Auditing Federal Awards: A New Approach
On July 5, 1996, President Clinton signed into law the Single Audit Act Amendments of 1996, legislation that significantly changes and improves the auditing of federal awards received by states, local governments and not-for-profit entities. The act is the culmination of assessments by the General Accounting Office (GAO) and the President's Council on Integrity and Efficiency (PCIE) of the effectiveness of the Single Audit Act of 1984. This article discusses the new provisions of the single audit process in the act and under Office of Management and Budget (OMB) requirements in Circular A-133, Audits of Institutions of Higher Education and Other Non-Profit Institutions, and how they have changed the way federal grants will be audited. OMB is revising circular A-133 to apply to audits of states, local governments and not-for-profit institutions. When the revisions are final, the OMB will rescind Circular A-128, Audits of State and Local Governments. Both the OMB changes and the act are effective for years beginning after June 30, 1996. Exhibits 1 and 2, page 55, summarize the major changes to the single audit process. THE BASIC REQUIREMENTS The new law extends audit requirements to not-for-profit organizations, including colleges and universities. It requires an entity that spends $300,000 or more in federal awards to have either a single audit or a program-specific audit and exempts any entity that spends less than $300,000 in federal awards, grants or funds. This provision significantly reduces the audit burden on the management of smaller entities by increasing to $300,000 from $25,000 the threshold that triggers the federal audit requirements. It also bases the monetary threshold on expenditures rather than receipts. More choices for management. The act gives managements of not-for-profit entities the flexibility of choosing what will be covered by a single audit. Management may elect to have a single audit covering its operations as a whole or a series of audits of the parts of the entity to which the federal awards were applied. Regardless of the choice, the financial statements and schedule of expenditures of the federal funds must be included in the audit. One of the more common problems under the 1984 act was determining whether amounts received from the federal government were "assistance" (subjecting the entity to the federal audit requirements) or "payments" for services rendered as a vendor. When it is revised, circular A-133 will provide guidance for managers who must make this determination. In the past, no guidance was provided. A single versus a program-specific audit. An entity must have a single audit for a fiscal year in which it spends funds from more than one federal program. The entity's management can choose to have a program-specific audit for a fiscal year in which it uses funds from only one federal program. Both auditors and management must understand how a federal program is defined under the 1996 act. Definition of federal program. The new definition of a federal program includes programs that share compliance requirements--referred to as "clusters of programs." Auditors will no longer look at programs and awards with similar requirements individually; rather, clusters of programs will be viewed as one. Through clustering, programs that were not defined as major under the 1984 act and, therefore, not subject to compliance testing now have a higher probability of being selected as major programs, discussed below. AUDITOR RESPONSIBILITIES Auditors, who must determine what federal programs are "major" programs, will have to comply with a new rule that mandates the amount of federal expenditures covered under a single audit. In addition, the new requirements expand the auditor's responsibilities in the areas of internal controls and the follow-up on management actions to address prior audit findings. Determination of major programs. …