Part 3 – compliance requirements introduction



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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 and Part 5 – Clusters of Programs, they are provided once in this part. For each program in this Compliance Supplement (this Supplement), Part 4 or Part 5 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 2 CFR part 215 (hereafter, OMB Circular A-110 and, as appropriate, specific citation to 2 CFR part 215), “Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations,” and the agencies’ codification (or other form of implementation) of OMB Circular A-110. The applicable guidance followed depends on the type of organization undergoing audit. Other administrative compliance requirements that are not of the type covered in the A-102 Common Rule or OMB Circular A-110 and are unique to a single program or a cluster of programs are provided in the Special Tests and Provisions sections of Parts 4 and 5.



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 title 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, which incorporate the cost principles by reference, apply to all grants and subgrants to governments, except grants and subgrants to State or local (public) institutions of higher education and hospitals, and 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 programs are exempted from the A-102 Common Rule. Appendix I to this Supplement specifies 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.

Non-Profit Organizations

The major source of requirements applicable to institutions of higher education, hospitals and other non-profit organizations is OMB Circular A-110, which incorporates the cost principles by reference. 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 in this part of the Supplement are shown as 2 CFR part 215 references. However, unlike the A-102 Common Rule, with OMB approval, agencies 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.” OMB Circular A-110 states in 2 CFR section 215.4 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. These remain unchanged by the reissuance of A-110 in Title 2 of the CFR. Auditors should reference A-110 provisions using
2 CFR part 215 and/or agency implementing citations, as appropriate.

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 subrecipients who are institutions of higher education, hospitals, or other non-profits, 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 Part 3 and Part 4 or 5 (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 descriptions of the compliance requirements in Parts 3, 4, and 5 are generally a summary of the actual compliance requirements. The auditor should refer to the referenced citations (e.g., laws and regulations) for the complete statement of the compliance requirements.

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 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.

The suggested audit procedures for compliance testing may be accomplished using dual-purpose testing.

Internal Control

Consistent with the requirements of OMB Circular A-133, this Part includes generic audit objectives and suggested audit procedures to test internal control. However, the auditor must determine the specific 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.

The suggested audit procedures for internal control testing may be accomplished using dual-purpose testing.

Improper Payments

Under OMB budgetary guidance and Public Law (Pub. L.) No. 107-300, Federal agencies are required to review Federal awards and, as applicable, provide an estimate of improper payments. Improper payments mean:

1. Any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements, and includes any payment to an ineligible recipient; and

2. Any payment for an ineligible service, any duplicate payment, any payment for services not received, and any payment that does not account for credit for applicable discounts.

Auditors should be alert to improper payments, particularly when testing the following parts of section III. - A, “Activities Allowed or Unallowed;” B, “Allowable Costs/Cost Principles;”
E, “Eligibility;” and, in some cases N, “Special Tests and Provisions.”

American Recovery and Reinvestment Act

The American Recovery and Reinvestment Act (Pub. L. No. 111-5) (Recovery Act) has significant implications for audits performed under OMB Circular A-133. Auditors should specifically ask auditees about and be alert to recipient and subrecipient expenditure of funds provided by the Recovery Act.  A more detailed discussion of the effect of the Recovery Act on single audits is included in Appendix VII, which also contains references to where additional information can be obtained.



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 this Supplement, the specific requirements of the governing statutes and regulations are included in Part 4 – Agency Program Requirements or Part 5 – Clusters of Programs, as applicable. This type of compliance requirement specifies the activities that can or cannot be funded under a specific program.



Source of Governing Requirements

The requirements for activities allowed or unallowed are contained in program legislation, Federal awarding agency regulations, and 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 Federal awards were expended only for allowable activities.

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 activities allowed or unallowed 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. 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.

2. When allowability is determined based upon summary level data, perform procedures to verify that:

a. Activities were allowable.

b. Individual transactions were properly classified and accumulated into the activity total.

3. 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.

4. The auditor should be alert for large transfers of funds from program accounts which may have been used to fund unallowable activities.

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: (1) States, local governments, and Indian tribal governments (State rules for expenditures of State funds apply for block grants authorized by the Omnibus Budget Reconciliation Act of 1981 and for other programs specified in Appendix I); (2) institutions of higher education; and (3) non-profit organizations. 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 (e.g., the Department of Heath and Human Services’ 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). Federal awards include Federal programs and cost-type contracts and may be in the form of grants, contracts, and other agreements.



Source of Governing Requirements

The requirements for allowable costs/cost principles are contained in the A-102 Common Rule (§___.22), OMB Circular A-110 (2 CFR section 215.27), program legislation, Federal awarding agency regulations, and the terms and conditions of the award.

The three cost principles circulars are as follows:


  • OMB Circular A 87, “Cost Principles for State, Local, and Indian Tribal Governments” (2 CFR part 225).

  • OMB Circular A-21, “Cost Principles for Educational Institutions” (2 CFR part 220) – All institutions of higher education are subject to the cost principles contained in OMB Circular A-21, which incorporates the four Cost Accounting Standards Board (CASB) Standards and the Disclosure Statement (DS-2) requirements, as described in OMB Circular A-21, sections C.10 through C.14 and Appendices A and B.

  • OMB Circular A-122, “Cost Principles for Non-Profit Organizations” (2 CFR part 230) – Non-profit organizations are subject to OMB Circular A-122, except those non-profit organizations listed in OMB Circular A-122, Attachment C that are subject to the commercial cost principles contained in the Federal Acquisition Regulation (FAR) at 48 CFR part 31. Also, by contract terms and conditions, some non-profit organizations may be subject to the CASB’s Standards and the Disclosure Statement (DS-1) requirements.

Although these cost principles circulars have been reissued in Title 2 of the CFR for ease of access, this Supplement refers to them by the circular title and numbering. Auditors should refer to them in the same manner.

The cost principles articulated in the three OMB cost principles 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 organizational structures, programs administered, and breadth of services offered by some grantees and not others. Exhibit 1 of this part of the Supplement, Selected Items of Cost, lists the treatment of the selected cost items in the different circulars.



LIST OF SELECTED ITEMS OF COST CONTAINED IN OMB COST PRINCIPLES CIRCULARS (Amended effective June 9, 2004)

The following exhibit provides an updated listing of selected items of cost contained in each of the OMB cost principles circulars based on the changes contained in the Federal Register notice dated May 10, 2004 (69 FR 25970-25995) (http://www.whitehouse.gov/omb/fedreg/2004/040510_cost_principles.pdf). The primary changes are deletion of items, changes in language for consistency, and extension of certain items previously only in one or more—but not all—sets of OMB cost principles to another set(s) of OMB cost principles. Although these changes minimized the number of non-substantive differences among the OMB cost principles, there remain several cost items that are unique to one type of entity (e.g., commencement and convocation costs are applicable only to universities).

The exhibit lists the selected items of cost along with a cursory description of their allowability. The numbers in parentheses refer to the cost item in the applicable circular, as revised. The reader is strongly cautioned not to rely exclusively on the summary but to place primary reliance on the referenced circular text.

Selected Items of Cost
Exhibit 1
(amended 6/04)

Selected Cost Item

OMB Circular A-87, Attachment B
State, Local, & Indian Tribal Gov’ts


OMB Circular A-21, Section J
Educational Institutions


OMB Circular A-122, Attachment B
Non-Profit Organizations


Advertising and public relations costs

(1) Allowable with restrictions

(1) Allowable with restrictions

(1)-Allowable with restrictions

Advisory councils

(2)-Allowable with restrictions

(2) Allowable with restrictions


(2) Allowable with restrictions



Alcoholic beverages

(3)-Unallowable

(3)-Unallowable

(3)-Unallowable

Alumni/ae activities

Not specifically addressed

(4)-Unallowable

Not specifically addressed

Audit costs and related services

(4)-Allowable with restrictions and as addressed in OMB Circular A-133

(5)-Allowable with restrictions and as addressed in OMB Circular A-133

(4)-Allowable with restrictions and as addressed in OMB Circular A-133

Bad debts

(5)-Unallowable

(6)-Unallowable

(5)-Unallowable

Bonding costs

(6)-Allowable with restrictions

(7) Allowable with restrictions

(6)-Allowable with restrictions

Commencement and convocation costs

Not specifically addressed

(8)-Unallowable with exceptions

Not specifically addressed

Communication costs

(7)-Allowable

(9)-Allowable

(7)-Allowable

Compensation for personal services

(8)-Unique criteria for support

(10)-Unique criteria for support

(8)-Unique criteria for support

Compensation for personal services - organization-furnished automobile

Not specifically addressed

(10.g)- Unallowable for that portion of costs attributed to personal use

(8.g)- Unallowable for that portion of costs attributed to personal use

Compensation for personal services - sabbatical leave costs

Not specifically addressed

(10.f(4))- Allowable with restrictions

Not specifically addressed

Compensation for personal services - severance pay

(8)-Allowable with restrictions

(10.h)-Allowable with restrictions

(8.k)-Allowable with restrictions

Contingency provisions

(9)-Unallowable with exceptions

(11)-Unallowable with exceptions

(9)-Unallowable with exceptions

Deans of faculty and graduate schools

Not addressed

(12)-Allowable

Not addressed

Defense and prosecution of criminal and civil proceedings and claims

(10)-Allowable with restrictions

(13)-Allowable with restrictions
(Defense and prosecution of criminal and civil proceedings, claims, appeals and patent infringement)

(10)-Allowable with restrictions
(Defense and prosecution of criminal and civil proceedings, claims, appeals and patent infringement)

Depreciation and use allowances

(11)-Allowable with qualifications

(14)-Allowable with qualifications

(11)-Allowable with qualifications

Donations and contributions

(12)-Unallowable (made by recipient); not reimbursable but value may be used as cost sharing or matching (made to recipient)

(15)-Unallowable (made by recipient); not reimbursable but value may be used as cost sharing or matching (made to recipient)

(12)-Unallowable (made by recipient); not reimbursable but value may be used as cost sharing or matching (made to recipient)

Employee morale, health, and welfare costs

(13)-Allowable with restrictions

(16)-Allowable with restrictions

(13)-Allowable with restrictions

Entertainment costs

(14)-Unallowable

(17)-Unallowable

(14)-Unallowable

Equipment and other capital expenditures

(15)-Allowability based on specific requirements

(18)-Allowability based on specific requirements

(15)-Allowability based on specific requirements

Fines and penalties

(16)-Unallowable with exception

(19)-Unallowable with exception

(16)-Unallowable with exception

Fundraising and investment management costs

(17)-Unallowable with exceptions

(20)-Unallowable with exceptions
(Fundraising)

(17)-Unallowable with exceptions

Gains and losses on depreciable assets

(18)-Allowable with restrictions
(Gains and losses on disposition of depreciable property and other capital assets and substantial relocation of Federal programs)

(21)-Allowable with restrictions

(18)-Allowable with restrictions

General government expenses

(19)-Unallowable with exceptions

Not specifically addressed

Not specifically addressed

Goods or services for personal use

(20) Unallowable

(22)-Unallowable

(19)-Unallowable

Housing and personal living expenses

Not specifically addressed

(23)-Unallowable

(20)-Unallowable as overhead costs

Idle facilities and idle capacity

(21)-Idle facilities - unallowable with exceptions; idle capacity - allowable with restrictions

(24)-Idle facilities - unallowable with exceptions; idle capacity - allowable with restrictions

(21)-Idle facilities - unallowable with exceptions; idle - capacity allowable with restrictions

Insurance and indemnification

(22)-Allowable with restrictions

(25)-Allowable with restrictions

(22)-Allowable with restrictions

Interest

(23)-Allowable with restrictions

(26)-Allowable with restrictions

(23)-Allowable with restrictions

Interest - substantial relocation

Not specifically addressed

(26.b(6))-Possible adjustment in relocated within 20 years

(23.a(6)(d))-Possible adjustment in relocated within 20 years

Labor relations costs

Not specifically addressed

(27)-Allowable

(24)-Allowable

Lobbying

(24)-Unallowable

(28)-Unallowable with exceptions

(25)-Unallowable with exceptions

Lobbying - executive lobbying costs

(24.b)-Unallowable

(28.h)-Unallowable

(25.d)-Unallowable

Losses on other sponsored agreements or contracts

Not specifically addressed

(29)-Unallowable

(26)-Unallowable
(Losses on other awards or contracts)

Maintenance and repair costs

(25)-Allowable with restrictions
(Maintenance, operations, and repairs)

(30)-Allowable with restrictions

(27)-Allowable with restrictions

Materials and supplies costs

(26)-Allowable with restrictions

(31)-Allowable with restrictions

(28)-Allowable with restrictions

Meetings and conferences

(27)- Allowable with restrictions

(32)- Allowable with restrictions

(29)-Allowable with restrictions

Memberships, subscriptions, and professional activity costs

(28)-Allowable as a direct cost for civic, community and social organizations with Federal approval; unallowable for lobbying organizations.

(33)-Unallowable for civic, community, or social organizations

(30)-Allowable for civic and community organizations with Federal approval; unallowable for social organizations.

Organization costs

Not specifically addressed

Not specifically addressed

(31)-Unallowable except Federal prior approval

Page charges in professional journals

(34.b)-Allowable with restrictions (addressed under “Publication and printing costs”)

(39.b)-Allowable with restrictions (addressed under “Publication and printing costs”)

(32)-Allowable with restrictions

Participant support costs

Not specifically addressed

Not specifically addressed

(33)-Allowable with prior approval of the Federal awarding agency

Patent costs

(29)-Allowable with restrictions

(34)-Allowable with restrictions

(34)-Allowable with restrictions

Plant and homeland security costs

(30)-Allowable with restrictions

(35)-Allowable with restrictions

(35)-Allowable with restrictions

Pre-agreement costs

(31)-Allowable with restrictions
(Pre-award costs)

(36)-Unallowable unless approved by the Federal sponsoring agency

(36)-Allowable with restrictions

Professional service costs

(32)-Allowable with restrictions

(37)-Allowable with restrictions

(37)-Allowable with restrictions

Proposal costs

(33)-Allowable with restrictions

(38)-Allowable with restrictions

Not specifically addressed

Publication and printing costs

(34)-Allowable with restrictions

(39)-Allowable with restrictions



(38)-Allowable with restrictions

Rearrangement and alteration costs

(35)-Allowable (ordinary and normal); allowable with Federal prior approval (special)

(40)-Allowable (ordinary and normal); allowable with Federal prior approval (special)

(39)-Allowable (ordinary and normal); allowable with Federal prior approval (special)

Reconversion costs

(36)-Allowable with restrictions

(41)-Allowable with restrictions

(40)-Allowable with restrictions

Recruiting costs

(1.c)-Allowable with restrictions (addresses costs of advertising only)

(42)-Allowable with restrictions

(1)-Allowable with restrictions

Relocation costs

Not specifically addressed

(42.d)-Allowable with restrictions

(42)-Allowable with restrictions

Rental cost of buildings and equipment

(37)-Allowable with restrictions

(43)-Allowable with restrictions

(43)-Allowable with restrictions

Royalties and other costs for use of patents

(38)-Allowable with restrictions

(44)-Allowable with restrictions

(44)-Allowable with restrictions

Scholarships and student aid costs

Not specifically addressed

(45)-Allowable with restrictions

Not specifically addressed

Selling and marketing costs

(39)-Unallowable with exceptions



(46)-Unallowable with exceptions

(45)-Unallowable with exceptions

Specialized service facilities

Not specifically addressed

(47)-Allowable with restrictions

(46)-Allowable with restrictions

Student activity costs

Not specifically addressed

(48)-Unallowable unless specifically provided for in the sponsored agreement

Not specifically addressed

Taxes

(40)-Allowable with restrictions

(49)-Allowable with restrictions

(47)-Allowable with restrictions

Termination costs applicable to sponsored agreements

(41)-Allowable with restrictions

(50)-Allowable with restrictions

(48)-Allowable with restrictions

Training costs

(42)-Allowable for employee development

(51)-Allowable for employee development

(49)-Allowable with limitations

Transportation costs

Not specifically addressed

(52)-Allowable with restrictions

(50)-Allowable

Travel costs

(43)-Allowable with restrictions

(53)-Allowable with restrictions

(51)-Allowable with restrictions

Trustees

Not specifically addressed

(54)-Allowable with restrictions

(52)-Allowable with restrictions

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