PART 1 – BACKGROUND, PURPOSE, AND APPLICABILITY
BACKGROUND
The Single Audit Act of 1984 established requirements for audits of states, local governments, and Indian tribal governments that administer federal financial assistance programs. In 1985, the Office of Management and Budget (OMB) issued OMB Circular A-128, "Audits of State and Local Governments," to provide implementing guidance. In 1990 OMB administratively extended the single audit process to non-profit organizations by issuing OMB Circular A-133, "Audits of Institutions of Higher Education and Other Non-Profit Organizations." On July 5, 1996, the president signed the Single Audit Act Amendments of 1996 (31 USC Chapter 75). The 1996 Amendments extended the statutory audit requirement to non-profit organizations and substantially revised various provisions of the 1984 Act.
On June 30, 1997, OMB issued revisions to OMB Circular A-133 (62 FR 35278) to implement the 1996 Amendments, extend the circular's coverage to states, local governments, and Indian tribal governments, and rescind OMB Circular A-128. The 1996 Amendments required the Director, OMB, to periodically review the audit threshold. On June 27, 2003, OMB amended OMB Circular A-133 (68 FR 38401) to increase the audit threshold to an aggregate expenditure of $500,000 in federal funds and to make changes in the thresholds for cognizant and oversight agencies. Those changes took effect for fiscal years ending after December 31, 2003. OMB further amended the circular on June 26, 2007 (72 FR 35080), to (1) update internal control terminology and related definitions and (2) simplify the auditee reporting package submission requirement.
On December 26, 2013, OMB Circular A-133 was superseded by the issuance of 2 CFR Part 200, Subpart F. Among other things, those changes increased the audit threshold to $750,000 for auditee fiscal years beginning on or after December 26, 2014 and made changes to the major program determination process.
The Compliance Supplement (Supplement) is based on the requirements of the 1996 Amendments and 2 CFR Part 200, Subpart F, which provide for the issuance of a compliance supplement to assist auditors in performing the required audits.
The Supplement is a document that identifies existing, important compliance requirements that the federal government expects to be considered as part of an audit required by the 1996 Amendments to the Single Audit Act. Without the Supplement, auditors would need to research many laws and regulations for each program under audit to determine which compliance requirements are important to the federal government and could have both a direct and material effect on a program. Providing the Supplement is a more efficient and cost-effective approach to performing this research. For the programs contained herein, the Supplement provides a source of information for auditors to understand the federal program's objectives, procedures, and compliance requirements subject to the audit as well as audit objectives and suggested audit procedures for determining compliance with these requirements.
The 2 CFR Part 200, Subpart F, provides that federal agencies are responsible for annually informing OMB of any updates needed to the Supplement and working with OMB to ensure that the Supplement focuses the auditor to test the compliance requirements most likely to cause improper payments, fraud, waste, abuse, or generate audit findings for which the federal awarding agency will take sanctions. This responsibility includes ensuring that program objectives, procedures, and the compliance requirements that are to be subject to the audit (including statutory and regulatory citations) are submitted to OMB for inclusion in the Supplement; it also ensures that agencies keep this information current.
Performance Focus for Grants
Federal awarding agencies are encouraged to continue to shift their focus in grants management from one heavy on compliance to a balanced approach that includes establishing measurable program and project goals and analyzing data to improve results. To that end, starting in 2019 and continuing in 2021, the Compliance Supplement reduced the areas for compliance reviews from a maximum of 12 to a maximum of six (A and B compliance areas are counted as one). This reduction focused the agencies and the auditors on the areas that are most important for federal awarding agencies to manage programs more efficiently.
In addition, under Part 3 L, Reporting, agencies continued to add the review requirement for Performance reporting for 57 programs (versus 29 in the 2020 Compliance Supplement). This review requirement provides federal awarding agencies with another tool to ascertain that recipients comply with program performance goal reporting requirements. OMB intends to work with federal awarding agencies to identify performance reporting requirements for more federal programs to be added to future Supplements.
Furthermore, in 2020, OMB and federal awarding agencies identified fourteen new COVID-19- related programs and issued an addendum to the 2020 Compliance Supplement on December 31, 2020, to provide audit guidance on these new programs. The addendum also requires universal review of the requirement for recipients to report subawards in the Federal Funding Accountability and Transparency Act (FFATA) for all programs for audit year ending after 09/30/20.
Parts 4 and 5 of the Supplement provide a stand-alone section for each program/cluster included in the Supplement, which contains program objectives, program procedures, and compliance requirements (including any Performance Reporting requirements noted in Part III, section L). For some programs, a separate section (IV, "Other Information") also is included to communicate additional information concerning the program. For example, when a program allows funds to be transferred to another program, the "Other Information" section provides guidance on how those funds are to be treated on the Schedule of Expenditures of Federal Awards and in major program determinations. See Appendix IV to the Supplement for a list of programs that contain this section.
The Supplement also provides guidance to assist auditors in determining compliance requirements relevant to the audit, audit objectives, and suggested audit procedures for programs not included herein. For single audits, the Supplement replaces agency audit guides and other audit requirement documents for individual federal programs.
Throughout the Supplement, the word "must," when used in conjunction with auditor responsibilities, means that the auditor is required to do what the statement indicates. Use of the term "should" when addressing auditor responsibilities indicates a recommended action or approach. See Part 3 of the Supplement for use of terminology in that part, which addresses compliance requirements for auditees as well as auditor responsibilities.
PURPOSE AND APPLICABILITY (Part 1)
Purpose
This 2021 Supplement is effective for audits of fiscal years beginning after June 30, 2020 and supersedes the 2020 Compliance Supplement (dated August 2020) and its Addendum (dated December 2020).
This 2021 Compliance Supplement adds, deletes, and modifies prior Supplement sections as usual. Further, it continues the OMB mandate adopted in the 2019 Compliance Supplement requiring that each federal agency limit the number of compliance requirements subject to the audit to six, with the exception of the Research and Development cluster, which has been permitted to identify seven compliance requirements as subject to the audit. For this purpose, the requirements relating to A. Activities Allowed and Unallowed and B. Allowable Costs and Cost Principles are treated as one requirement. The Part 2 matrix and the related program sections in parts 4 and 5 reflect this OMB mandate. Additionally, this six-requirement mandate does not apply to programs not included in this Supplement.
The 2 CFR Part 200, Subpart F, describes the nonfederal entity's responsibilities for managing federal assistance programs (2 CFR section 200.508) and the auditor's responsibility with respect to the scope of the audit (2 CFR section 200.514). Auditors are required to follow both the provisions of 2 CFR Part 200, Subpart F, and this Supplement.
Applicability
General
Auditors must consider the Supplement and the referenced laws, regulations, and OMB Circulars/Uniform Guidance (whether codified by federal agencies in agency regulations or adopted or implemented by other means) in determining the compliance requirements subject to the audit that could have both a direct and material effect on the programs included herein. The use of the Supplement is mandatory. Accordingly, adherence to the Supplement satisfies the requirements of 2 CFR Part 200, Subpart F. For program-specific audits performed in accordance with a federal agency's program-specific audit guide, the auditor must follow such program-specific audit guide. Finally, for major programs not included in the Supplement, the auditor must follow the guidance in Part 7 and use the types of compliance requirements in Part 3 to identify the applicable compliance requirements that could have both a direct and material effect on the program.
Update of Requirements
The 2 CFR section 200.513(c)(4) provides that federal agencies are responsible for annually informing OMB of any needed updates to the Supplement. However, auditors must recognize that laws and regulations change periodically and that delays will occur between such changes and revisions to the Supplement. Moreover, auditors must recognize that there may be provisions of grant agreements and contracts that are not specified in law or regulation and, therefore, the specifics of such are not included in the Supplement. For example, the grant agreement may specify a certain matching percentage or set a priority for how funds can be spent (e.g., a requirement not to fund certain size projects). Another example is a federal agency imposing additional requirements on a recipient (see 2 CFR section 200.208 regarding use of specific award conditions).
Accordingly, the auditor should perform reasonable procedures to ensure that compliance requirements identified as subject to the audit are current and to also determine whether there are any additional provisions of federal awards relevant to the compliance requirements subject to the audit that should be covered by an audit under the 1996 Amendments. Reasonable procedures would be an inquiry of nonfederal entity management and a reviewal of the federal awards for programs selected for testing (i.e., major programs).
For example, if a program entry in the Part 2 matrix indicates that Procurement and Suspension and Debarment compliance requirement is subject to the audit, then the auditor should follow the guidance in the previous paragraph and perform the reasonable procedures described therein. However, if a program entry in the Part 2 matrix indicates that Procurement and Suspension and Debarment compliance requirement is not subject to the audit, then the procedures described in the previous paragraph would not be required by the auditor.
Similarly, as it relates to provisions of grant agreements and contracts, if a program entry in the Part 2 matrix indicates that the Activities Allowed and Unallowed compliance requirement is subject to the audit and that the grant agreement for that program sets a priority for how funds can be spent (e.g., a requirement to not fund certain size projects), then the auditor would be expected to consider the grant agreement provisions. However, if a program entry in the Part 2 matrix indicates that the Matching, Level of Effort, Earmarking compliance requirement is not subject to the audit and that the grant agreement for that program specifies a certain matching percentage requirement for the same program, then the auditor is not expected to consider the grant agreement provisions related to matching in the audit.
Safe Harbor Status
Because the suggested audit procedures were written to be able to apply to many different programs administered by many different entities, they are necessarily general in nature. Auditor judgment is necessary to determine whether the suggested audit procedures are sufficient to achieve the stated audit objectives or whether alternative audit procedures are needed. Therefore, the auditor cannot consider the Supplement to be a "safe harbor" for identifying the audit procedures to apply in a particular engagement.
The matrices included throughout the Supplement indicate with a "Y" which types of compliance requirements are subject to the audit. The auditor can consider the Supplement a "safe harbor" for identification of those compliance requirements for the programs included herein if, as discussed above, the auditor (1) performs reasonable procedures to ensure that the requirements subject to the audit in the Supplement are current and to determine whether there are any additional provisions of federal awards relevant to the compliance requirements subject to the audit that should be covered by an audit under the 1996 Amendments, and (2) updates or augments the requirements contained in the Supplement, as appropriate.
For compliance audit purposes, an "N" in a program matrix indicates that a type of compliance requirement is not subject to the audit.