The Recovery Act: An Auditee's Perspective: Fund Recipients Must Heed Single Audit Act Requirements
EXECUTIVE SUMMARY * Recovery Act funds allocated for contracts, grants and loans are subject to the requirements of the federal Single Audit Act of 1984 (as amended in 1996), passed by Congress to establish requirements for audits of governments and not-for-profit organizations that administer federal financial assistance programs. * Auditors use a risk-based approach to determine which federal programs to audit each year, however, federal programs funded in whole or in part by the Recovery Act have a high chance of being selected as a major program. * An auditee is required to identify all federal awards received and expended and prepare a schedule of expenditures of federal awards for the period covered by the auditee's financial statements. The accuracy of this schedule is critical since it is the primary basis for the auditor's major program determination. The schedule should separately identify expenditures of Recovery Act funding by the inclusion of the prefix "ARRA" in the name of the federal program. * An auditee is required to establish and maintain internal control that is designed to reasonably ensure compliance with federal laws, regulations, and the provisions of contracts or grant agreements of each federal program. * An auditee is responsible for complying with the laws, regulations and the provisions of contracts or grant agreements related to each federal program including the additional requirements imposed by the Recovery Act. ********** In response to the severe economic crisis, the $787 billion American Recovery and Reinvestment Act (Recovery Act) became law in February 2009. The primary goal of this act was to create and save jobs and stimulate long-term economic growth. Only $275 billion of the Recovery Act funds allocated for contracts, grants and loans are subject to the requirements of the federal Single Audit Act. Noncompliance with Recovery Act requirements could have significant implications for recipients of the funds, including the potential for termination of federal funding. The Single Audit Act of 1984, as amended in 1996, (the "single audit") was passed by Congress to establish requirements for audits of governments and not-for-profit organizations that administer federal financial assistance programs. This article is intended to help recipients of Recovery Act funds, and CPAs who advise them, understand the basics of the single audit requirements and their responsibilities relating to compliance and internal control over compliance. BASICS OF THE SINGLE AUDIT Generally, a single audit is required if a nonfederal entity (the auditee) spends $500,000 or more of federal awards in a year. A single audit includes an audit of the auditee's financial statements and a compliance audit of federal awards. A federal award is defined as federal financial assistance and federal cost-reimbursement contracts that are received directly from federal awarding agencies or indirectly from pass-through entities. It does not include procurement contracts, under grants or contracts, used to buy goods or services from vendors. The auditor uses a risked-based approach to determine which federal programs to audit each year (referred to as major programs). Federal programs funded in whole or in part by the Recovery Act have a high chance of being selected as a major program. A federal program is all federal awards assigned a single catalog of federal domestic assistance (CFDA) number or a cluster of programs (a grouping of closely related programs that share common compliance requirements) as defined by the Office of Management and Budget (OMB). The CFDA number has five digits (for example, 14.218). The first two digits represent the federal funding agency; the last three digits represent the federal program. The auditor is required to (1) obtain an understanding and perform testing of the auditee's internal controls over major programs and (2) test compliance with applicable laws, regulations, and the provisions of contracts or grant agreements that may have a direct and material effect on each major program. …