OMB’s uniform grant guidance: A deeper dive into audit requirements
So, where did OMB A-133 go?
Some of you may have heard that Circular A-133 is going away. Circular A-133 sets forth standards for audits of states, local governments, and non-profit organizations that expend federal awards. I know what you're thinking, and the answer is “no” – it isn’t really gone, but has been moved (and slightly modified in the process!). The provisions of OMB Circular A-133 are now found in Subpart F of the new Uniform Grant Guidance or “Super Circular.” Technically, Circular A-133 is no longer applicable. The Single Audit requirements have been incorporated into the “Super Circular” so that all grants management-related regulations are contained in one place. The location of the requirements is not the only thing that changed; the rules themselves have changed a bit as well. Changes impact many areas of the single audit process but most significantly they impact when an audit of federal expenditures (a “single audit”) is required and which programs are required to be tested by your auditors.
This article briefly summarizes the key changes.
Planning the single audit requires several essential steps. The first one is to determine if a single audit is even required. The established single audit threshold under Circular A-133 was $500,000 of total federal expenditures in a fiscal year; in other words, states, local governments, and non-profit organizations that expended more than $500,000 in federal dollars in any one year needed to engage an independent auditor to audit the spending of those dollars. Subpart F of the new Uniform Grant Guidance raises that threshold to $750,000. For many entities, the increase will have little impact, and a single audit will continue to be required. However, for smaller or lower funded entities, it could mean that a single audit will not be required to be completed.
Type A programs
Once it is determined that the single audit is required, the auditor turns to program selection. Several changes were included in Subpart F. The first change is raising the cutoff for a Type A program to $750,000 under Subpart F from the $300,000 threshold amount for a Type A program used in A-133. Type A programs are the first programs the auditor must evaluate when selecting which federal programs they will test. If total federal expenditures exceed $25 million, a tiered formula is used to raise the Type A threshold further.
Type A program risk rating
Once Type A programs are identified, based on the dollar thresholds mentioned above, the risk of each Type A program is required to be assessed. Specific criteria to rate the risk of the program are spelled out in the grants regulations. Even though this risk rating process existed under A-133, under Subpart F, the risk criteria are simplified and will likely allow more Type A programs not to be tested. The following are mandatory criteria that would require a Type A program to be selected to test:
- Not audited as a major program in one of the last two years
- In the most recent audit period had one (or more) of the following audit findings related to the program:
- Modified compliance opinion
- Material weakness in internal controls
- Known or likely questioned costs exceeding 5 percent of total program expenditures
A Type A program that doesn’t meet the mandatory criteria to be tested may still require testing by your auditor given additional risk factors auditors are required to consider.
Type B program selection
Any program that does not meet the quantitative thresholds for a Type A program is considered a Type B program. Because these programs are smaller in size, the process an auditor is required to undergo to determine if these programs will be tested generally results in very few Type B programs being selected for testing. This has not changed under the Super Circular.
Auditor Coverage – Once the Type A and B programs are selected, the auditor must determine if sufficient coverage is achieved. Under A-133 50 percent of the total federal program expenditures needed to be covered for “regular” auditees and 25 percent of expenditures for Low Risk Auditees. Subpart F changes those coverage percentages to 40 and 20 percent, respectively. If the selection process failed to gain the required coverage, then the auditor must select an additional program(s) to attain the coverage.
Low Risk auditee
A few of the requirements to become a Low Risk Auditee have changed. The benefit of being a low risk auditee is the lower coverage requirements for testing federal programs, as mentioned in the previous paragraph. The changes likely will make more entities eligible to be low risk auditee. An entity qualifies as a low risk auditee if for each of the previous two years the entity had:
- An unmodified opinion on the GAAP based financial statements or the financial statements were audited using a basis of accounting required by state law
- An unmodified opinion on the Schedule of Expenditures of Federal Awards (“SEFA”)
- No financial statement or federal award material weaknesses
- An unmodified opinion on federal program compliance
- No questioned costs exceeding 5 percent of federal program expenditures
- Timely filing with the federal single audit clearinghouse
- No going concern opinion
Once the programs are selected, much of the auditors work under Subpart F will be similar to that done under A-133. However, you will notice that, especially in the first few years that your entity is operating under the new Uniform Grant Guidance, more questions may come from your auditors as they focus on the changes you’ve made in order to adhere to the new grants rules. Key areas of focus will be time and effort, procurement, indirect costs, allowable costs, and subrecipient monitoring.
The basic elements of the Single Audit report continue under the requirements of Subpart F. No new letters or reports are required. However, there are some changes to what is included, especially for findings and data on the SEFA.
Known or likely questioned costs that are greater than $25,000 for a type of compliance requirement for a major program will be reported. The prior threshold was $10,000 under A-133, so this change may result in fewer findings being reported.
The biggest change to the SEFA is the requirement to include on the schedule the dollar value of funds passed through by grant. Essentially the SEFA will report the total expenditures for the grant and then include in another column, the amount of the grant that was passed through to a subrecipient. If the payment was to a contractor (previously referred to as a vendor) it is not considered pass-through funding.
Effective date and final thoughts
The auditee requirement to comply with the Uniform Guidance began with new funding received after December 26, 2014. In order for the audit requirements to be implemented similarly with the change in grants management, the first single audits to be completed under Subpart F will be for the December 31, 2015, fiscal year end. For single audits with fiscal year ends prior to December 31, 2015, A-133 requirements remain in force. Early adoption is not permitted!
As auditees and auditors plan for adoption, understanding the changes and planning for any resultant impact on the single audit progress will be critical.