Part 3 – compliance requirements introduction



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Suggested Audit Procedures – Compliance

1. Identify Program Income

a. Review the laws, regulations, and the provisions of contract or grant agreements applicable to the program and ascertain if program income was anticipated. If so, ascertain the requirements for determining or assessing the amount of program income (e.g., a scale for determining user fees, prohibition of assessing fees against certain groups of individuals, etc.), and the requirements for recording and using program income.

b. Inquire of management and review accounting records to ascertain if program income was received.

2. Determining or Assessing Program Income – Perform tests to verify that program income was properly determined or calculated in accordance with stated criteria, and that program income was only collected from allowable sources.

3. Recording of Program Income – Perform tests to verify that all program income was properly recorded in the accounting records.

4. Use of Program Income – Perform tests to ascertain if program income was used in accordance with the program requirements, the A-102 Common Rule, and OMB Circular A-110.

Note: The suggested audit procedures above for internal control and compliance testing may be accomplished using dual-purpose testing.



K. REAL PROPERTY ACQUISITION AND RELOCATION ASSISTANCE

Compliance Requirements

The Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, as amended, (URA) provides for uniform and equitable treatment of persons displaced by Federally-assisted programs from their homes, businesses, or farms. Property acquired must be appraised by qualified independent appraisers. All appraisals must be examined by a review appraiser to ensure acceptability. After acceptance, the review appraiser certifies the recommended or approved value of the property for establishment of the offer of just compensation to the owner. Federal requirements govern the determination of payments for replacement housing assistance, rental assistance, and down payment assistance for individuals displaced by federally funded projects. The regulations also cover the payment of moving-related expenses and reestablishment expenses incurred by displaced businesses and farm operations.



Source of Governing Requirements

Governmentwide requirements for real property acquisition and relocation assistance are contained in Department of Transportation’s single governmentwide rule at 49 CFR part 24, Uniform Relocation Assistance and Real Property Acquisition Regulations for Federal and Federally-Assisted Programs.



Audit Objectives

1. Obtain an understanding of internal control, assess risk, and test internal control as required by OMB Circular A-133 §___.500(c).

2. Determine whether the non-Federal entity complied with the real property acquisition, appraisal, negotiation, and relocation requirements.

Suggested Audit Procedures – Internal Control

1. Using the guidance provided in Part 6 – Internal Control, perform procedures to obtain an understanding of internal control sufficient to plan the audit to support a low assessed level of control risk for the program.

2. Plan the testing of internal control to support a low assessed level of control risk for real property acquisition and relocation assistance and perform the testing of internal control as planned. If internal control over some or all of the compliance requirements is likely to be ineffective, see the alternative procedures in §___.500(c)(3) of OMB Circular
A-133, including assessing the control risk at the maximum and considering whether additional compliance tests and reporting are required because of ineffective internal control.

3. Consider the results of the testing of internal control in assessing the risk of noncompliance. Use this as the basis for determining the nature, timing, and extent (e.g., number of transactions to be selected) of substantive tests of compliance.



Suggested Audit Procedures – Compliance

1. Inquire of management and review the records of Federal programs to ascertain if the non-Federal entity administers Federally-assisted programs that involve the acquisition of real property or the displacement of households or businesses.

2. Property Acquisitions

For a sample of acquisitions:

a. Appraisal – Test records to ascertain if: (1) the just compensation amount offered the property owner was determined by an appraisal process; (2) the appraisal(s) was examined by a review appraiser; and, (3) the review appraiser prepared a signed statement which explains the basis for adjusting comparable sales to reach the review appraiser’s determination of the fair market value.

b. Negotiations – Test supporting documentation to ascertain if: (1) a written offer of the appraised value was made to the property owner; and (2) a written justification was prepared if the purchase price for the property exceeded the amount offered and that the documentation (e.g., recent court awards, estimated trial costs, valuation problems) supports such administrative settlement as being reasonable, prudent, and in the public interest.

c. Residential Relocations – Test supporting documentation to ascertain if the non-Federal entity made available to the displaced persons one or more comparable replacement dwellings.

3. Replacement Housing Payments – For a sample, test the non-Federal entity’s records to ascertain if there is documentation that supports the following:

a. The owner occupied the displacement dwelling for at least 180 days immediately prior to initiation of negotiations.

b. The non-Federal entity examined at least three comparable replacement dwellings available for sale and computed the payment on the basis of the price of the dwelling most representative of the displacement dwelling.

c. The asking price for the comparable dwelling was adjusted, to the extent justified by local market data, to recognize local area selling price reductions.

d. The allowance for increased mortgage cost “buy down” amount was computed based on the remaining principal balance, the interest rate, and the remaining term of the old mortgage on the displacement dwelling.

e. The non-Federal entity prepared written justification on the need to employ last resort housing provisions, if the total replacement housing payment exceeded $22,500.

4. Rental or Downpayment Assistance – For a sample, test the non-Federal entity’s records to ascertain if there is documentation that supports the following:

a. The displacee occupied the displacement dwelling for at least 90 days immediately prior to initiation of negotiations.

b. The displacee rented, or purchased, and occupied a decent, safe, and sanitary replacement dwelling within one year.

c. The non-Federal entity prepared written justification if the payment exceeded $5,250.

5. Business Relocations – For a sample of business relocations:

a. Moving Expenses – Test that payments for moving and related expenses were for actual costs incurred or that fixed payments, in lieu of actual costs, were limited to a maximum of $20,000 and computed based on the average annual net earnings of the business, as evidenced by income tax returns, certified financial statements, or other reliable evidence.

b. Business Reestablishment Expense – Verify that (1) the displacee was eligible as a farm operation, a non-profit organization, or a small business to receive reestablishment assistance, and (2) the payment was for actual costs incurred and did not exceed $10,000.

Note: The suggested audit procedures above for internal control and compliance testing may be accomplished using dual-purpose testing.

L. REPORTING



Compliance Requirements

Financial Reporting

Recipients should use the standard financial reporting forms or such other forms as may be authorized by OMB (approval is indicated by an OMB paperwork control number on the form). Each recipient must report program outlays and program income on a cash or accrual basis, as prescribed by the Federal awarding agency. If the Federal awarding agency requires reporting of accrual information and the recipient’s accounting records are not normally maintained on the accrual basis, the recipient is not required to convert its accounting system to an accrual basis but may develop such accrual information through analysis of available documentation. The Federal awarding agency may accept identical information from the recipient in machine-readable format, computer printouts, or electronic outputs in lieu of the prescribed formats.

The financial reporting requirements for subrecipients are as specified by the pass-through entity. In many cases, these will be the same as or similar to the following requirements for recipients.

The standard financial reporting forms are as follows:

1. Financial Status Report (FSR) (SF-269 (OMB No. 0348-0039) or SF-269A (OMB No. 0348-0038)). Recipients use the FSR to report the status of funds for all non-construction projects and for construction projects when the FSR is required in lieu of the SF 271. See below for information concerning the transition to the Federal Financial Report
(SF-425/425 A (OMB No. 0348-0061)).

2. Request for Advance or Reimbursement (SF-270 (OMB No. 0348-0004)). Recipients use the SF 270 to request Treasury advance payments and reimbursements under non-construction programs.

3. Outlay Report and Request for Reimbursement for Construction Programs (SF-271 (OMB No. 0348-0002)). Recipients use the SF-271 to request funds for construction projects unless advances or the SF-270 is used.

4. Federal Cash Transactions Report (SF-272 (OMB No. 0348-0003) or SF-272-A (OMB No. 0348-0003)). Recipients use the SF-272 when payment is by advances or reimbursements. The Federal awarding agency may waive the requirement for an SF-272 when electronic payment mechanisms provide adequate data. See below for information concerning the transition to the Federal Financial Report (SF-425/425 A (OMB No. 0348-0061)).

The Federal Financial Report (SF-425/425A), which is intended to supersede the SF-269and
SF-272, has been approved by OMB under the Paperwork Reduction Act and is available to the Federal awarding agencies for inclusion in award requirements. For financial reports due to the Federal awarding agencies and, when different, the servicing payment office during the audit period covered by the 2009 Supplement, recipients may be submitting the Financial Status Report/Federal Cash Transactions Report (SF-269 or 269A)/SF-272) and/or the Federal Financial Report (SF-425/SF-425A), depending on the report due date and Federal awarding agency/program requirements. The Federal awarding agencies and paying offices must complete their transition to use of the Federal Financial Report by September 30, 2009. References in L.1, "Reporting - Financial Reporting" in Parts 4 and 5 of the Supplement will continue to show the SF 269/SF-272 as the standard financial reports until after the transition is complete. The award terms and conditions will specify the initial reporting period for which use of the SF-425 will be required. In addition, where a transition date has been determined for a program included in the Supplement, it will be shown in Part 4 or 5. Electronic versions of the existing and new standard forms are located on OMB’s Internet home page (http://www.whitehouse.gov/omb/grants/grants_forms.html).
Reporting Under the Payment Management System

Many recipients utilize the Payment Management System (PMS) operated by the Division of Payment Management (DPM) within the Department of Health and Human Services’ Program Support Center. After a Federal agency awards a grant, DPM is responsible for processing payments to the recipient; receiving collections for unexpended funds, duplicate payments, and, when applicable, interest earned on Federal funds; accounting for disbursement information provided by the recipient; and reporting data equivalent to the SF-272, Federal Cash Transactions Report (as indicated above, this report also will be superseded by the SF 425/SF 425A), to the recipient and the Federal agency.

Federal awarding agencies enter authorization amounts in PMS to allow recipients to draw Federal funds. There are two methods by which recipients can request funds: (1) the PMS 270 request or (2) SMARTLINK II. SMARTLINK II enables recipients to request Federal funds through computer link with DPM. Once a quarter, using the authorization amounts provided by the Federal agency, payments requested by recipients, cash collection activity, and disbursement information provided by recipients, DPM generates PSC-272 reports.

The PSC 272 is a series of reports consisting of:

1. PSC 272, Federal Cash Transactions Report, Status of Federal Cash (OMB No. 0937-0200). This report provides the total availability of Federal cash received by the recipient at the account level. It is partially prepared by DPM based on data reported to DPM, and is completed and certified by the recipient.

2. PSC 272-A, Federal Cash Transactions Report (OMB No. 0937-0200). This report is a continuation of the PMS-272 and is used by the recipient to report cash disbursements at the grant level.

3. PSC 272-B, Statement of Cash Accountability (OMB No. 0937-0200). This report is furnished for the recipient’s information and shows how the recipient’s cash accountability was derived by DPM.

4. PSC 272-C, Error Correction Document (OMB No. 0937-0200). This report can be used by the recipient to report data reconciliation problems for awards on the PSC 272-A or the Advances to Payee portion of the PSC 272-B.

5. PSC 272-E, Major Program Statement (OMB No. 0937-0200). This report is furnished to all accounts that are sub-accounted and is for information only. This report lists individual payments during the quarter among the various programs, and provides a cash accountability for all advances received through PMS by major program. All information provided is pre-printed by DPM.

6. PSC 272-F, Authorizations for Future Periods (OMB No. 0937-0200). This report is provided for information only and requires no action by the recipient. It represents all awards posted in the PMS database that have effective dates in future reporting periods.

7. PSC 272-G, Inactive Documents Report (OMB No. 0937-0200). This report lists all awards posted in the PMS database that have become inactive or fully disbursed during the current period or a previous period. In the event that disbursement adjustments are required, they should be reported via the PSC 272-A.

The reports (except for the PSC 272-C) are available to recipients electronically via the Internet using DPM’s Electronic 272 System. Recipients should verify the reported amounts. The recipient uses the PSC 272-A to report the amount of disbursements made; then signs, dates, and returns the report to DPM. PSC 272 reporting requirements do not apply to block grant programs; however, DPM does provide block grant recipients with a PSC 272-E, Major Program Statement, quarterly. This report is provided solely for information and no action is required by the recipient.



Performance Reporting

Recipients shall submit performance reports at least annually but not more frequently than quarterly. Performance reports generally contain, for each award, brief information of the following types:

1. A comparison of actual accomplishments with the goals and objectives established for the period.

2. Reasons why established goals were not met, if appropriate.

3. Other pertinent information including, when appropriate, analysis and explanation of cost overruns or high unit costs.

Note: The Federal agencies are moving toward the use of standard performance/progress reporting formats; however, there currently is no specified date for completion of the transition. Currently some agencies/programs are using the Performance Progress Report.



Special Reporting

Non-Federal entities may be required to submit other reporting which may be used by the Federal agency for such purposes as allocating program funding.

Compliance testing of performance and special reporting are only required for data that are quantifiable and meet the following criteria:

1. Have a direct and material effect on the program.

2. Are capable of evaluation against objective criteria stated in the laws, regulations, contract or grant agreements pertaining to the program.

Performance and special reporting data specified in Part 4, Compliance Requirements, meet the above criteria.



Source of Governing Requirements

Reporting requirements are contained in the following documents:

a. A-102 Common Rule - Financial reporting, §____.41; Performance reporting, §___.40(b).

b. OMB Circular A-110 - Financial reporting, 2 CFR section 215.52 (this section has not been updated to reference the new form); Performance reporting, 2 CFR section 215.51.

c. Program legislation.

d. Federal awarding agency regulations.

e. The terms and conditions of the award.

Audit Objectives

1. Obtain an understanding of internal control, assess risk, and test internal control as required by OMB Circular A-133 §___.500(c).

2. Determine whether required reports for Federal awards include all activity of the reporting period, are supported by applicable accounting or performance records, and are fairly presented in accordance with program requirements.

Suggested Audit Procedures – Internal Control

1. Using the guidance provided in Part 6 – Internal Control, perform procedures to obtain an understanding of internal control sufficient to plan the audit to support a low assessed level of control risk for the program.

2. Plan the testing of internal control to support a low assessed level of control risk for reporting and perform the testing of internal control as planned. If internal control over some or all of the compliance requirements is likely to be ineffective, see the alternative procedures in §___.500(c)(3) of OMB Circular A-133, including assessing the control risk at the maximum and considering whether additional compliance tests and reporting are required because of ineffective internal control.

3. Consider the results of the testing of internal control in assessing the risk of noncompliance. Use this as the basis for determining the nature, timing, and extent (e.g., number of transactions to be selected) of substantive tests of compliance.



Suggested Audit Procedures – Compliance

Note: For recipients using PMS to draw Federal funds, the auditor should consider the following steps numbered 1 through 5 as they pertain to the PSC 272, PSC 272-A, PSC 272-B, and PSC 272-E, regardless of the source of the data included in the PMS reports. Although certain data is supplied by the Federal awarding agency (i.e., award authorization amounts) and certain amounts are provided by DPM, the auditor should ensure that such amounts are in agreement with the recipient’s records and are otherwise accurate.

1. Review applicable laws, regulations, and the provisions of contract or grant agreements pertaining to the program for reporting requirements. Determine the types and frequency of required reports. Obtain and review Federal awarding agency, or pass-through entity in the case of a subrecipient, instructions for completing the reports.

a. For financial reports, ascertain the accounting basis used in reporting the data (e.g., cash or accrual).

b. For performance and special reports, determine the criteria and methodology used in compiling and reporting the data.

2. Perform appropriate analytical procedures and ascertain the reason for any unexpected differences. Examples of analytical procedures include:

a. Comparing current period reports to prior period reports.

b. Comparing anticipated results to the data included in the reports.

c. Comparing information obtained during the audit of the financial statements to the reports.

Note: The results of the analytical procedures should be considered in determining the nature, timing, and extent of the other audit procedures for reporting.

3. Select a sample of each of the following report types:

a. Financial reports

(1) Ascertain if the financial reports were prepared in accordance with the required accounting basis.

(2) Trace the amounts reported to accounting records that support the audited financial statements and the Schedule of Expenditures of Federal Awards and verify agreement or perform alternative procedures to verify the accuracy and completeness of the reports and that they agree with the accounting records. If reports require information on an accrual basis and the entity does not prepare its accounting records on an accrual basis, determine whether the reported information is supported by available documentation.

(3) For any discrepancies noted in PSC-272 reports, review subsequent PSC-272 reports to ascertain if the discrepancies were appropriately resolved with the Department of Health and Human Services’ Division of Payment Management.

b. Performance and special reports

(1) Trace the reported data to records that accumulate and summarize data.

(2) Perform tests of the underlying data to verify that the data were accumulated and summarized in accordance with the required or stated criteria and methodology, including the accuracy and completeness of the reports.

c. When intervening computations or calculations are required between the records and the reports, trace reported data elements to supporting worksheets or other documentation that link reports to the data.

d. Test mathematical accuracy of reports and supporting worksheets.

4. Test the selected reports for accuracy and completeness.

a. For financial reports, review accounting records and ascertain if all applicable accounts were included in the sampled reports (e.g., program income, expenditure credits, loans, interest earned on Federal funds, and reserve funds).

b. For performance and special reports, review the supporting records and ascertain if all applicable data elements were included in the sampled reports.

c. For each type of report—

(1) When intervening computations or calculations are required between the records and the reports, trace reported data elements to supporting worksheets or other documentation that link reports to the data.

(2) Test mathematical accuracy of reports and supporting worksheets.

5. Obtain written representation from management that the reports provided to the auditor are true copies of the reports submitted or electronically transmitted to the Federal awarding agency, the Department of Health and Human Services’ DPM for recipients using the Payment Management System, or pass-through entity in the case of a subrecipient.

Note: The suggested audit procedures above for internal control and compliance testing may be accomplished using dual-purpose testing.

M. SUBRECIPIENT MONITORING

Compliance Requirements

A pass-through entity is responsible for:

- Award Identification – At the time of the award, identifying to the subrecipient the Federal award information (i.e., CFDA title and number; award name and number; if the award is research and development; and name of Federal awarding agency) and applicable compliance requirements.

- During-the-Award Monitoring – Monitoring the subrecipient’s use of Federal awards through reporting, site visits, regular contact, or other means to provide reasonable assurance that the subrecipient administers Federal awards in compliance with laws, regulations, and the provisions of contracts or grant agreements and that performance goals are achieved.

- Subrecipient Audits – (1) Ensuring that subrecipients expending $500,000 or more in Federal awards during the subrecipient’s fiscal year for fiscal years ending after December 31, 2003 as provided in OMB Circular A-133 have met the audit requirements of OMB Circular A-133 (the circular is available on the Internet at http://www.whitehouse.gov/omb/circulars/a133/a133.html) and that the required audits are completed within 9 months of the end of the subrecipient’s audit period; (2) issuing a management decision on audit findings within 6 months after receipt of the subrecipient’s audit report; and (3) ensuring that the subrecipient takes timely and appropriate corrective action on all audit findings. In cases of continued inability or unwillingness of a subrecipient to have the required audits, the pass-through entity shall take appropriate action using sanctions.

- Pass-Through Entity Impact – Evaluating the impact of subrecipient activities on the pass-through entity’s ability to comply with applicable Federal regulations.



During-the-Award Monitoring

Following are examples of factors that may affect the nature, timing, and extent of during-the-award monitoring:

- Program complexity – Programs with complex compliance requirements have a higher risk of non-compliance.

- Percentage passed through – The larger the percentage of program awards passed through the greater the need for subrecipient monitoring.

- Amount of awards – Larger dollar awards are of greater risk.

- Subrecipient risk – Subrecipients may be evaluated as higher risk or lower risk to determine the need for closer monitoring. Generally, new subrecipients would require closer monitoring. For existing subrecipients, based on results of during-the-award monitoring and subrecipient audits, a subrecipient may warrant closer monitoring (e.g., the subrecipient has (1) a history of non-compliance as either a recipient or subrecipient, (2) new personnel, or (3) new or substantially changed systems).

Monitoring activities normally occur throughout the year and may take various forms, such as:

- Reporting – Reviewing financial and performance reports submitted by the subrecipient.

- Site Visits – Performing site visits at the subrecipient to review financial and programmatic records and observe operations.

- Regular Contact – Regular contacts with subrecipients and appropriate inquiries concerning program activities.



Agreed-upon procedures engagements

A pass-through entity may arrange for agreed-upon procedures engagements for certain aspects of subrecipient activities, such as eligibility determinations. Since the pass-through entity determines the procedures to be used and compliance areas to be tested, these agreed-upon procedures engagements enable the pass-through entity to target the coverage to areas of greatest risk. The costs of agreed-upon procedures engagements is an allowable cost to the pass-through entity if the agreed-upon procedures are performed for subrecipients below the A-133 threshold for audit (currently at $500,000 for fiscal years ending after December 31, 2003) for the following types of compliance requirements: activities allowed or unallowed; allowable costs/cost principles; eligibility; matching, level of effort, earmarking; and reporting (OMB Circular A-133 (§___.230(b)(2)).


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