directly
associated costs are also unallowable.
Test a sample
of transactions for conformance with the following criteria contained
in the "Basic Guidelines" section of applicable OMB cost principles
circulars.
a. For State
and local governments, authorized or not prohibited under State
or local laws or regulations.
b. Approved
by the Federal awarding agency, if required.