UNITED STATES DEPARTMENT OF AGRICULTURE

CFDA 10.551 FOOD STAMPS

CFDA 10.561 STATE ADMINISTRATIVE MATCHING GRANTS FOR FOOD STAMP PROGRAM

I. PROGRAM OBJECTIVES

The objective of the Food Stamp Program is to help low-income households buy the food they need for good health.

II. PROGRAM PROCEDURES

This description of Food Stamp Program procedures incorporates provisions of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (Welfare Reform, P.L. 104-193, August 22, 1996). However, regulatory citations and form descriptions may be revised without any change in the policies described herein as the result of new regulations covering these legislative changes and regulatory streamlining that is currently underway in the Food Stamp Program. Food Stamp Program regulations are found in 7 CFR parts 271 through 285.

Administration

The U.S. Department of Agriculture (USDA), Food and Nutrition Services (FNS) administers the Food Stamp Program in cooperation with State and local governments.

State welfare agencies (or county welfare agencies under the oversight of the State government) certify eligibility and provide benefits to households. FNS authorizes, monitors and investigates stores that redeem benefits, provides funding for State administration and benefits, and oversees the operation of State welfare agencies to ensure compliance with Federal law and regulations.

Federal Funding of Benefits and State Administrative Costs

The Federal Government pays 100 percent of the value of Food Stamp Program benefits and generally reimburses States for 50 percent of their costs to administer the program (7 CFR section 277.4(b)), except for those functions listed in Part III G., Matching. The Food Stamp Program is an open-ended entitlement program. Therefore, its authorizing statute places no cap on the amount of funds available to reimburse States for allowable administrative expenses. No reimbursement is allowed for State expenditures for activities undertaken as a condition of settlement of quality control claims against the State for low payment accuracy.

Certification

Eligibility for food stamps is based primarily on income and resources. Although welfare reform increases State design options that can affect benefits for recipients, a key feature of the Program is its status as an entitlement program with standardized eligibility and benefits.

Assessing Need

Households generally cannot exceed a gross income eligibility standard set at 130 percent of the Federal poverty standard (7 CFR section 273.9(a(1)). Households also cannot exceed a net income standard which is set at 100 percent of the Federal poverty standard (7 CFR section 273.9(a)(2)). The net income standard allows specified deductions from gross income, e.g., a standard deduction and deductions for medical expenses (elderly and disabled only), excess shelter costs, and work expenses. Non-financial eligibility criteria, only some of which affect benefit amounts, include: age, school status, citizenship, residency, household composition, work requirements, and disability status. Most non-citizens are ineligible to participate in the program (7 USC 2015(f)). Able-bodied adults without dependents are subject to a time limit for receiving benefits if certain requirements are not met (7 USC 2015(o)).

Application Process

The application process includes completing and filing an application form, being interviewed and having certain information verified. In addition to using information supplied by the recipients, welfare agencies use data from other agencies, such as the Social Security Administration, the Internal Revenue Service and the State employment security agency, to verify the household's identity and income.

Benefits

Benefit amounts vary with household size and income. As required by law, allotments for various household sizes are revised October 1 of each year to reflect the cost of the Thrifty Food Plan, a model plan for a low-cost nutritious diet that is developed and costed by USDA.

The benefits each household receives are redeemed for food in participating retail stores. Historically, the benefit form has been a paper coupon issued in denominations of $1, $5 and $10. However, States are in the process of transferring to electronic benefit transfer (EBT) systems, whereby recipients receive a magnetic strip card which they can use to purchase food at retailers. Welfare reform legislation requires all States to use EBT by 2002. In September 1996, about 15 percent of aggregate benefits were delivered by EBT, and all States were in some stage of planning or implementing EBT systems. In a limited number of situations, recipients may receive their benefits in cash.

Benefit Redemption

Generally, households must use program benefits for foods to be prepared and consumed at home. There are, however, some exceptions to this general policy. For example, there are provisions for the homeless to redeem food stamps in authorized restaurants and for residents of some small institutional settings to participate in the program. Retailers redeem the food stamps through the banking system without the direct involvement of State governments. However, EBT increases State involvement in the redemption process because States must reconcile the benefits they issue to redemptions by retailers and to the amounts the banks pay the retailers.

State Responsibilities

A State administering the Food Stamp Program must sign a Federal/State Agreement that commits it to observe applicable laws and regulations in carrying out the program (7 CFR section 272.2(b)). Although the welfare reform legislation provided additional administrative flexibility, the Food Stamp Act remains highly prescriptive. Both the law and regulations prescribe detailed requirements for: (1) meeting program goals, such as providing timely service and rights to appeal; and, (2) ensuring program integrity, such as verifying eligibility, safeguarding coupon inventories, establishing and collecting claims for benefit overpayments, and prosecuting fraud.

To ensure that States operate in compliance with the law, program regulations, and their own Plan of Operations, each State is required to have a system for monitoring and improving its administration of the Food Stamp Program (7 CFR section 275.1(a)), particularly the accuracy of eligibility and benefit determinations. This performance monitoring system includes management reviews, reviews of quality control systems, and reporting to FNS on program performance. State agencies shall conduct a review once every year for large project areas, once every two years for medium project areas, and once every three years for small project areas, unless an alternative schedule is approved by FNS. Projects are classified as large, medium, or small based on State determinations. The State must also ensure corrective action in response to the detection of program deficiencies (7 CFR sections 275.2, 275.5, and 275.16-19).

Federal Oversight and Compliance Mechanisms

FNS oversees State operations through an organization consisting of headquarters, seven regional offices, and about 60 field offices.

FNS program oversight includes budget review and approval, reviews of financial and program reports and State management review reports, and on-site FNS reviews. Each year FNS headquarters conveys to its regions the concerns that were elevated to the national level through audits or other mechanisms. Regions combine this with their knowledge of individual States to inform the States of possible vulnerabilities to include in their internal management reviews and corrective action plans.

Although FNS uses technical assistance extensively to promote improvements in State operation of the Program, enforcement mechanisms are also available. In addition to the financial rewards and penalties related to payment accuracy, FNS has other mechanisms to recover other losses and the cost of negligence (7 CFR sections 276.2 and 276.3). For other forms of noncompliance, FNS has the authority to give notice and, if improvements do not occur, withhold administrative funds for failure to implement program requirements (7 CFR section 276.4).

Certification Quality Control System

The Food Stamp Program maintains an extensive quality control system required by law and regulation (7 CFR sections 275.10-14). The system provides State and national measures of the accuracy of eligibility and benefit amount determination (often referred to as payment accuracy), both underpayment and overpayment, and of the correctness of decisions to deny benefits.

Measurement

States are required to select a statistically valid sample of cases and to review the cases for eligibility and benefit amount. Review methods in this sample are generally more intensive than those used in eligibility. States submit findings of all sampled cases, including incomplete and not-subject-to-review cases, to an automated database maintained by the Federal Government. State quality control data allow a State to be aware on an ongoing basis of its level of accuracy, and allow for the identification of trends and appropriate corrective action.

The applicable FNS regional office reviews each State's sampling plan annually and re-reviews a subsample of the State quality control reviews. The FNS re-review process provides feedback to each State on its quality control system. FNS uses the State's sample and the FNS subsample in a regression formula (described in regulation) to determine payment error rates. By law, the error rate is the combined value of overpayments and under payments to participating households. FNS headquarters also reviews its regional operations and provides technical assistance to assure consistency in the national quality control system.

Rewards and Penalties

A State with both an active payment error rate (improper certifications or benefit determinations) which is at or below 5.9 percent and a negative case error rate (improper denials of certification or benefits improperly terminated) that meets the standards set out at 7 CFR section 275.1(b) is eligible for an enhanced rate of administrative funding as follows: a one percentage point increase in funding for each full one-tenth of a percentage point that the State's active payment error rate is below 6 percent (7 CFR section 275.1(b)(2)). This enhancement to a State's funding level may not exceed a 10 percentage point increase for an active payment error rate below five percent (7 CFR 277.4(b)(2)). States with error rates in excess of the national average are subject to penalties that are based on the amount of benefits issued in error. Those States pay a portion of the value of benefits in excess of the national average based on a sliding scale that increases as the State's error rate exceeds the national average (7 USC 2025(c)(1)(A) and 2025 (c)(1)(C)).

The Food Stamp Act of 1977, as amended, allows States subject to potential quality control liabilities the option of either a direct repayment to the Federal government or a reinvestment of all or a portion of these liabilities in unmatched State dollars used for activities designed to reduce payment errors through improvements in program administration (7 CFR section 275.23(e)(11)). Most States have settled potential claims for Federal Fiscal Years 1992-1996 by agreeing to reinvest a portion of their liability in payment accuracy improvement activities that would promote the reduction of error rates and maintain them at low levels. Settlement agreements generally require States that fail to achieve the established standard to invest additional State funds in such activities.

Corrective Action

There is a specific legislative requirement for corrective action by any State with an error rate above 6 percent (7 USC 2025 (c)(1)(B)). FNS maintains an extensive system of technical assistance for States as they develop and implement corrective action. FNS also monitors the implementation of corrective action plans.

Recent Error Rates, Enhanced Funding, and Penalties

For fiscal year 1996, the combined national error rate was 9.22 percent. The overpayment error rate was 6.92 percent; the underpayment error rate was 2.31 percent. State error rates ranged from 3.5 percent to 13.95 percent; 25 States face potential liabilities totaling $59.6 million as the result of high error rates for Fiscal Year 1996. Error rates are updated annually.

Implications of Quality Control for the Compliance Supplement

The Food Stamp Program Quality Control system uses an intensive State review of more than 50,000 active cases across the United States to measure the accuracy of Food Stamp Program eligibility determinations and benefit amounts. An FNS re-review of more than 18,000 of those cases follows. These samples are statistically valid at the State and national level. Information from Federal program oversight indicates that this sampling system is operating adequately to provide assurances that FNS is measuring the accuracy of eligibility decisions and that these data provide a basis for corrective action to improve the accuracy of eligibility decisions. Therefore, the Quality Control System sufficiently tests individual eligibility in the Food Stamp Program.

However, in those situations where computer systems are integral to the operation of the program, e.g., automated eligibility determination, the auditor should perform necessary tests as to obtain assurance of the integrity of these systems. In those instance where multiple programs share the same systems, e.g., automated intake systems for TANF, Food Stamps, Medicaid, etc., testing may be done as part of the work on multiple programs.

III. COMPLIANCE REQUIREMENTS

In developing the audit procedures to test compliance with the requirements for a Federal program, the auditor should first look to Part 2, Matrix of Compliance Requirements, to identify which of the 14 types of compliance requirements described in Part 3 are applicable and then look to Parts 3 and 4 for the details of the requirements.

Note: Generally, "E. Eligibility," "G. Matching," "I. Procurement," and "N. Special Tests and Provisions" only apply to State governments. However, when States have delegated to the local governments functions normally performed by the State as administering agency, e.g., eligibility determination, automated data processing (ADP) systems, and issuance of food stamps, the related compliance requirements will apply to the local government.

A. Activities Allowed or Unallowed

Funds made available for administrative costs must be used to screen and certify applicants for program benefits, issue benefits to eligible households, conduct fraud investigations and prosecutions, provide fair hearings to households for which benefits have been denied or terminated, conduct nutrition education activities, prepare financial and special reports, operate ADP systems, monitor subrecipients (where applicable), and otherwise administer the program. Portions of the award made available for specific purposes, such as ADP systems development or Employment and Training activities, must be used for such purposes (7 CFR part 277).

E. Eligibility

1. Eligibility for Individuals

The auditor is not required to test eligibility because detail testing of the individual case files is performed by the quality control unit and reviewed by FNS and the automated system supporting eligibility determinations and processing and tracking food stamp issuances is tested under III.N.1, ADP System for Food Stamps.

2. Eligibility for Group of Individuals or Area of Service Delivery - Not Applicable

3. Eligibility for Subrecipients - Not Applicable

G. Matching, Level of Effort, Earmarking

1. Matching

The State is required to pay 50 percent of the costs of administering the program. Exceptions to the 50 percent reimbursement rates are: (a) 100 percent grants to administer the Employment and Training Program (7 CFR section 277.4(b)(9)); and (b) an increased reimbursement rate for States with high benefit payment accuracy rates (7 CFR section 277.4(b)(2)) -- generally about eight States receive this money). The Food Stamp Program is a cost reimbursement program and private in-kind contributions are not allowable.

Costs of payment error rate reduction activities conducted under reinvestment agreements with FNS are not eligible for any level of Federal reimbursement (7 CFR section 275.23(e)(11)(i)(C)).

2. Level of Effort - Not Applicable

3. Earmarking - Not Applicable

I. Procurement and Suspension and Debarment

ADP Systems Development - For competitive acquisitions of ADP equipment and services costing $5 million or more (combined Federal and State shares), the State must submit an Advanced Planning Document (APD) for the costs to be approved and allowable as charges to FNS. This threshold is for the total project cost. In addition, noncompetitive acquisitions of $1 million or more require an APD. Contracts resulting from noncompetitive procurements of more than $1 million also must be provided to FNS for review (7 CFR section 277.18).

L. Reporting

1. Financial Reporting

a. SF-269, Financial Status Report - Applicable

b. SF-270, Request for Advance or Reimbursement - Applicable

c. SF-271, Outlay Report and Request for Reimbursement for Construction Program - Not Applicable

d. SF-272, Federal Cash Transactions Report - Not Applicable

2. Performance Reporting - Not Applicable

3. Special Reporting

Note: The requirement for State agencies to automate their food stamp program includes automation of reporting requirements (7 CFR section 272.10(b)(2)(vi). The testing to ensure accuracy and completeness of the following reports should be coordinated with the testing of the ADP System for Food Stamps (see III.N.1).

a. FNS-46 - Food Stamp Program Issuance Reconciliation Report (OMB No. 0584-0080). This monthly report is used to account for benefits issued during a report month for each issuance reconciliation point. The FNS-46 reports the reconciliation of food stamp benefits actually issued with the State's (or county's in county-run operations) Master Issuance File. The Master Issuance File contains records on all households eligible to receive benefits (such as a listing of the households and the benefits each is authorized to receive). Actual issuances may be recorded in the Record for Issuance (RFI) or alternative filing system. The RFI is created from the Master Issuance File and shows the amount of benefits the household is eligible to receive and the actual amount issued. Generally, one FNS-46 covers the entire State. However, a State may submit a separate FNS-46 for each type of issuance system (Authorization to Participate (ATP), mail issuance, EBT, or cash-out).

Key Line Items - The following line item contain critical information.

1. Line 6 - Total Issuance this month

2. Line 7 - Returns during current month

3. Line 9 - Value of authorized replacements(s) transacted

b. FNS-209 - Status of Claims Against Households (OMB No. 0584-0069). If a household receives more food stamp benefits than it is entitled to receive, the State must establish a claim against that household and demand repayment (7 CFR section 273.18 (a)). The State is required to create and maintain a system of records for monitoring these claims against households (7 CFR section 273.18 (l)). States use a variety of manual and computer systems as the source for the line items on the FNS-209. At a minimum, a system must be able to produce a detailed listing of cases that reconciles to the beginning and ending balances on the FNS-209. The State is permitted to retain a portion of the collected repayments: 35 percent of the recovered funds from claims involving fraud or other intentional program violations; and 20 percent of the recovered funds from claims involving inadvertent household errors. No portion of funds recovered from agency-error overpayments may be retained (7 USC 2025(a)).

The State agency completes the FNS-209 on a quarterly basis to detail the State's activities relating to claims against households. The form is due no later than 30 days after the end of each calendar quarter and is submitted to FNS even if the State agency has not collected any payments (7 CFR section 273.18(i)(2)).

Key Line Items - The following line items contain critical information.

1. Line 3a Beginning Balance, and 13 Ending Balance - represent the beginning and ending balances, respectively, of the claims. Columns A, B, and C represent the number and amount of claims by claim type (i.e., intentional program violation, inadvertent household error, and State agency administrative error). The aggregate value of claims activity from the subunits should equal the State totals. The beginning and ending balances should represent the total of individual claims that comprise these balances.

2. Line 14 Cash, Check, and M.O. - represents total claims payments made in the form of cash, checks, or money orders.

3. Line 15 Food Stamps - represents all payments in the form of food stamps.

4. Line 16 Recoupment - represents the value of collections made through allotment reductions.

5. Line 17 Offset - represents the total value of collections made by offsetting restored benefits against outstanding claim balances.

6. Line 18b Cash Adj.(+ or -) - represents amendments or corrections to the collection summary of a previous report.

7. Line 18c Non-Cash Adj. (+ or -) - represents amendments or corrections to the collection summary of a previous report relative to the return of food stamps, recoupment, or offsetting transactions.

8. Line 19 Transfers (+ or -) - represents the claims that were contained in the collection summary of a previous report and which are being transferred from one claim category to another claim category.

9. Line 20a Cash Refunds - represents the value of cash refunds provided to households that overpaid claims.

10. Line 20b Non-Cash Refunds - represents the value of non-cash refunds provided to households that overpaid claims.

11. Lines 21 Total, and 28 Total Letter of Credit Adjustments - represent the Total Collection Summary and the Total Letter of Credit Adjustments. The aggregate value of claims collection activity from the subunits should equal the State totals.

c. FNS-250 - Food Coupon Accountability Report (OMB No. 0584-0009) . Monthly, State Agencies must submit an FNS-250 to FNS reporting monthly food stamp coupon issuance and inventory by an individual or consolidated site. The FNS-250, or equivalent information, is provided by each coupon issuer and bulk storage point that distributes food stamps. The reports are to be submitted within 45 calendar days after the last day of coupon issuance each month, and should reach the FNS by the 15th day of the second month following the last day of coupon issuance for the month (7 CFR section 274.4(b)(1)). Verification of FNS-250 information will likely require test work at individual coupon issuers or bulk storage points.

Key Line Items - The following line items contain critical information.

1. Line 14 Total Available - represents the total number of food coupons that were available for the month. (Testing this line will require verifying lines 8-13.)

2. Line 15 Ending Inventory - represents the total number of food coupons that were on hand at the end of the month.

3. Line 16 Inventory Difference - represents the monthly issuance activity for coupon issuers and an unauthorized shortage in inventory for bulk storage locations.

4. Line 19 Total Value of Coupon Books Issued - represents the total value of coupons issued during the month based on the physical inventory.

5. Line 22 Total Value of Coupons Issued Based on Documents - represents the total value of coupons issued according to records.

N. Special Tests and Provisions

1. ADP System for Food Stamps

Note: Reference III.E.1, Eligibility for Individuals, for why the testing of the ADP system for food stamps is under this special test and provision instead of under eligibility and Part 3, E.1.a (suggested audit procedures for eligibility for individuals relating to automated systems) for other guidance in this Supplement concerning testing ADP systems.

Compliance Requirement - State agencies are required to automate their food stamp program operations and computerize their systems for obtaining, maintaining, utilizing, and transmitting information concerning the food stamp program (7 CFR section 272.10 and 277.18). This includes: (1) processing and storing all case file information necessary for eligibility determination and benefit calculation, identifying specific elements that affect eligibility, and notifying the certification unit of cases requiring notices of case disposition, adverse action and mass change, and expiration; (2) providing an automatic cutoff of participation for households which have not been recertified at the end of their certification period by reapplying and being determined eligible for a new period (7 CFR sections 272.10(b)(1)(iii) and 273.10(f) and (g)); and, (3) generating data necessary to meet Federal issuance and reconciliation reporting requirements.

Audit Objective - Determine whether the State administering agency's ADP system for food stamps is meeting the requirements to: (1) accurately and completely process and store all case file information for eligibility determination and benefit calculation; (2) automatically cut off households at the end of their certification period unless recertified; and, (3) provide data necessary to meet Federal issuance and reconciliation reporting requirements.

Suggested Audit Procedures

Because of the diversity of ADP systems, both hardware and software, it is not practical for the Compliance Supplement to provide suggested audit procedures to address each system. However, the auditor should test the ADP system to ascertain if the system:

(1) Accurately and completely processes and stores all case file information for eligibility determination and benefit calculation.

(2) Automatically cuts off households from food stamps at the end of their certification period unless the household is recertified.

(3) Provides data necessary to meet Federal issuance and reconciliation reporting requirements. Note: This testing should be coordinated with the testing of Special Reporting (see III.L.1).

2. EBT Reconciliation

Compliance Requirement - States that use Electronic Benefit Transfer (EBT) must have systems in place to reconcile all of the funds entering into, exiting from, and remaining in the system each day. This includes a reconciliation of the State's issuance files of postings to recipient accounts with the EBT contractor. States (generally through the EBT contractor that operates the EBT system) must also have systems in place to reconcile retailer credit activity as reported through the banking system to client transactions maintained by the processor and to the funds drawdown from the Federal Reserve Bank (FRB). States should maintain audit trails that document the cycle of client transactions from posting to point-of-sale transactions at retailers through settlement of retailer credits. The financial and management data that comes from the EBT processor is reconciled by the State to the Food Stamp Program issuance files and settlement data to ensure that benefits are authorized by the State and that funds have been properly drawn down. States may only draw Federal funds for authorized transactions, i.e., supported by entry of a valid personal identification number (PIN) (7 CFR 274.12(j)(1)).

Audit Objective - Determine whether the State reconciles retailer activity to client transactions and to drawdown activity from the FRB.

Suggested Audit Procedures

a. Verify that the State has a system in place to reconcile total funds entering into, exiting from, and remaining in the system each day.

b. Select and test a sample of reconciliation(s) to verify that discrepancies are followed up and resolved. This is generally a contractor duty.

c. Verify that the State has a system in place to reconcile retailer credits against the information entered into the Automated Clearinghouse network and to the amount of funds drawn down by State or the State's fiscal agent (the EBT contractor).

d. Determine if the State or its contractor have recorded any non-Federal liabilities in the daily EBT reconciliation, i.e., transactions which cannot be charged to the program. If so, verify that the non-Federal liabilities were funded by non-Federal sources (i.e., the State or the contractor).

3. Issuance Document Security

Compliance Requirement - The State is required to maintain adequate security over, and documentation/records for, Authorization to Participate (ATP) cards, other documents authorizing issuance, EBT cards (7 CFR section 274.12(h)(3)), and the food stamp coupons themselves to prevent: coupon theft, embezzlement, loss, damage, destruction; unauthorized transfer, negotiation, or use of coupons; and alteration or counterfeiting of coupons and other documents authorizing issuance (7 CFR sections 274.7(b) and 274.11(c)).

Audit Objective - Determine whether the State maintains security over instruments used to authorize issuance of food stamp benefits.

Suggested Audit Procedures

a. Observe the physical security over food stamps, ATP cards, EBT cards, and/or other negotiable instruments used in the issuance process.

b. Verify that food stamp coupons, ATP cards, and EBT cards returned from the Postal Service are returned to inventory or destroyed.

4. Physical Inventory

Compliance Requirement - Each coupon issuer and bulk storage point that distributes food stamps is required to prepare a Food Coupon Accountability Report (FNS-250) to report monthly coupon issuance and inventory (7 CFR section 274.4(b)). Each State agency must assure that day-to-day operations of all coupon issuers comply with regulations by performing a triennial on-site review, including physical inventory, of each coupon issuer and bulk storage site under its direction (7 CFR section 274.1(c)).

Audit Objective - Determine whether the State agency has conducted required triennial on-site reviews, including physical inventories, at coupon issuers and bulk storage points.

Suggested Audit Procedures

Determine by inquiry or inspection of records that the State agency conducts the required triennial reviews of coupon issuers and bulk storage points to ensure physical inventories are appropriate, inventories are made as required, and differences between recorded and actual inventories are reconciled.

5. Food Coupon Inventory Levels

Compliance Requirement - State agencies must monitor the coupon inventories of coupon issuers and bulk storage points to ensure that inventories are neither excessive nor insufficient to meet the issuance needs and requirements. Inventory levels are not to exceed a "six-month supply," taking into account coupons on hand and on order (7 CFR section 274.7(a)(1)). State agencies must review the FNS-250 and other reports including shipping and transfers, returned and/or replaced mail-issuances, improperly manufactured or mutilated coupons, and reports of shortage or overage of food coupon books to ensure the accuracy of monthly inventories, compliance with required inventory levels, and accuracy and reasonableness of coupon orders.

Audit Objective - Determine whether food stamp coupon levels are neither excessive nor insufficient to meet the issuer's requirements.

Suggested Audit Procedures

Verify that the State agencies determine that inventory levels at coupon issuers and bulk storage points are neither excessive nor insufficient to meet the issuance needs and requirements, and that inventory levels do not exceed a six-month supply, taking into account coupons on hand and on order.

6. Quality Control Unit

Compliance Requirement - The State or local government must establish a quality control unit that is independent of program operations (7 CFR section 275.2(b)).

Audit Objective - Determine whether the quality control unit is organizationally independent of program operations.

Suggested Audit Procedures

Ascertain that the quality control unit is organizationally independent of program operations.

UNITED STATES DEPARTMENT OF AGRICULTURE

CFDA 10.553 SCHOOL BREAKFAST PROGRAM (SBP)

CFDA 10.555 NATIONAL SCHOOL LUNCH PROGRAM (NSLP)

CFDA 10.556 SPECIAL MILK PROGRAM FOR CHILDREN (SMP)

CFDA 10.559 SUMMER FOOD SERVICE PROGRAM FOR CHILDREN (SFSPC)

I. PROGRAM OBJECTIVES

The objectives of the child nutrition cluster programs are to: (1) assist States in administering food services that provide healthful, nutritious meals to eligible children in public and non-profit private schools, residential child care institutions, and summer recreation programs; and (2) encourage the domestic consumption of nutritious agricultural commodities.

II. PROGRAM PROCEDURES

General Overview

The programs included in this cluster are authorized by the National School Lunch Act (NSLA) (42 USC 1751 et. seq.) and the Child Nutrition Act (CNA) (42 USC 1771 et. seq.). The implementing guidance for each program is included in parts of 7 CFR as indicated: National School Lunch Program (NSLP), part 210; School Breakfast Program (SBP), part 220; Special Milk Program for Children (SMP), part 215; and, Summer Food Service Program for Children (SFSPC), part 225.

At the Federal level, these programs are administered by the Food and Nutrition Service (FNS) of the U.S. Department of Agriculture (USDA). FNS generally administers these programs through grants to State agencies. Each State agency, in turn, enters into agreements with subrecipient organizations for local level program operation and the delivery of program benefits and services to eligible children. The types of organizations that receive subgrants under each program are described below under "Program Descriptions." In cases where a State agency is not permitted or is not available to administer the program(s), they are administered directly by FNS regional offices. The regional offices then perform the administrative functions for local program operators that are normally performed by a State agency (7 CFR sections 210.3, 220.3, 215.3, and 225.3). For purposes of this discussion, State agencies and FNS regional offices are referred to collectively as "administering agencies."

Under 7 CFR Part 250 (Food Distribution), USDA makes donated agricultural commodities available for use in the operation of all child nutrition programs except the SMP. FNS enters into agreements with State distributing agencies for the distribution of USDA donated commodities. The State distributing agencies, in turn, enter into agreements with local program operators which are defined collectively as "recipient agencies." A State may designate a recipient agency to perform its storage and distribution duties. A State distributing agency may engage a commercial food processor to use the commodities in the manufacture of food products, and then deliver such manufactured products to recipient agencies.

Program Descriptions

Common Characteristics

The programs in the child nutrition cluster are all variants of a basic program design having the following characteristics:

a. Local program operators provide prepared meals to children in structured settings. Four categories of meal service may be authorized: breakfast, lunch, supplements (snacks), and supper. Milk service may be authorized only under the SMP. The categories a particular program operator may offer are determined first by the respective program's authorizing statute and regulations, and second by the program operator's agreement with its administering agency.

b. While all children in attendance are entitled to receive these program benefits, children whose households meet stated income eligibility criteria generally receive their meals (or milk, where applicable) free or at a reduced price. With certain exceptions, children not eligible for free or reduced price meals or free milk must pay the full prices for these items.

c. Federal assistance to local program operators takes the form of cash reimbursement. In addition, USDA donates food (commodities) under 7 CFR part 250 for use in preparing meals to be served under the NSLP, SBP, and SFSPC.

d. To obtain cash and commodity assistance, a local program operator must submit monthly claims for reimbursement to its administering agency. All meals (and half-pints of milk under SMP) claimed for reimbursement must meet Federal requirements and be served to eligible children.

e. The program operator's entitlement to reimbursement payments is generally computed by multiplying the number of meals (and/or half-pints of milk under the SMP) served by a prescribed per-unit payment rate (called a "reimbursement rate"). Different reimbursement rates are prescribed for different categories and types of service. "Type" refers to the kind of service (breakfast, lunch, milk, etc.), while "category" refers to the beneficiary's eligibility (free, reduced price, or paid). Under this formula, a local program operator's entitlement to funding from its administering agency is generally a function of the categories and types of service provided. Therefore, the child nutrition cluster programs are said to be "performance funded."

Characteristics of Individual Programs

The program-specific variants of this basic program model are outlined below.

a. School Nutrition Programs (NSLP and SBP) - These programs target children enrolled in schools. For program purposes, a "school" is a public or non-profit private school of high school grade or under, or a public or licensed non-profit residential child care institution. At the local level, a school food authority (SFA) is the entity with which the administering agency makes an agreement for the operation of the programs. A SFA is the governing body (such as a school board) responsible for the operation of the NSLP and/or SBP in one or more schools. A school operated by a SFA may be approved to serve breakfast and lunch. A school in which the SFA operates an after-school care program and which meets additional criteria at 7 CFR 210.10(n)(1) may also be approved to serve supplements. See also the description of the SMP, below.

b. SFSPC - The SFSPC is directed toward children in low-income areas when school is closed for vacation. It is locally operated by approved sponsors, which may include public or private non-profit SFAs, public or private non-profit residential summer camps, or units of local, municipal, county or State governments or other private non-profit organizations that develop a special summer or other school vacation program providing food service similar to that available to children during the school year under the NSLP and SBP.

A feeding site under a sponsor's oversight may be approved to serve breakfast, lunch, supplements, and/or supper. Except for children enrolled in participating summer camps, all participating children receive their meals free. Participating summer camps must identify children eligible for free or reduced price meals and may charge those not income-eligible for free meals. Sponsors are reimbursed for operating (meal service) costs at the lesser of the performance funding formula outlined above or actual costs incurred (7 CFR section 225.9(d)(6)), except that participating summer camps can receive reimbursement only for meals served to children identified as income-eligible for free and reduced price meals (7 CFR 225.6(e)(6). In addition, sponsors receive payment for administrative costs under a formula described at 7 CFR section 225.9(d)(7).

Although USDA donated foods are made available under the SFSPC, they are restricted to sponsors that prepare the meals to be served at their sites and those that have entered into an agreement with a SFA for the preparation of meals.

c. SMP - The SMP provides milk to children in schools and child care institutions that do not participate in other Federal meal service programs. However, schools operating the NSLP and/or SBP may also participate in the SMP to provide milk to children in half-day pre-kindergarten and kindergarten programs where children do not have access to the NSLP and SBP. A SFA or institution operating the SMP as a pricing program (See "Pricing of Program Meals," below) may elect to serve free milk but there is no Federal requirement that it do so. The SMP has no reduced price benefits (7 CFR part 215).

Meal Charges

There are two systems of charging for the program meals, "pricing" and "nonpricing" programs (7 CFR sections 245.10, and 225.6(c)(3)).

Pricing Programs

Pricing programs are those in which enrolled children who do not qualify for free meals are charged separate fees for their meals. Pricing may be: direct payment from the child at the time each meal is served; a separate daily, weekly, or monthly food charge or meal ticket payment; a portion of the tuition payment specifically earmarked for food service; or, an identifiable reduction from the standard tuition rate for meals provided by parents. A meal must be priced as a unit. Meal prices are set by the SFA or sponsor.

Nonpricing Programs

In a nonpricing program, no separate charges are made for meals served to enrolled children. Examples of organizations that often operate nonpricing programs include juvenile detention centers, boarding schools, and some private schools.

Funding of Benefits and State Administrative Costs

FNS furnishes funds to State agencies by letter of credit. The State agencies use the funds to support program operations by SFAs and institutions under their oversight, and to fund their own administrative costs. Funding for FNS regional office-administered programs is handled through FNS's Agency Financial Management System (AFMS).

Funding Program Benefits

FNS provides cash assistance (called national average payments) to each State agency for each meal served under the NSLP, SBP, and SFSPC and for each half pint of milk served under the SMP. A basic level of cash assistance is provided for each meal/milk served. Additional assistance is provided for each free or reduced price meal served to an eligible child. For example, FNS provides a basic, "general cash assistance" payment from funds made available under Section 4 of the NSLA for every lunch served under the NSLP, and an additional "special assistance" payment from NSLA Section 11 funds for each such lunch served free or at reduced price. Free milk is funded at the lesser of the national average payment rate or actual costs.

State agencies earn commodity assistance based on the number of program meals served in schools participating in the NSLP and for certain sponsors participating in the SFSPC. The State agency's level of commodity assistance is the product of the number of meals served in the preceding year multiplied by the national average payment for donated foods.

FNS adjusts the national average payment rates annually for NSLP, SBP, and SFSPC to reflect changes in the Consumer Price Index and for the SMP to reflect changes in the Producer Price Index. FNS adjusts commodity assistance rates annually to reflect changes in the Price Index for Food Used in Schools and Institutions (7 CFR sections 210.4(b), 220.4(b), 215.1, and 225.9(d)(8)).

A State agency uses the cash assistance obtained through performance funding to reimburse participating SFAs and sponsors for eligible meals served to eligible persons. Like "national average payments" to States, reimbursement payments are also made on a per-meal (performance funding) basis. SFAs and SFSPC sponsors receive commodities to the extent they can use them for program purposes; however, certain types of products are limited by an entitlement.

Funding State-Level Administrative Costs

In addition to funding for reimbursement payments to SFAs and sponsors, State agencies receive funding from several sources for costs they incur to administer these programs.

a. State Administrative Expense (SAE) Funds - These funds are granted under CFDA 10.560, which is not included in the child nutrition cluster.

b. SFSPC State Administrative Funds - In addition to regular SAE grants, administrative funds are made available to State agencies under CFDA 10.559 to assist with administrative costs of the SFSPC (7 CFR section 225.5). The State agency must describe its intended use of the funds in a Program Management and Administrative Plan submitted to FNS.

Participant Eligibility and Program Benefits

Eligible Population

The child nutrition cluster programs exist to serve children. The specific classes of children eligible to receive meals under each program are identified in the respective program's regulations as follows: NSLP - 7 CFR section 210.2; SBP - 7 CFR section 220.2; SMP - 7 CFR section 215.2; and SFSPC - 7 CFR section 225.2.

a. School Nutrition Programs (NSLP and SBP) - A "child" is defined as: (1) a student of high school grade or under (as determined by the State educational agency) enrolled in an educational unit of high school grade or under, including students who are mentally or physically handicapped (as determined by the State) and who are participating in a school program established for the mentally or physically handicapped; (2) a person who has not reached his/her twenty-first birthday and is enrolled in a public or non-profit private residential child care institution; or (3) for meal supplements served in after-school care programs operated by an eligible school, a person who is 12 years of age or under, or children of migrant workers and children with disabilities who are not more than 15 years of age (7 CFR sections 210.2 and 220.2).

b. SFSPC - A "child" is defined as: (1) any person 18 years of age and under; and (2) a person over 18 years of age, who has been determined by the State educational agency or a local public educational agency to be mentally or physically handicapped, and who participates in a public or non-profit private school program established for the mentally or physically handicapped (7 CFR section 225.2).

c. SMP - Schools operating this program use the same definition of "child" that is used in the NSLP and SBP, except for provision (3) under the definition of "child" at 7 CFR section 210.2 regarding supplements served in after-school care programs. Where the program operates in child care institutions, as defined in 7 CFR section 215.2(e), a "child" is any enrolled person who has not reached his/her nineteenth birthday (7 CFR section 215.2(e-1)).

Determining Eligibility

Generally, any child enrolled in a participating school or summer camp, or attending a SFSP feeding site, who meets the applicable program's definition of "child" may receive meals under the applicable program.

A child's eligibility for free or reduced price meals may be established by the submission of an annual application or statement which furnishes such information as family income and family size. A child's eligibility may also be established based on his/her household receiving benefits under the Food Stamp Program, Food Distribution Program on Indian Reservations (FDPIR) or Aid to Families With Dependent Children Program (AFDC) (AFDC is being replaced by "State programs funded" under part A of Title 4 of the Social Security Act, commonly referred to as the Temporary Assistance for Needy Families (TANF)) (7 CFR section 245.6). Such a household may furnish documentation of its participation in one of these programs in order to establish a member's eligibility for free or reduced price meals under a child nutrition cluster program.

Under the SMP, children of families whose income is at or below 130 percent of the poverty level are eligible to receive free milk. There is no provision for reduced price benefits.

Determining Eligibility - Exceptions

The following are exceptions to the requirement for annual determinations of eligibility for free or reduced price meals and free milk under the child nutrition cluster programs.

a. Puerto Rico and the Virgin Islands - These two State agencies have the option to provide free meals and milk to all children participating in the School Nutrition Programs, regardless of each child's economic circumstances. Instead of counting meals and milk by type, they may determine the percentage that each type comprises of the total count using statistical surveys. The survey design must be approved by FNS (7 CFR section 245.4).

b. Special Assistance Certification and Reimbursement Alternatives - Special Assistance Certification and Reimbursement Alternatives, Provisions 1, 2 and 3, are authorized by Section 11(a)(1) of the NSLA (42 USC 1759(a)(1)). Provision 1 may be used in schools where at least 80 percent of the children enrolled are eligible for free or reduced price meals. Under Provision 1, eligibility determinations for free meals under the School Nutrition Programs must only be made every other year.

For Provisions 2 and 3, extended cycles are allowed for eligibility determinations. Since the schools also use alternative counting and claiming procedures, descriptions of Provisions 2 and 3 are included in the next section under "Claiming - Exceptions."

c. SFSP Open Sites - Determinations of individual household eligibility are not required for meals served free at SFSP "open sites." See III.E.3.a for more information.

Claiming Reimbursement for Meals Served

To receive reimbursement payments for meals served to eligible persons, a SFA or sponsor must submit a monthly claim for reimbursement to its administering agency. The claiming process is described below.

Claiming - General Process

At a minimum, a claim must include the number of reimbursable units served by category and type during the month covered by the claim. All meals (and milk under the SMP) claimed for reimbursement must meet Federal requirements; must be served to persons eligible for the applicable category and type of service; and be supported by accurate meal counts and records.

a. School Nutrition Programs - The following types of service may be authorized for schools participating in these programs: breakfast, lunch, supplement if the school operates an after-school care program, and milk if the SFA operates the SMP for children who do not have access to the NSLP and SBP. All claims must be supported by accurate meal counts by category and type taken at the point of service or developed through an approved alternative procedure (7 CFR sections 210.7, 210.8, 220.9, and 220.11).

b. SFSPC - The meals that may be claimed under the program are: breakfast, lunch, supper, and supplement. Food service sites other than camps and sites which primarily serve migrant children may claim either: one meal each day, a breakfast, a lunch, or supplement; or two meals each day, if one is a lunch and the other is a breakfast or a supplement (7 CFR section 225.16(b)(4)). Camps or sites which serve meals primarily to migrant children may serve three meals or two meals and one supplement (The Personal Responsibility and Work Opportunity Reconciliation Act of 1996, Public Law 104-193, amended section 13(b)(2) of the NSLA).

Claiming - Exceptions

As noted under "Determining Eligibility - Exceptions," above, schools operating the School Nutrition Programs under Special Provisions 2 and 3 may use alternative counting and claiming procedures. Under either provision, the schools must serve free meals to all children regardless of income eligibility for program benefits; and the SFA must make up the difference between Federal program assistance and the cost of the free, reduced price and paid meals from sources other than Federal funds.

a. Special Provision 2 - Provision 2 has a three year cycle for annual notification and certification for free and reduced price meals. In the first year, schools must take daily counts of the number of meals served by meal type and establish the percentage of meals served by type each month. In the second and third school years, schools must count only the total number of meals served each month; the monthly percentages established in the first year are then applied to the counts taken in the corresponding months of the current year. At the end of three years, the cycle may be extended for another two years if the State determines that the economic condition of the community has not improved. Additional five-year extensions may be approved on the same basis (Section 111 of Public Law 103-448, the Healthy Meals for Healthy Americans Act of 1994).

b. Special Provision 3 - Provision 3, authorized by Section 111 of Public Law 103-448, has a four year cycle and is available for schools with high percentages of children eligible for free and reduced price meals. Cash reimbursement and commodity assistance are provided at the same level as the school received in the last year free and reduced price applications were taken and daily meal counts by category and type were made, adjusted for inflation and enrollment. Schools opting for this alternative are not required to make annual free and reduced price eligibility determinations or take daily meal counts. Free and reduced price eligibility determinations and daily meal counts by income category are only required during a base year which is not included as part of the four year cycle. Provisions exist for authorizing subsequent four-year extensions if the economic status of enrolled children has not improved.

III. COMPLIANCE REQUIREMENTS

In developing the audit procedures to test compliance with the requirements for a Federal program, the auditor should first look to Part 2, Matrix of Compliance Requirements, to identify which of the 14 types of compliance requirements described in Part 3 are applicable and then look to Parts 3 and 4 for the details of the requirements.

A. Activities Allowed or Unallowed

1. Reimbursement for Meals

To be eligible for Federal reimbursement, meals must be served to eligible children and must be supported by accurate meal counts and records indicating the number of meals served by category and type. For the NSLP and SBP, meal count and claiming systems must comply with the requirements of 7 CFR sections 210.7, 210.8, 220.9, and 220.11, respectively. Requirements for meal reimbursement under the SFSPC are set forth under 7 CFR section 225.9(d).

2. Reimbursement for Sponsor Administrative Costs

SFSPC - Sponsor reimbursement is provided for central-level general administrative overhead, including such costs as site monitoring, preparation of claims and reports, and audits. Payment to sponsors for administrative costs will be the lesser of: actual net expenses incurred for administrative costs; or the number of meals by type actually served to eligible children multiplied by the administrative rates for those meals; or the administrative budget that was approved by the administering agency and included in the program agreement, along with any approved amendments to it (7 CFR 225.9(d)(7)).

E. Eligibility

1. Eligibility for Individuals

a. School Nutrition Programs - Eligible persons from households with incomes at or below 130 percent of the Federal poverty level are eligible to receive meals or milk free under the School Nutrition Programs. Persons from households with incomes above 130 percent but at or below 185 percent of the Federal poverty level are eligible to receive reduced price meals. Persons from households with incomes exceeding 185 percent of the poverty level pay a full price for the meals. In addition to being published in the Federal Register, income eligibility information is published on the USDA Food and Nutrition Service Home page (http://www.usda.gov/fcs/fcs.htm) under Child Nutritions Programs, Income Eligibility Guidelines. Meal prices are set by the SFA. However, the maximum price for a reduced price lunch or breakfast is $0.40 and $0.30, respectively. Under the SMP, children of households whose income is at or below 130 percent of the poverty level are eligible to receive free milk. There is no provision under the SMP for reduced price benefits (7 CFR section 245.2(g); sections 9(b)(1) and 17(c)(4) of the NSLA, 42 USC 1758 (b)(1) and 42 USC 1766(c)(4); sections 3(a)(6) and 4(e) of the CNA of 1966, 42 USC 1772(a)(6) and 1773(e); and 7 CFR section 245.3).

b. SFSPC - Free and reduced price eligibility requirements for the SFSPC are set forth in 7 CFR sections 225.15(f).

2. Eligibility for Group of Individuals or Area of Service Delivery - Not Applicable

3. Eligibility for Subrecipients

Administering agencies may disburse program funds only to those organizations that meet eligibility requirements. Under the NSLP, SBP and SMP, this means the definition of "School Food Authority" (SFA) as described at 7 CFR sections 210.2, 215.2, and 220.2., respectively. Eligible SFSPC organizations are described at 7 CFR section 225.2 under the definition of "Sponsor." Additional organizational eligibility requirements apply to the SFSPC at the feeding site level (see detail below).

a. SFSPC - There are three categories of sites eligible to provide service under the SFSPC:

(1) Open Sites - Open sites must have aggregate data for their geographic area showing that 50 percent or more of the children in the area are eligible for free or reduced price meals. Sources for the eligibility information may include: (a) schools which maintain free and reduced price eligibility data and serve the same area, (b) census data, or (c) other statistical data, such as Food Stamp Program participation.

(2) Enrolled Sites - Enrolled sites may be established on an exception basis to reach isolated pockets of poverty. The sponsor does this by collecting data (income eligibility statements) from enrolled children showing that at least 50 percent are eligible for free or reduced price meals.

(3) Camps - Summer camps comprise the sole exception to the general site-based eligibility requirement. While sponsors of open or enrolled sites receive reimbursement payments for all meals served regardless of attending children's household income, sponsors of camps are reimbursed only for meals served to eligible children whose household income is at or below 185 percent of the poverty level. Therefore, camps must collect income eligibility statements to support meals claimed in accordance with 7 CFR sections 225.14(d) and 225.6(b)(8).

b. SBP - Severe Need Schools - In addition to the national average payment, FNS makes additional payments for breakfasts served to children qualifying for free or reduced price meals at schools that are in severe need. The administering agency must determine whether a school is eligible for severe need reimbursement based on the following eligibility criteria: (1) the normal reimbursement rate per meal established by the Secretary of Agriculture is insufficient to cover the costs of the school's breakfast program; (2) the school is participating in or desiring to initiate a breakfast program; and (3) 40 percent or more of the lunches served to students at the school in the second preceding school year under the NSLP were served free or at a reduced price. Administering agencies must maintain on file, and have available for reviews and audits, their eligibility criteria for determining the severe need schools and the source of the data to be used in making individual determinations. The administering agency is also responsible for establishing systems for determining breakfast costs (7 CFR section 220.9(e)).

G. Matching, Level of Effort, Earmarking

1. Matching

NSLP - State Revenue Matching Requirement

The State is required to contribute State appropriated funds amounting to at least 30 percent of the funds it received under Section 4 of the NSLA in the school year beginning July 1, 1980, unless otherwise exempted by 7 CFR section 210.17. In the fall of each year, FNS furnishes each State with a report giving data for the State's use in determining its matching requirements. However, the State revenues derived from the operation of the NSLP and State revenues expended for salaries and administrative expenses of the NSLP at the State level are not considered in this computation. In States with per capita income lower than the national average, the 30 percent match is proportionately reduced (sections 7(a)(1)and (2) of the NSLA, and 7 CFR section 210.17(a)).

a. Private School Exemption - States that are prohibited by law from disbursing State appropriated funds to non-public schools are not required to match "General Cash Assistance" (Section 4) funds expended for meals in such schools, or to disburse to such schools any of the State revenue required to meet the matching requirements. Also, the matching requirements do not apply to schools in which the program is administered by a FNS Regional office (7 CFR section 210.17(b)).

b. Applicable State Revenues - State revenues, appropriated or used specifically for program purposes, are eligible for meeting the matching requirement. States use a number of methods to apply funds toward the matching requirement. For example, they may: (1) disburse such funds directly to SFAs, generally on a per-meal basis; (2) pay bills that SFAs would otherwise have had to pay themselves (such as FICA payments for school food service workers); and (3) track State-appropriated funds that SFAs have indirectly applied to the program through transfers from their general funds to their school food service funds (7 CFR section 210.17(d)).

2. Level of Effort - Not Applicable

3. Earmarking - Not Applicable

L. Reporting

1. Financial Reporting

a. SF-269, Financial Status Report - Applicable

b. SF-270, Request for Advance or Reimbursement - Applicable

c. SF-271, Outlay Report and Request for Reimbursement for Construction Program - Not Applicable

d. SF-272, Federal Cash Transactions Report - Not Applicable

e. FNS-13, Annual Report of State Revenue Matching (OMB No. 0584 - 0075) - This report is due 120 days after the end of each school year and identifies the State revenues to be counted toward meeting the State revenue matching requirement (7 CFR section 210.17(g)).

Key Line Item: Line 5.

2. Performance Reporting - Not Applicable

3. Special Reporting

A State agency administering one or more of the child nutrition cluster programs compiles the data gathered on its subrecipients' claims for reimbursement into monthly reports to its FNS regional office. Such reports present the number of meals served, by category and type, by schools or sponsors under the State agency's oversight during the report month.

An initial monthly report, which may contain estimated participation figures, is due 30 days after the close of the report month. A final report containing only actual participation data is due 90 days after the close of the report month. A final close-out report is also required, in accordance with the FNS close out-schedule. Revisions to the data presented in a 90 day report must be submitted by the last day of the quarter in which they are identified. However, the State agency must immediately submit an amended report if, at any time following the submission of the 90 day report, identified changes to the data cause the State agency's level of funding to change by more than (plus or minus) 0.5 percent. The specific reports for each program are described below.

a. FNS-10, Report of School Program Operations (OMB No. 0584-0002) - This report captures meals served under the NSLP and SBP, and half-pints of milk served under the SMP (7 CFR sections 210.5(d), 210.8, 215.10, 215.11, 220.11, and 220.13).

Key Line Items: Items 5 - 11.

b. FNS-418, Report of the Summer Food Service Program for Children (OMB No. 0584-0280) - This report documents the number of meals served under the SFSPC by sponsors under the State agency's oversight. Unlike the FNS-10 and FNS-44, which are generally submitted year round, the FNS-418 is filed only for the months when the program is in operation (7 CFR sections 225.8(b) and 225.9(d)(5)).

Key Line Items: Part A - Meals Served, Items 5 - 19.

M. Subrecipient Monitoring

State agencies administering the programs included in the Child Nutrition Cluster are required to perform specific monitoring procedures in accordance with 7 CFR 210.18 (SBP and NSLP), 7 CFR 215.11 (SMP), and 7 CFR 225.7 (SFSPC).

N. Special Tests and Provisions

1. Verification of Free and Reduced Price Applications (NSLP)

Compliance Requirement - By December 15th of each school year, the SFA (or State in certain cases) must verify the current free and reduced price eligibility of households selected from a sample of applications that it has approved for free and reduced price meals, unless the SFA is otherwise exempt from the verification requirement. The verification sample size is based on the total number of approved applications on file on October 31th (7 CFR section 245.6a(a)).

A State agency may, with FNS approval, assume from SFAs under its jurisdiction the responsibility for performing the verifications. If the SFA performs the verification function it must be in accordance with instructions provided by the State agency. The SFA must follow-up on children determined ineligible for free and reduced price meals and change the category of such children determined ineligible.

SFAs (or State agencies) must select the sample by:

a. Random sampling (the lesser of three percent or 3000 of the approved applications on file, all randomly selected) or

b. Focused sampling, in which the SFA must verify a sample that is, at a minimum, the sum of:

1. The lesser of one percent or 1000 of the total number of approved applications (both income and categorical) selected from households claiming income within $100 monthly or $1200 annually of the income eligibility guidelines for free and reduced price meals; and

2. The lesser of .5 percent or 500 of the total number of applications that were approved based on categorical eligibility, selected from applications with a Food Stamp Program, FDPIR, or AFDC case number (AFDC is being replaced by TANF).

Sources of information for verification include written evidence, collateral contacts, and systems of records, as described in 7 CFR 245.6a(b).

Audit Objective - Determine whether the SFA (or State) selected and verified the required sample of approved free and reduced price applications.

Suggested Audit Procedures

a. Obtain the current family size and income guidelines published by FNS.

b. Through examination of documentation, ascertain that the sampling and verification of free and reduced price applications were performed, as required.

2. Accountability for Commodities

Compliance Requirement - Accurate and complete records shall be maintained with respect to the receipt, distribution/use, and inventory of donated foods including end products processed from donated foods. Failure to maintain records required by section 250.16 shall be considered prima facie evidence of improper distribution or loss of donated foods, and the agency, processor, or entity is liable for the value of the food or replacement of the food in kind (7 CFR sections 250.16(a)(6) and 250.15(c)). Distributing and recipient agencies shall take a physical inventory of all storage facilities. Such inventory shall be reconciled annually with the storage facility's inventory records and maintained on file by the agency which contracted with or maintained the storage facility. Corrective action shall be taken immediately on all deficiencies and inventory discrepancies and the results of the corrective action forwarded to the distributing agency (7 CFR section 250.14(e)).

Audit Objective - Determine whether an appropriate accounting was maintained for donated food commodities, that an annual physical inventory was taken, and the physical inventory was reconciled with inventory records.

Suggested Audit Procedures

a. Determine storage facility, processing, and end use locations of all donated food commodities, including end products processed from donated foods. Determine the commodity records maintained by the entity and obtain a copy of procedures for conducting the required annual physical inventory. Obtain a copy of the annual physical inventory results.

b. Perform analytical procedures, obtain explanation and documentation for unusual or unexpected results. Consider the following:

(1) Compare receipts, usage/distribution, losses and ending inventory of donated foods for the audit period to the previous period.

(2) If auditing at the distributing agency level, compare distribution by entity for the audit period to the previous period.

(3) If auditing at the recipient agency level, compare relationship of usage of donated foods to production, meals served, or similar activity reports for the audit period to the same relationship for the previous period.

c. Ascertain the validity of the required annual physical inventory. Consider performing the following steps, as appropriate:

(1) Observe the annual inventory process at selected locations and recount a sample of commodity items.

(2) If the annual inventory process is not observed, select a sample of significant commodities on hand as of the physical inventory date and, using the commodity records, "roll forward" the balance on hand to the current balance observed.

(3) On a test basis, recompute physical inventory sheets and related summarizations.

(4) Ascertain that the annual physical inventory was reconciled to commodity records. Investigate any large adjustments between the physical inventory and the commodity records.

d. On a sample basis, test the mathematical accuracy of the commodity records and related summarizations. From the commodity records, vouch a sample of receipts, usage/distributions, and losses to supporting documentation. Ascertain that activity is properly recorded, including correct quantity, proper period and, if applicable, correct recipient agency.

IV. Other Information

This cluster was previously named the Nutrition Cluster in the OMB Circular A-133 Compliance Supplement (Provisional) issued in June 1997. The Child and Adult Care Food Program (CFDA 10.558) which was previously included in the Nutrition Cluster is not a part of this cluster. However, it is included as a separate program in this Supplement.

UNITED STATES DEPARTMENT OF AGRICULTURE

CFDA 10.557 SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS, AND CHILDREN (WIC)

I. PROGRAM OBJECTIVES

The objective of the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) is to provide supplemental nutritious foods, nutrition education, and referrals to health care for low-income persons during critical periods of growth and development. Such persons include low-income pregnant women, breast-feeding women up to one year postpartum, non-breast-feeding women up to six months postpartum, infants (persons under one year of age), and children under age five determined to be at nutritional risk. Intervention during the prenatal period improves fetal development and reduces the incidence of low birth weight, short gestation, and anemia.

II. PROGRAM PROCEDURES

WIC Program regulations are found in 7 CFR part 246.

Administration

The U.S. Department of Agriculture (USDA) Food and Nutrition Service (FNS) administers the WIC program through grants awarded to State health departments or comparable State agencies, Indian tribal governments, bands or intertribal councils, or groups recognized by the Bureau of Indian Affairs, U.S. Department of the Interior, or the Indian Health Service (IHS) of the U.S. Department of Health and Human Services. These WIC State agencies, in turn, award subgrants to local agencies to certify applicants' eligibility for WIC program benefits and deliver such benefits to eligible persons. Organizations eligible to serve as WIC local agencies include public or private non-profit health agencies, human service agencies which provide health services, and IHS health units.

Funding of WIC Program Costs

The WIC program is a grant program that is 100 percent federally-funded (7 CFR sections 246.16(a), (b), and (c)). No State matching requirement exists. Funds are awarded by FNS on the basis of funding formulas prescribed in the WIC program regulations.

FNS allocates federally-appropriated funds to WIC State agencies as grants which are divided into two parts: a grant for food costs and a grant for nutrition services and administrative (NSA) costs. The objectives of the food grant funding formula are to provide program stability by maintaining each State agency's prior year operating level and to encourage program growth by providing a greater share of funds to those State agencies receiving comparatively less than their fair share of funds based on their WIC eligible population. The NSA funding formula strives to preserve a reasonable measure of funding stability, while promoting funding levels that provide equivalent service to participants, and to promote incentives for reducing food costs so that more persons may be served.

Resources available to a State agency for program purposes under the two components of its initial Federal WIC formula grant may be modified by the cumulative effect of the following requirements:

Reallocations and Recoveries

The WIC program's authorizing statute and regulations require FNS to recover unspent funds and reallocate them to State agencies.

Conversion Authority

A State agency that achieves WIC participation increases under a cost containment strategy, as outlined under the "Cost Containment Requirements" section below, in excess of the increases projected by FNS in the NSA funds allocation formula, may shift a portion of its food grant component to its NSA component. This "conversion authority" is a function of the "excess" participation increase and is determined by FNS.

Spending Options

Federal legislation and regulations authorize a State agency to shift a portion of its Federal WIC formula grant between grant periods (Federal fiscal years).

Rebates

A State agency may contract with a food manufacturer to receive a rebate on each unit of the manufacturer's product purchased with food instruments (FI) redeemed by program participants. Such rebates are credits against prior expenditures made during the month in which the rebate was earned for WIC food costs. Rebates held in State accounts are exempt from the interest provisions of the Cash Management Improvement Act (CMIA), 31 USC 6501 et.seq., and 31 CFR part 205.

Vendor and Participant Collections

A State agency is authorized to retain Federal program funds recovered through claims action against vendors and participants and to use such recoveries for program purposes. Like rebates, post-payment vendor and participant collections are credits against prior expenditures for WIC food costs. Such credits may be applied to expenditures for food in the fiscal year in which the collection is received or in the fiscal year in which the food instrument resulting in the collection was issued. Pre-payment vendor collections are improper payments prevented, not recoveries of food outlays. Therefore, they represent credits to vendor billings, not prior expenditures. The State agency may credit up to 100 percent of its vendor and participant collections for NSA costs. This authority is in addition to the conversion authority related to cost containment initiatives outlined above (Section 17(f)(21) of the Child Nutrition Act of 1966, as amended (42 USC 1786(f)(21).

Program Income

Certain miscellaneous receipts a State agency collects as the result of WIC program operations are classified as program income (7 CFR 246.15).

State Funding

Although the Federal financial participation (FFP) for WIC is 100 percent, some States voluntarily appropriate funds from their own revenues to extend WIC services beyond the level that could be supported by Federal funding alone.

Certification

Applicants for WIC program benefits are screened at WIC clinic sites to determine whether they meet the eligibility criteria in the following categories: categorical, residency, income, and nutritional risk (7 CFR sections 246.7(c), (d), (e), and (g)).

Benefits

The WIC program provides participants with specific nutritious supplemental foods, nutrition education, and health services referrals at no cost. The authorized supplemental foods are prescribed from standard food packages according to the category and nutritional need of the participant. The seven food packages available are described in detail in WIC program regulations (7 CFR section 246.10). In general, infants receive iron-fortified formula, iron-fortified infant cereal, and fruit juices high in vitamin C. Participating women and children receive fortified milk and/or cheese, eggs, hot or cold cereals high in iron, fruit and vegetable juices high in vitamin C, and either peanut butter or dry beans/peas. In addition to these foods, certain breast-feeding women also receive tuna, carrots, and both peanut butter and dry beans/peas.

About 75 percent of the WIC program's annual appropriation is used to provide WIC participants with monthly food package benefits. The remainder is used to provide additional benefits and to manage the program. Additional benefits provided to WIC participants include nutrition education, breast-feeding promotion and support activities, and client services, such as diet and health assessments, referral services for other health care and social services, and coordination activities.

Food Benefit Delivery

Supplemental foods are provided to participants in any one of the following three ways (7 CFR section 246.12(b)):

Direct Distribution (used only in Mississippi and parts of Illinois)

The State agency and/or its agent purchases supplemental foods in bulk and issues them to participants at designated distribution points.

Home Delivery (used in Vermont and parts of Ohio)

Contractual arrangements with dairies provide for the delivery of supplemental foods directly to participants' homes.

Retail Purchase System (used by most States)

Negotiable food instruments (FIs) are issued directly to individual participants and the participants exchange them for authorized supplemental foods at retail stores. Two types of retail systems are used: voucher systems and check systems. In a voucher system, the vendor submits the voucher directly to the State agency for payment; in a check system, vendors deposit checks to their bank accounts and the State reimburses the banks. A participant must use an FI within 30 days of its issuance date, and the vendor must submit the FI for payment within 90 days of the issuance.

Each FI issued to a participant must have a unique serial number. The State agency is required to reconcile all redeemed FIs to issuance records (generally created at the local agency level) by serial number within 150 days of the first valid date for participant use.

A State agency must adjust previously reported obligations for WIC food costs in order to account for actual FI redemptions and other changes in the status of FIs. A State agency is also subject to claims action for the value of redeemed, unreconciled FIs. While the State agency is required to reconcile all redeemed FIs to issuance records, FNS may determine that the reconciliation process has been satisfactorily completed if certain conditions have been met. These conditions are: (1) the State can demonstrate that all reasonable management efforts were devoted to achieving 100 percent reconciliation; and (2) 99 percent or more of redeemed FIs were reconciled (7 CFR section 246.23(a)(4)).

Cost Containment Requirements

In an effort to use their food funding more efficiently, all WIC State agencies in the 50 States, the District of Columbia, Puerto Rico, Guam, the Virgin Islands, American Samoa, and most Indian Tribal State agencies have implemented cost containment activities (7 CFR sections 246.16(j) through (o)).

The Child Nutrition and WIC Reauthorization Act of 1989 (Public Law 101-147), enacted November 10, 1989, requires WIC State agencies to explore the feasibility of implementing one of four acceptable cost containment initiatives: competitive bidding, rebates, home delivery, or direct distribution. A substantial portion of WIC's participation increases is attributable to the success of cost containment measures. Reducing the average food cost per person enables WIC to reach more participants with a given amount of funds. The most successful strategy has been the negotiation of competitive rebate contracts between State agencies and infant formula companies. Such contracts provide for the State agency to receive rebates on infant formula used in the program.

State Responsibilities

A State administering the WIC program must sign a Federal/State Agreement that commits it to observe applicable laws and regulations in carrying out the program (7 CFR section 246.3(c)). Section 17 of the Child Nutrition Act of 1966 (42 USC 1786), the authorizing legislation for the WIC Program, prescribes the basic goals of the WIC program. States are required to establish an ongoing management evaluation system; to conduct monitoring reviews of each local agency at least biennially, including on-site reviews of 20 percent of the clinics in each local agency; and to monitor 10 percent of their authorized vendors annually (7 CFR section 246.12(i)). The State must also ensure corrective action is taken in response to the detection of program deficiencies and fully document the results of reviews and corrective action plans. Monitoring of local agencies encompasses evaluation of management, certification, nutrition education, civil rights compliance, accountability, financial management systems, and food delivery systems (7 CFR section 246.19(b)).

State and local agencies prepare a WIC Local Agency Directory Report (FNS-648), updated as needed, to inform FNS of additions, deletions, or address changes for the local agencies administering the WIC Program. FNS uses the data to maintain and issue a current WIC Local Agency Directory. This directory is used by FNS and State and local agencies to provide potential Program participants with the correct name, address and phone number of the nearest WIC local agency. FNS also uses this information for mailings of publications and other important information.

Federal Oversight and Compliance Mechanisms

FNS oversees State operations through an organization consisting of headquarters and seven regional offices. Federal program oversight encompasses review of 11 functional areas of the program, including vendor management, management information systems, funds management, certification and eligibility, nutrition services, and food delivery/food instrument accountability. Each year FNS Regional Offices evaluate one or more of these areas or other related areas in those States that they determine are in most need of review.

Although FNS uses technical assistance extensively to promote improvements in State operation of the WIC Program, enforcement mechanisms are also present. The misuse of funds through State or local agency negligence or fraud may result in the assessment of a claim (7 CFR section 246.23(a)). Claims may be established for funds lost due to food instrument theft or embezzlements or for unreconciled food instruments (7 CFR sections 246.23(a)(2) and (4)). FNS has other mechanisms to recover other losses and the cost of negligence. For other forms of noncompliance, FNS has the authority to give notice and, if improvements do not occur, withhold administrative funds for failure to implement program requirements (7 CFR section 246.19(a)(2)).

FNS has identified the following circumstances that may be indicators of noncompliance with WIC program requirements: (1) redeemed FIs which the issuing local agencies had reported as voided or unclaimed; (2) a large number of consecutively numbered, unreconciled FIs issued by the same local agency; (3) FIs that appear to have been validly issued and used but, nevertheless, fail to match existing issuance records; and, (4) participants that redeemed all of their FIs on the same day as they were issued.

III. COMPLIANCE REQUIREMENTS

In developing the audit procedures to test compliance with the requirements for a Federal program, the auditor should first look to Part 2, Matrix of Compliance Requirements, to identify which of the 14 types of compliance requirements described in Part 3 are applicable and then look to Parts 3 and 4 for the details of the requirements.

A. Activities Allowed or Unallowed

1. Funds allocated to a State agency for food must be expended to purchase supplemental foods for participants or to redeem food instruments issued for that purpose. Funds allocated for NSA must be used for the costs incurred by the State or local agency to provide participants with nutrition education, breast-feeding promotion and support, and referrals to other social and medical service providers and to conduct participant certification, caseload management, food benefit delivery, vendor management, voter registration and program management (7 CFR sections 246.14(a) through (d)).

There are two exceptions to the preceding rules. Funds allocated for NSA costs but not needed for such costs may be applied to food costs (7 CFR section 246.14(a)(2)). Funds allocated for food costs may be applied to NSA costs as a result of exceeding participation levels projected by the Federal funding formula and/or vendor/participant collections (7 CFR sections 246.14(e) and 246.16(f)).

Under no circumstances may the WIC grant be charged for costs which are demonstrably outside the scope of the WIC program. The cost for some screening (exclusive of laboratory tests), referrals for other medical/social services, such as immunizations, prenatal (before birth)/perinatal (near the time of birth from the 28th week of pregnancy through 28 days following birth) care, well child care and/or family planning, and follow-up on participants referred for such services, may be charged to the Federal WIC grant. However, the cost of the services performed by other health care/social service providers to which the participant has been referred shall not be charged to the WIC grant. For example, the cost to screen, refer, and follow-up on immunizations for WIC participants may be charged to the WIC grant; but, the cost to administer the shot, the vaccine, and vaccine-related equipment may not be charged to the WIC grant.

2. FNS has authorized WIC State and local agencies to charge the full acquisition cost of non-computer equipment costing less than $25,000 per unit without obtaining prior FNS approval, and to allow local agencies under their oversight to do likewise. FNS regional offices retain the discretion to apply a lower dollar to an individual State agency and to the local agencies under its oversight, provided certain requirements apply and the State agency receives written notice.

ADP Projects

FNS authorizes WIC State agencies to make ADP acquisitions with a total project cost of up to $24,999 without prior FNS approval. Instead, WIC State agencies must notify the FNS Regional Office in writing of such purchases within 60 days of the expenditure or contract execution. ADP acquisitions with a total project cost of $25,000 to $499,999 require a written request for prior approval from the FNS Regional Office, including an explanation of the purchase(s), description of needs, and other information appropriate to the proposed acquisition (cost allocation, procurement documents, etc, as appropriate).

WIC State agencies are required to submit an Advanced Planning Document (APD) to request prior approval of automation acquisitions with a total project cost of $500,000 or more. Prior approval from FNS is required for such costs to be allowable charges to the WIC grant (7 CFR section 3016.22).

Purchases of other capital assets, such as buildings, land and improvements to buildings or land that materially increase their value or useful life, costing more than $5000, continue to require prior approval from FNS.

B. Allowable Costs/Cost Principles

Rebates, vendor collections (post-payment vendor collections are funds collected by the recovery of claims assessed against food vendors for errors and overcharges; pre-payment vendor collections are improper payments prevented as a result of reviews of food instruments prior to payment) and participant collections (collections for improperly issued food benefits as the result of a participant, guardian or caretaker intentionally making a false or misleading statement or withholding information) are credits against vendor billings or prior expenditures. A State agency must recognize, use, and account for these items in accordance with program regulations. A State agency's failure to do so could result in overclaims against its Federal WIC grant and in cash management problems.

C. Cash Management

The WIC program is subject to the provisions of the CMIA; however, rebates are exempt from the interest provisions of the CMIA and its implementing regulations (Section 17(h)(8)(J) of the Child Nutrition Act) (42 USC 1786(h)(8)(J).

E. Eligibility

1. Eligibility for Individuals

Applicants for WIC Program benefits are screened at WIC clinic sites to determine whether they meet the following eligibility criteria (7 CFR sections 246.7(c), (d), (e) and (g)).

a. Categorical ­ Eligibility is restricted to pregnant, postpartum, and breast-feeding women, infants, and children up to their fifth birthday (7 CFR sections 246.2 (definition of each category) and 246.7(c)).

b. Residency ­ An applicant must meet the State agency's residency requirement. Except in the case of Indian State agencies, the applicant must reside in the jurisdiction of the State. Indian State agencies may require applicants to reside within their jurisdiction. All State agencies may designate service areas for any local agency, and may require that applicants reside within the service area (7 CFR section 246.7(c)(1)).

c. Income ­ An applicant must meet an income standard established by the State agency or be determined to be automatically income-eligible based on documentation of his/her eligibility, or certain family members' eligibility, for the following Federal programs: (1) Temporary Assistance for Needy Families (formerly Aid To Families With Dependent Children); (2) Medicaid; or (3) Food Stamps, i.e., adjunctive income-eligible. State agencies may also determine an individual automatically income-eligible based on his/her eligibility for certain State-administered programs (7 CFR sections 246.2 (definition of "family"), 246.7(c), and 246.7(d)).

Income Guidelines: The income standard established by the State agency may be up to 185 percent of the income poverty guidelines issued annually by the Department of Health and Human Services or State or local income guidelines used for free and reduced-price health care. However, in using health care guidelines, the income guidelines for WIC must be between 100 and 185 percent of poverty guidelines. Local agency income guidelines may vary as long as they are based on the guidelines used for free and reduced-price health care (7 CFR section 246.7(d)(1)).

Income Determination: Except for applicants determined automatically income-eligible, income is based on gross income and other cash readily available to the family or economic unit. Certain Federal payments and benefits are excluded from the computation of income. In addition, the State agency may exclude the value of military families' off-base housing allowances but must implement such exclusion uniformly for all military families (7 CFR section 246.7(d)(2)(iv)).

At a minimum, in-stream (away from home base) migrant farm workers and their families with expired Verification of Certification cards shall meet the State agency's income standard provided that the income of the family is determined at least once every 12 months (7 CFR section 246.7(d)(2)(viii)).

An Indian State agency, or a State agency acting on behalf of an Indian local agency, may submit reliable data that proves to FNS that the majority of Indian households in a local agency service area have incomes at or below the State agency's income guidelines. In such cases, FNS may authorize the State agency to permit the use of an abbreviated income screening process whereby an applicant affirms, in writing, that its family income is within the State agency's prescribed guidelines.

State agencies may instruct local agencies to consider family income over the preceding 12 months or the family's current rate of income, whichever indicator more accurately reflects the family's income status. However, applicants in which an adult member is unemployed shall have income determined based on the period of unemployment. A State or local agency may require verification of information which it determines necessary to confirm income eligibility.

d. Nutritional Risk ­ A competent professional authority (e.g., physician, nutritionist, registered nurse, or other health professional) must determine that the applicant is at nutritional risk. Nutritional risk is defined by each State agency within broad guidelines set forth in WIC legislation and regulations. At a minimum, this determination must be based on measurement of height or length and weight, and on a hematological test for anemia. Such anemia testing is required of all applicants except infants under six months of age and, at the State or local agency's discretion, children who are determined to be within the normal range at their last certification. The determination of nutritional risk may be based on referral data provided by a competent professional authority who is not on the WIC staff (7 CFR sections 246.2 (definitions of competent professional authority and nutritional risk) and 246.7(e)).

When an applicant meets all eligibility criteria, he/she is determined by WIC clinic staff to be eligible for program benefits. Certification periods are assigned to each participant based on categorical status for women, infants, and children (7 CFR section 246.7(g)).

A WIC local agency assigns each eligible person a priority classification according to the classification system described in 7 CFR section 246.7(e)(4). A person's priority assignment reflects the severity of his/her nutritional risk. If the local agency cannot immediately place the person on the program for lack of an available caseload slot, the person is placed on a waiting list. Caseload vacancies are filled from the waiting list in priority classification order. State agencies are expected to target program outreach and caseload management efforts toward persons at greatest nutritional risk (i.e., those in the highest priority classifications).

Pregnant women are certified for the duration of their pregnancy and for up to six weeks postpartum. Breast-feeding women may be certified for six-month intervals ending with the breast-fed infant's first birthday. Infants are certified at intervals of approximately six months, except that infants under six months of age may be certified for a period extending up to the child's first birthday, provided the quality and accessibility of health care services are not diminished. Children are certified for six-month intervals ending with the month in which the child reaches the fifth birthday. Non-breast-feeding women are certified for up to six months postpartum.

2. Eligibility for Group of Individuals or Area of Service Delivery - Not Applicable

3. Eligibility of Subrecipients

A State agency may award WIC subgrants only to organizations meeting the definition of "local agency" in 7 CFR section 246.2. Such organizations are identified under "Program Procedures" above.

H. Period of Availability of Federal Funds

A State agency may spend up to 1 percent of its total WIC formula grant for food costs of the fiscal year preceding and/or food or NSA costs of the fiscal year following the fiscal year for which the grant was awarded. This feature, known as "backspend" and "spendforward," is unique to the WIC Program. Under certain conditions related to cost containment strategies, a State agency may spend forward a maximum of three or five percent and/or backspend a maximum of three percent of its formula food grant award. The three percent backspend and the three and five percent spendforward provisions incorporate, and are not in addition to the one percent backspend/spendforward provisions. A State agency's total spending options may never exceed three or five percent, as applicable, of its food grant (7 CFR section 246.16(b)(3)) (Section 17(i)(3) of the Child Nutrition Act) (42 USC 1786(i)(3)).

J. Program Income

The State agency may use current program income for costs incurred in the current fiscal year and, with the approval of FNS, for costs incurred in previous or subsequent fiscal years. Currently, the following are the only funds FNS is aware of that WIC State agencies receive that are classified as program income: (1) royalties from printed publications; (2) nominal fees, not to exceed costs, for reproducing or mailing publications, videotapes, posters, etc.; (3) interest earned on rebate funds for infant formula and other foods; and, (4) general grants not tied directly to foods redeemed, but made for inclusion of food items in a State's food package (such as certain grants from the private sector). A State agency may use program income for any combination of food and NSA costs or other costs that further the broad objectives of the program (7 CFR section 246.15(b)).

L. Reporting

1. Financial Reporting

a. SF-269, Financial Status Report - Not Applicable

b SF-270, Request for Advance or Reimbursement - Not Applicable

c. SF-271, Outlay Report and Request for Reimbursement for Construction Program - Not Applicable

d. SF-272, Federal Cash Transactions Report - Not Applicable

e. FNS-227, WIC Program Annual Closeout Report (OMB No. 0584-0427) - This report replaces the annual SF-269, Financial Status Report, as the official document used by WIC State agencies to provide the data needed by FNS to conduct the annual reconciliation and closeout of grants which is required by 7 CFR section 3016. The FNS-227 discloses WIC program funds and costs according to WIC's two grant components, food and NSA. The FNS-227 presents the status of the report year grant and costs adjusted by the spending options unique to WIC which allow a small portion of WIC grant funds to be shifted between Federal fiscal years. The FNS-227 is the State's official validation of the final status of its grant and costs for the report year.

Key Line Items - The following line items contain critical information:

1. Line 9 Gross Outlays and Unliquidated Obligations For Report Year Program Costs - reflects the total of the State agency's outlays and unliquidated obligations for report year WIC program costs.

2. Line 10a Rebates - reflects the total annual credit to the Federal grant as a result of rebates collected.

3. Line 10b Program Income - reflects the total amount of gross income received by the State directly generated by a grant-supported activity, or earned only as a result of the grant agreement during the grant period.

4. Line 10c Vendor/Participant Collections - reflects the amount of post-payment vendor collections (i.e., funds collected by the recovery of claims assessed against food vendors for errors and overcharges) and participant collections. Pre-payment vendor collections are not reported in this line as they represent credits to vendor billings, not credits to gross expenditures. Participant collections are funds collected for improperly issued food benefits as the result of a participant, guardian or caretaker making a false or misleading statement or withholding information.

f. FNS-227A, Addendum to WIC Program Annual Closeout Report - NSA Expenditures (OMB No. 0584-0427) - The FNS-227A is prepared annually by State agencies to report (1) NSA expenditures by function for the fiscal year being closed out (2) the method by which NSA expenditures were charged as indirect costs, and (3) the method by which the indirect cost amount was determined. FNS uses the amounts reported in nutrition education and breast-feeding promotion and support, two of the four functional categories on the FNS-227A, to determine whether the State agencies met the statutory minimum spending level for those functions.

Key Line Items - The following line items and columns contain critical information for State-level activities.

1. Line 5a Federal Outlays - Column (03) - State-Level Nutrition Education -represents total outlays and unliquidated obligations made for State-level nutrition education costs supported by Federal grant funds and program income.

2. Line 5a Federal Outlays - Column (04) - State-Level Breast-feeding Promotion and Support - represents total outlays and unliquidated obligations made for State-level breast-feeding promotion and support costs supported by Federal grant funds and program income.

3. Line 5b State Outlays - Column (03) - State-Level Nutrition Education -represents total outlays and unliquidated obligations made for State-level nutrition education costs supported by State-appropriated funds plus the dollar value of any in-kind contributions received from any Federal, State or local funding source.

4. Line 5b State Outlays - Column (04) - State-Level Breast-feeding Promotion and Support - represents total outlays and unliquidated obligations made for State-level breast-feeding promotion and support costs supported by State-appropriated funds plus the dollar value of any in-kind contributions received from any Federal, State or local funding source.

Key Line Items - The following line items and columns contain critical information for local-level activities - Outlays and unliquidated obligations made by local agencies or made by the State agency for local clinics or other units in local communities which directly provide benefits to participants.

1. Line 5a Federal Outlays - Column (07) - Local-Level Nutrition Education - represents total outlays and unliquidated obligations made for local-level nutrition education costs supported by Federal grant funds and program income.

2. Line 5a Federal Outlays - Column (08) - Local-Level Breast-feeding Promotion and Support - represents total outlays and unliquidated obligations made for local-level breast-feeding promotion and support costs supported by Federal grant funds and program income.

3. Line 5b State outlays - Column (07) - Local-Level Nutrition Education -represents total outlays and unliquidated obligations made for local-level nutrition education costs supported by State-appropriated funds plus the dollar value of any in-kind contributions received from any Federal, State or local funding source.

4. Line 5b State outlays - Column (08) - Local-Level Breast-feeding Promotion and Support - represents total outlays and unliquidated obligations made for local-level breast-feeding promotion and support costs supported by State-appropriated funds plus the dollar value of any in-kind contributions received from any Federal, State or local funding source.

(Refer to 7 CFR section 246.14(c))

g. FNS-498, WIC Monthly Financial Management and Participation Report (OMB No. 0584-0045) - A State agency is required to submit monthly financial and program performance (participation) data (7 CFR section 246.25(b)).

Each WIC State agency uses the FNS-498 to report projected and actual Federal food expenditures and participation for each month of the fiscal year. Participation for any given month equals the number of individuals who received supplemental foods or food instruments during that month plus the number of infants who received no supplemental foods or food instruments, but were breast-fed by participating women during that month.

The FNS-498 also reports actual NSA expenditures and unliquidated obligations and the source of funds available to support both food and NSA expenditures. The reporting of State-supported food expenditures and participation is optional. The States and FNS use this information for program monitoring, funds management, budget projections, monitoring caseload, policy development, and responding to requests from Congress and the interested public.

Key Line Items - The following line items contain critical information:

1. Line 1 Gross Obligation - reflects the amount of money, net of vendor and participant collections and program income, used to fund food outlays that a State agency estimates it will spend for each month's food orders or FI issuances.

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2. Line 2 Estimated Rebate - reflects the amount of money that a State agency estimates it will receive for rebates.

3. Line 4 Actual Outlays - reflects the amount of payments for redeemed food instruments or the total amount of redeemed documents approved by the WIC program for payment, minus vendor and participant collections and program income used to fund food outlays for the report month. The State's WIC program food cost ledger account should support this amount.

4. Line 5 Rebates Billed - reflects the dollar value of bills or invoices submitted by the State to food manufacturers, such as infant formula companies, for rebate payments.

5. Line 11 Total Federal Participation - reflects the actual number of federally-supported participants for elapsed months. The participation counts should be supported by FI issuance records and participant files.

6. Line 16c Total Year-to-Date Administrative Costs - reflects cumulative year-to-date payments made for WIC program NSA costs incurred up to the report month minus those payments funded with program income.

2. Performance Reporting - Not Applicable

3. Special Reporting - Not Applicable

N. SPECIAL TESTS AND PROVISIONS

1. One-to-One Reconciliation

Compliance Requirement - A State agency must reconcile all redeemed FIs to issuance records within 150 days of the FI's first valid date for participant use. The State agency must determine whether each redeemed FI was: (1) validly issued and validly used; (2) used after being lost, stolen, or voided; (3) validly issued but used outside its valid use dates; (4) used pursuant to a duplicate issuance (either two FIs bearing the same serial number or a participant receiving duplicate benefits); or, (5) otherwise not matching issuance records. State agencies generally do this by analyzing computer reports that provide detailed issuance and redemption information on each FI redeemed (7 CFR section 246.12(n)(1)).

Audit Objective - Determine whether the State agency's FI reconciliation process complies with the one-to-one reconciliation requirement.

Suggested Audit Procedures

a. Obtain an understanding of the State agency's process for reconciling redeemed FIs. At a minimum, this includes determining how the State agency:

(1) Identifies the ultimate disposition of every redeemed FI; and

(2) Follows up on redeemed FIs that cannot be matched with valid issuances (State agencies do this by contacting the issuing local agencies and by other means).

b. Determine whether written guidance on how to follow up on unreconciled FIs exists for local agencies.

c. Determine through inspection of reconciliation reports that the State agency:

(1) Reconciled its records to issued FIs on a one-to-one basis within the 150 day time frame set by regulation;

(2) Followed-up on FIs that were not validly issued and validly used, in order to determine their ultimate disposition;

(3) Obtained explanations for identified discrepancies; and

(4) Adjusted its accounting records and external reports in order to reflect the results of the reconciliation process.

d. Using State agency reconciliation reports for one or more months of the audit period, verify the State agency's non-reconciliation rate. The non-reconciliation rate should not exceed one percent. The State agency should use the following steps in performing the non-reconciliation rate calculation:

(1) Determine total FIs redeemed

(2) Determine total redeemed FIs initially identified as unreconciled (listed as redeemed with no record of issuance on exception report)

(3) Determine total redeemed FIs finally identified as unreconciled (after follow-up with local agencies/clinics)

(4) Calculate the unreconciled rate (#3 divided by #1)

(5) Calculate total value of FIs redeemed

(6) Calculate total value of FIs finally identified as unreconciled

2. Management Evaluations

Compliance Requirement - State agencies must establish an ongoing management evaluation system which includes at least the monitoring of local agency operations, the review of local agency financial and participation reports, the development of corrective action plans, the monitoring of the implementation of corrective action plans, and on-site visits. Monitoring of the local agencies shall include evaluation of management, certification, nutrition education, civil rights compliance, accountability, financial management systems, and food delivery systems. These reviews must be conducted on each local agency at least once every two years, including on-site reviews of a minimum of 20 percent of the clinics in each local agency or one clinic, whichever is greater (7 CFR section 246.19(b)).

Audit Objective - Determine whether the State agency has conducted the required local agency management reviews and that the local agency management reviews cover the required areas.

Suggested Audit Procedures

a. Ascertain that the State agency conducts the required local agency management reviews, including on-site visits of a minimum of 20 percent of the clinics in each local agency or one clinic, whichever is greater.

b. Ascertain that the local agency management reviews include required areas.

UNITED STATES DEPARTMENT OF AGRICULTURE

CFDA 10.558 CHILD AND ADULT CARE FOOD PROGRAM (CACFP)

I. PROGRAM OBJECTIVES

The CACFP assists States, through grants-in-aid and donated foods, to initiate and maintain non-profit food service programs for eligible children and adults in nonresidential day care settings.

II. PROGRAM PROCEDURES

General Overview

The CACFP is authorized at section 17 of the National School Lunch Act (42 U.S.C. 1766), as amended. Program regulations are issued by the U.S. Department of Agriculture (USDA) and codified at 7 CFR part 226.

USDA's Food and Nutrition Service (FNS) administers the CACFP through grants to States. The program is administered within most States by the State educational agency. In a few States, it is administered by an alternate agency, such as the State department of health or social services. At the discretion of the Governor, different agencies within a State may administer the program's child care and adult day care components. In Virginia, the CACFP is directly administered by the FNS Mid-Atlantic Regional Office (MARO). For purposes of this discussion, State agencies and the MARO are referred to collectively as "administering agencies."

CACFP benefits consist of nutritious meals and snacks served to eligible children and adults who are enrolled for care at participating child care centers, adult day care centers, outside-school-hours care centers, and family and group day care homes. These entities are discussed in more detail below. Child and adult day care centers and outside-school-hours care centers (often referred to collectively in this discussion as "centers") may operate independently under agreements with their administering agencies, or they may participate under the auspices of sponsoring organizations. Day care homes may participate only through sponsoring organizations. An entity with which an administering agency enters into an agreement for the operation of the CACFP, be it an independent center or a sponsoring organization, is known as an "institution."

A sponsoring organization usually does not provide child care services itself. Rather, it assumes administrative and financial responsibility for CACFP operations in centers and day care homes under its sponsorship. In that capacity, sponsoring organizations generally pass Federal funds received from their administering agencies through to their homes and centers; in some cases, however, sponsoring organizations provide meals to their centers in lieu of cash reimbursement.

Child Care Centers

Eligible child care centers include public, private non-profit, and proprietary child care centers, Head Start programs, and other entities which are licensed or approved to provide day care services. Proprietary child care centers may participate in the CACFP if at least 25 percent of their participants are funded under Title XX of the Social Security Act.

Adult Day Care Centers

Public, private non-profit, and proprietary adult day care facilities which provide structured, comprehensive services to nonresidential adults who are functionally impaired, or aged 60 and older, may participate in CACFP. Proprietary adult day care centers may be eligible for CACFP if at least 25 percent of their participants receive benefits under Title XIX or Title XX of the Social Security Act.

Outside-School-Hours Care Centers

Outside-school-hours care centers include public, private non-profit, and proprietary organizations, licensed or approved to provide nonresidential child care services to enrolled children outside of school hours. Proprietary organizations may participate as outside-school-hours care centers if at least 25 percent of their participants are funded under Title XX of the Social Security Act.

Day Care Homes

A family or group day care home is a private home licensed or approved to provide day care services. As noted above, the provider of such services must sign an agreement with a sponsoring organization to participate in CACFP; a day care home cannot enter into an agreement directly with the administering agency.

Program Funding

Federal assistance to institutions takes the form of cash reimbursement for meals served, and USDA donated commodities or cash in lieu of commodities. An institution's entitlement to cash reimbursement is generally computed by multiplying the number of meals served, by category and type, by prescribed per-unit payment rates called "reimbursement rates." For meals served in centers, "category" refers to the economic need of the child or adult to whom a meal is served; such meals are categorized as paid, reduced price, or free. Meals served in day care homes are categorized by the tiering structure (tier I or II) described under "Participant Eligibility and Program Benefits," below. "Type" refers to the kind of meal service for which the institution seeks reimbursement (breakfast, lunch, supplement, supper). Under this formula, an institution's entitlement to funding from its administering agency is a function of the categories and types of services provided. An institution establishes its entitlement to reimbursement payments by submitting monthly claims for reimbursement to its administering agency.

Independent centers, sponsors of centers, and sponsors of day care homes may be approved to claim reimbursement for up to two reimbursable meals (breakfast, lunch or supper) and one snack, or two snacks and one meal, each day. The specific types of meals for which an institution may claim reimbursement payments are stated in its agreement with its administering agency.

In addition to cash assistance, USDA makes donated commodities or cash-in-lieu of commodities available for use by institutions in operating the CACFP (7 CFR section 226.5). FNS enters into agreements with State distributing agencies for the distribution of commodities to CACFP institutions; the distributing agencies, in turn, enter into agreements with the institutions. The distributing agency may be the CACFP administering agency or a separate State agency.

Documentation Requirements

An institution operating the CACFP must have procedures in place to collect and maintain the documentation required at 7 CFR section 226.15(e). Examples of such documentation includes: the institution's application and supporting documents submitted to its administering agency; records of enrollment of each CACFP participant; records supporting the free and reduced price eligibility determinations for children and adults enrolled in centers and for providers' children in day care homes; daily records indicating the number of children and adults in attendance and the number of meals served by type and category; copies of receipts, invoices and other records of CACFP costs and income required by the administering agency; copies of claims for reimbursement submitted to the administering agency; and documentation of non-profit operation of food service.

Participant Eligibility and Program Benefits

Eligible Population

7 CFR section 226.2 describes who may receive CACFP meal benefits.

Children means "(a) persons 12 years of age and under, (b) children of migrant workers 15 years of age and under, and (c) mentally or physically handicapped persons, as defined by the State, enrolled in an institution or a child care facility serving a majority of persons 18 years of age and under."

Adult participant means "a person enrolled in an adult day care center who is functionally impaired ... or 60 years of age or older." The adult component of CACFP is targeted to individuals who remain in the community and reside with family members. Individuals who reside in institutions are not eligible for CACFP benefits.

Determining Eligibility for Free and Reduced Price Meals - Centers

While an independent center or sponsoring organization of centers receives Federal cash reimbursement for all meals served in centers, it receives enhanced levels reimbursement for meals served to children and adults who meet income eligibility criteria for free or reduced price meals stated at 7 CFR section 226.23. Participants from households with incomes at or below 130 percent of poverty are eligible for free meals; and participants in centers with household incomes between 130 percent and 185 percent of poverty are eligible for meals at a reduced price. Institutions must determine each enrolled participant's eligibility for free and reduced price meals.

A participant's eligibility may be established by submission of an income eligibility statement which provides information about family size and income. The information submitted by each household is compared with USDA's published Income Eligibility Guidelines. In addition to being published in the Federal Register, income eligibility information is published on the USDA Food and Nutrition Service Home page (http://www.usda.gov/fcs/fcs.htm) under Child Nutritions Programs, Income Eligibility Guidelines.

This procedure is modified for children and adults who are categorically eligible for free and reduced price meals by virtue of their participation in certain other programs. For children, such programs include the Food Stamp Program, Food Distribution Program on Indian Reservations (FDPIR), or State programs funded through Temporary Assistance for Needy Families (TANF). Categorically eligible adults include those who receive Food Stamp Program, FDPIR, Supplemental Security Income (SSI), or Medicaid benefits. Categorically eligible participants must indicate on the income eligibility statement the other program for which they are eligible. No income eligibility statement is required for children participating in the Head Start Program, nor is any eligibility determination required beyond documenting their participation in Head Start (7 CFR section 226.23(e)).

Determining Eligibility - Day Care Homes

A tiering structure prescribed by program regulations forms the basis for meal reimbursement payments to sponsoring organizations of day care homes. A home is classified as tier I or tier II, depending on the home's location or the provider's income eligibility.

Tier I day care homes are those that are located in low-income areas, or those for which the provider's household income is at or below 185 percent of the Federal income poverty guidelines. Sponsoring organizations may use census block group data or elementary school free and reduced price enrollment data to determine which areas are low-income (7 CFR section 226.15 (e)(3)).

Tier II homes are those family day care homes which do not meet the location or provider income criteria for a tier I home. Per-meal reimbursement rates for meals served in tier II homes are lower than corresponding rates for tier I homes. The provider in a tier II home may nevertheless elect to have the sponsoring organization identify income-eligible children, so that meals served to those children who qualify for free and reduced price meals would be reimbursed at the higher tier I rate (7 CFR section 226.23(e)(1)(i)).

Meals served to a day care home provider's own children are not reimbursable unless both of the following conditions are met: (1) other, nonresidential children are enrolled and participating in the meal service; and (2) the provider's own children are determined eligible for free and reduced price meals (7 CFR section 226.18(e)).

Reimbursement Payments to CACFP Institutions

General

Institutions must submit accurate monthly claims for reimbursement to their administering agencies in accordance with 7 CFR section 226.10(c). Reimbursement is not allowed for meals served to a participant who is not enrolled for care, meals served in excess of licensed or authorized capacity, meal types that are not approved in the institution's agreement with its administering agency, meals served in excess of the maximum number of approved meal services, or meals that do not meet Federal requirements.

Meals served at proprietary centers during a calendar month when less than 25 percent of the center's enrollment or licensed capacity (whichever is less) receive Title XIX or Title XX benefits may not be claimed for reimbursement. Meals served to adults which are claimed for reimbursement under part C of Title III of the Older Americans Act may not be claimed under the CACFP.

Payments for Meals Served in Centers

The administering agency determines whether centers and sponsors of centers under its oversight shall be reimbursed solely according to the meals-times-rates formula outlined above, or at the lesser of meals-times-rates or actual, documented costs. Several variants on the meals-times-rates formula are available. They include: (1) reporting actual meal counts by category and type; (2) applying "blended per-meal rates" to actual counts of meals served by type; and (3) applying the center's "claiming percentage" for each category to its actual count of each type of meal served. The claiming percentage for each category is the ratio of enrolled persons eligible for meals in that category to all enrolled persons (7 CFR section 226.9).

Sponsoring organizations of centers do not receive separate reimbursement for their administrative costs parallel to that received by sponsors of family day care homes. However, such a sponsor may retain a portion of the meal reimbursement payments for such costs up to the amount approved by its administering agency.

Payments to Sponsoring Organizations of Day Care Homes

Reimbursement payments to sponsoring organizations of family day care homes consist of program (meal reimbursement) payments (7 CFR section 226.13) and administrative payments (7 CFR section 226.12).

The rates at which a sponsoring organization receives program payments for meals served in day care homes under its sponsorship are determined by the home's location or the provider's income, as described under "Participant Eligibility and Program Benefits," above. The sponsoring organization claims reimbursement for meals by category and type; with respect to day care homes, however, "category" refers to the tiering structure (tier I or tier II) rather than to an individual's income eligibility (7 CFR section 226.13(b)).

To develop the information needed to prepare a claim, the sponsoring organization requires each day care home under its sponsorship to report the number of reimbursable meals served during each claim month. The sponsoring organization collects the number of meals served, by type, from tier I homes and from tier II homes that elect not to request the sponsoring organization to make individual income eligibility determinations for enrolled children. (7 CFR 226.13(d)(1) and (2)) If a tier II day care home provider has elected to have its sponsoring organization make individual income eligibility determinations, program regulations provide several options for reporting the number of meals eligible for reimbursement at the tier I and II rates, respectively (7 CFR 226.13(d)(3)).

The reimbursement rates for lunches and suppers served in family day care homes whose sponsoring organizations have elected to receive USDA donated commodities is reduced by the value of the commodities (7 CFR section 226.13).

Sponsoring organizations of family day care homes also receive administrative funds related to the documented costs they incur in planning, organizing, and managing CACFP. They are the only CACFP institutions that may receive such assistance (7 CFR section 226.12).

Pricing of Program Meals

Institutions other than sponsoring organizations of family day care homes may charge a single fee (nonpricing program) to cover tuition, meals, and all other day care services, or they may charge separate fees for meals (pricing program). The institution must describe its pricing policy in a free and reduced price policy statement submitted to its administering agency. All day care homes and the vast majority of centers participate in CACFP as nonpricing programs, since the fees they charge cover all areas of their day care services. (7 CFR 226.23(b) and (c))

Federal Assistance to States

Program funds are provided to States through letters of credit issued under the FNS Agency Financial Management System. The States, in turn, use the funds to reimburse institutions for costs of CACFP operations, as described above, and to support State administrative expenses.

Funding Program Benefits

FNS provides a cash payment (called a "national average payment") to each State agency for each meal served under the CACFP. A State's entitlement to national average payments is determined by substantially the same performance-based formula used by administering agencies to compute reimbursement payments to institutions. From the State's standpoint, all funds received via this formula are pass-through funds that the State must use for reimbursement payments to institutions under its oversight.

FNS adjusts the national average payment rates on July 1 of each year. National average payments for meals served in centers are adjusted to reflect changes in the Food Away From Home series of the Consumer Price Index. Adjustments in national average payments for meals served in day care homes are adjusted on the basis of changes in the Food at Home series of the Consumer Price Index.

The State's level of commodity assistance or cash in lieu of commodities is based on the numbers of lunches and suppers served in centers in the preceding year, multiplied by the national average payment for donated foods. Commodity assistance rates are also adjusted every July 1, to reflect changes in the Food Used in Schools and Institutions series of the Consumer Price Index.

Funding State-Level Administrative Costs

FNS makes State Administrative Expense (SAE) funds available to State agencies for administrative expenses incurred in supervising and giving technical assistance to institutions participating in CACFP. SAE requirements are prescribed at 7 CFR part 235.

Additional funds are also available to States to help State agencies and institutions comply with Federal audit requirements, and to fund costs associated with performing administrative reviews of institutions after the audit requirements have been met. A State receives such assistance in an amount equal to two percent of the payments FNS made to the State for CACFP meal reimbursement to institutions during the second fiscal year preceding the year for which the funds are to be made available. These funds are therefore known as "two percent audit funds."

III. COMPLIANCE REQUIREMENTS

In developing the audit procedures to test compliance with the requirements for a Federal program, the auditor should first look to Part 2, Matrix of Compliance Requirements, to identify which of the 14 types of compliance requirements described in Part 3 are applicable and then look to Parts 3 and 4 for the details of the requirements.

A. Activities Allowed or Unallowed

1. Reimbursement for Meals

To be eligible for Federal reimbursement, meals must be served to eligible children or adults, and must be supported by accurate meal counts and records indicating the number of meals served by category and type. Requirements for meal reimbursement payments are contained in 7 CFR sections 226.11 and 226.13.

2. Reimbursement for Sponsoring Organization's Administrative Costs

a. Sponsoring Organizations of Day Care Homes

In addition to their meal reimbursement payments, sponsoring organizations of family day care homes may receive reimbursement for administrative costs of planning, organizing, and managing the food service under the CACFR (7 CFR section 226.2). The formula a State must use to determine a sponsoring organization's entitlement to payments is also described in III.G.3., Earmarking.

b. Sponsoring Organizations of Centers

There is no provision for sponsoring organizations of centers to receive separate reimbursement for administrative costs. However, such a sponsoring organization may retain a portion of its meal reimbursement payments for such costs if authorized to do so by the management plan approved by its administering agency under 7 CFR 226.6(f)(2)).

3. Use of Reimbursements

Reimbursements shall be used solely for the conduct of the food service operation or to improve such food service operations, principally for the benefit of the enrolled participants (7 CFR 226.15(e)(12).

C. Cash Management

A sponsoring organization must disburse advance and meal reimbursement payments to centers and day care homes under its sponsorship within five working days of their receipt from its administering agency (7 CFR sections 226.16(g) and (h)).

E. Eligibility

1. Eligibility for Individuals

Free and reduced price eligibility requirements for are set forth in 7 CFR section 226.23.

2. Eligibility for Group of Individuals or Area of Service Delivery - Not Applicable

3. Eligibility for Subrecipients

Administering agencies may disburse CACFP funds only to those organizations that meet the eligibility requirements stated in the following program regulations: (a) generic requirements for all institutions at 7 CFR section 226.15; (b) additional requirements for sponsoring organizations at 7 CFR section 226.16; (c) additional requirements for child care centers (whether independent or sponsored) at 7 CFR section 226.17; (d) additional requirements for day care homes (which must be sponsored) at 7 CFR section 226.18; (e) additional requirements for outside-school-hours centers at 7 CFR section 226.19; and (f) additional requirements for adult day care centers (whether independent or sponsored) at 7 CFR section 226.19a.

G. Matching, Level of Effort, Earmarking

1. Matching - Not Applicable

2. Level of Effort - Not Applicable

3. Earmarking

Administrative cost reimbursement to sponsoring organizations of day care homes is limited to the lesser of the following factors on a cumulative year-to-date basis: (a) the sponsoring organization's approved administrative budget; (b) actual administrative costs less income to the program; or (c) the appropriate monthly rates per home, multiplied by the number of operating homes in each month. In addition, during any fiscal year, administrative payments to a sponsoring organization may not exceed 30 percent of the total amount of administrative payments and program (meal reimbursement) payments for day care home operations (7 CFR section 226.12(a)).

L. Reporting

1. Financial Reporting

a. SF-269, Financial Status Report - Applicable

b. SF-270, Request for Advance or Reimbursement - Applicable

c. SF-271, Outlay Report and Request for Reimbursement for Construction Program - Not Applicable

d. SF-272, Federal Cash Transactions Report - Not Applicable

2. Performance Reporting - Not Applicable

3. Special Reporting

FNS-44, Report of the Child and Adult Care Food Program (OMB No. 0584-0078) - This report documents the number of meals served under the CACFP (7 CFR section 226.7(d)). A State agency administering the program compiles the data gathered on its subrecipients' claims for reimbursement into monthly reports to its FNS regional office. Such reports present the number of meals served, by category and type, in institutions under the State agency's oversight during the report month.

An initial monthly report, which may contain estimated participation figures, is due 30 days after the close of the report month. A final report containing only actual participation data is due 90 days after the close of the report month. A final close-out report is also required, in accordance with the FNS close-out schedule. Revisions to the data presented in a 90 day report must be submitted by the last day of the quarter in which they are identified. However, the State agency must immediately submit an amended report if, at any time following the submission of the 90 day report, identified changes to the data cause the State agency's level of funding to change by more than (plus or minus) 0.5 percent.

Key Items are Parts A and E.

M. Subrecipient Monitoring

The administering agency is responsible to monitor the institution's non-profit status to ensure that all reimbursements shall be used solely for the conduct of the food service operation or to improve such food service operations, principally for the benefit of the enrolled participants (7 CFR 226.7(b)).

The administering agency is required to assess institutional compliance by performing reviews of independent centers, sponsoring organizations of centers, and sponsoring organizations of day care homes, including reviews of new organizations, in accordance with a schedule prescribed in 7 CFR section 226.6(l).

N. Special Tests and Provisions

1. Accountability for Commodities

Compliance Requirement - Accurate and complete records shall be maintained with respect to the receipt, distribution/use, and inventory of donated foods including end products processed from donated foods. Failure to maintain records required by 7 CFR section 250.16 shall be considered prima facie evidence of improper distribution or loss of donated foods, and the agency, processor, or entity is liable for the value of the food or replacement of the food in kind (7 CFR sections 250.16(a)(6) and 250.15(c)). Distributing agencies and institutions shall take a physical inventory of all storage facilities. Such inventory shall be reconciled annually with the storage facility's inventory records and maintained on file by the agency which contracted with or maintained the storage facility. Corrective action shall be taken immediately on all deficiencies and inventory discrepancies and the results of the corrective action forwarded to the distributing agency (7 CFR section 250.14(e)).

Audit Objective - Determine whether an appropriate accounting was maintained for donated food commodities, that an annual physical inventory was taken, and the physical inventory was reconciled with inventory records.

Suggested Audit Procedures

a. Determine storage facility, processing, and end use locations of all donated food commodities, including end products processed from donated foods. Determine the commodity records maintained by the entity and obtain a copy of procedures for conducting the required annual physical inventory. Obtain a copy of the annual physical inventory results.

b. Perform analytical procedures, obtain explanation and documentation for unusual or unexpected results. Consider the following:

(1) Compare receipts, usage/distribution, losses and ending inventory of donated foods for the audit period to the previous period.

(2) If auditing at the distributing agency level, compare distribution by entity for the audit period to the previous period.

(3) If auditing at the institution level, compare relationship of usage of donated foods to production, meals served, or similar activity reports for the audit period to the same relationship for the previous period.

c. Ascertain the validity of the required annual physical inventory. Consider performing the following steps, as appropriate:

(1) Observe the annual inventory process at selected locations and recount a sample of commodity items.

(2) If the annual inventory process is not observed, select a sample of significant commodities on hand as of the physical inventory date and, using the commodity records, "roll forward" the balance on hand to the current balance observed.

(3) On a test basis, recompute physical inventory sheets and related summarizations.

(4) Ascertain that the annual physical inventory was reconciled to commodity records. Investigate any large adjustments between the physical inventory and the commodity records.

d. On a sample basis, test the mathematical accuracy of the commodity records and related summarizations. From the commodity records, vouch a sample of receipts, usage/distributions, and losses to supporting documentation. Ascertain that activity is properly recorded, including correct quantity, proper period and, if applicable, correct recipient agency.

IV. Other Information

This program was previously included in the Nutrition Cluster in the OMB Circular A-133 Compliance Supplement (Provisional) issued in June 1997.

UNITED STATES DEPARTMENT OF AGRICULTURE

CFDA 10.566 NUTRITION ASSISTANCE PROGRAM FOR PUERTO RICO

I. PROGRAM OBJECTIVES

The objective of the Puerto Rico Nutrition Assistance Program (NAP) is to help needy residents of Puerto Rico meet their nutritional needs.

II. PROGRAM PROCEDURES

Under NAP, participating households receive supplemental income in the form of checks that are issued up to twice monthly. The amount of the benefit payment depends on the household's characteristics, financial circumstances, and the funds available for distribution. The Commonwealth of Puerto Rico (PR) establishes the eligibility and benefit levels for the program.

Funds for the NAP are appropriated annually. The Food and Nutrition Service (FNS) of the USDA provides an annual grant to the PR Department of the Family to cover the full cost of program benefits and 50 percent of the costs of administering the program. As a condition of receiving the grant, PR must submit an annual plan of operation for review and approval by FNS. FNS provides monthly increments to PR's NAP letter-of-credit authorization on the basis of budget estimates contained in the approved plan. FNS also monitors program operations to assure program integrity. These monitoring activities include reviewing financial reports and making on-site management reviews of selected program operations (7 CFR sections 285.2(a) and 285.3).

USDA regulations pertaining to NAP are found in 7 CFR part 285.

III. COMPLIANCE REQUIREMENTS AND SUGGESTED AUDIT PROCEDURES

In developing the audit procedures to test compliance with the requirements for a Federal program, the auditor should first look at Part 2, Matrix of Compliance Requirements, to identify which of the 14 types of compliance requirements described in Part 3 are applicable and then look to Parts 3 and 4 for the details of the requirements.

A. Activities Allowed or Unallowed

The annual plan of operation submitted by the PR Department of the Family must include a description of PR's program for providing nutrition assistance to needy persons. The nutrition assistance PR actually provides must conform to the approved plan (7 CFR section 285.3(b)(3)).

E. Eligibility

1. Eligibility for Individuals

The PR Department of the Family is required to identify in its annual plan the population eligible for NAP benefits. In testing the propriety of eligibility determinations and disbursements for NAP benefits, the auditor shall apply the eligibility criteria established by the PR Department of the Family and identified in the annual plan (7 CFR section 285.3(b)(2)).

2. Eligibility for Group of Individuals or Area of Service Delivery - Not Applicable

3. Eligibility of Subrecipients - Not Applicable

G. Matching, Level of Effort, and/or Earmarking Requirements

1. Matching

The NAP grant provided by FNS is intended to cover 100 percent of PR's expenditures for food assistance and 50 percent of the related administrative expenses. PR must provide funds for its 50 percent share of the administrative expenses (7 CFR section 285.2(a)).

2. Level of Effort - Not Applicable

3. Earmarking - Not Applicable

H. Period of Availability of Federal Funds

Payments received by PR for a fiscal year may not exceed the amount authorized for the grant or the total NAP cost eligible for funding, whichever is less, for that fiscal year. Funds for payments for any prior fiscal year expenditures must be claimed against the funding for that fiscal year (7 CFR section 285.2(b)).

L. Reporting

1. Financial Reporting

a. SF-269, Financial Status Report - Applicable

b. SF-270, Request for Advance or Reimbursement - Not Applicable

c. SF-271, Outlay Report and Request for Reimbursement for Construction Program - Not Applicable

d. SF-272, Federal Cash Transactions Report - Not Applicable

2. Performance Reporting - Not Applicable

3. Special Reporting - Not Applicable

UNITED STATES DEPARTMENT OF AGRICULTURE

CFDA 10.568 EMERGENCY FOOD ASSISTANCE PROGRAM (ADMINISTRATIVE COSTS)

CFDA 10.569 EMERGENCY FOOD ASSISTANCE PROGRAM (FOOD COMMODITIES)

I. PROGRAM OBJECTIVES

The objective of the Emergency Food Assistance Program (TEFAP) Cluster is to provide USDA donated commodities to low-income households for home consumption, and to provide hot meals prepared from USDA donated commodities to needy persons in congregate settings. TEFAP is authorized by the Emergency Food Assistance Act of 1983 (Public Law 98-8) (7 USC 7501-16), as amended by the Hunger Prevention Act of 1988 (Public Law 100-435) and the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (Public Law 104-193). Program regulations are found at 7 CFR part 251.

II. PROGRAM PROCEDURES

The Food and Nutrition Service (FNS) of the U.S. Department of Agriculture (USDA) administers TEFAP. FNS enters into agreements with State distributing agencies for the distribution of USDA donated commodities, and provides funding for the administrative costs these organizations incur in performing this function. The State distributing agencies, in turn, enter into agreements with local program operators known as Emergency Feeding Organizations (EFOs). A State may designate an EFO to perform its storage and distribution duties. The State distributing agencies with which FNS makes agreements for the operation of TEFAP are generally the same State agencies that administer other USDA commodity programs, such as State departments of agriculture, education, etc. The commodity recipient agencies engaged by these State agencies to deliver TEFAP benefits to eligible persons may include charitable institutions, food banks, hunger centers, soup kitchens, and similar public and non-profit private entities.

USDA provides commodities to State agencies, and the State agencies arrange for their delivery to EFOs. State agencies are prohibited from charging EFOs any type of fee for providing this service (7 CFR section 251.9(d)). FNS also awards each State agency a cash grant for the administrative cost of carrying out its TEFAP food delivery and oversight functions. The State agency, in turn, may award subgrants to its EFOs and/or incur administrative costs on their behalf. The value of TEFAP entitlement commodities and the amount of administrative funds a State agency may receive are determined through an allocation formula described at 7 CFR section 251.3(d). USDA may provide bonus commodities in addition to the formula-generated entitlement commodities.

To gain access to its commodities and administrative funds, a State agency must have a distribution plan and a Federal-State Agreement on file with the applicable FNS regional office. The distribution plan gives the State agency's criteria for awarding subgrants to EFOs and for certifying households eligible for TEFAP benefits. Both the Federal-State Agreement and the State agency's agreements with its EFOs may be amended at any time due to program changes or at the request of either party.

Determinations of households' eligibility for TEFAP benefits are generally made by EFOs in accordance with the criteria and procedures established by the State agency in its distribution plan. EFOs generally issue commodities to members of eligible households in quantities suitable for meal preparation at home. They accomplish this either through food pantries or mass distributions. In the latter case, the date, time, and location of such a distribution is publicized in advance. An EFO may also use the commodities in the preparation of meals served at designated congregate feeding sites.

The locations where EFOs conduct these issuance and congregate feeding activities are known as "distribution sites." In some cases, distribution sites are operated by separate organizations as sub-subrecipients of the EFOs. Some EFOs and distribution sites use mostly paid employees to carry out their missions, while others rely heavily on the services of volunteers.

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 incorporated into TEFAP a previously separate program entitled Commodities for Soup Kitchens and Food Banks (CFDA 10.571). Activities formerly conducted under that program are now deemed TEFAP activities, and residual stocks of commodities originally made available for that program are now deemed TEFAP commodities. Accordingly, CFDA 10.571 should not appear in a State's or subrecipient's Schedule of Expenditures of Federal Awards.

III. COMPLIANCE REQUIREMENTS

In developing the audit procedures to test compliance with the requirements for a Federal program, the auditor should first look to Part 2, Matrix of Compliance Requirements, to identify which of the 14 types of compliance requirements described in Part 3 are applicable and then look to Parts 3 and 4 for the details of the requirements.

A. Activities Allowed or Unallowed

A State agency or EFO must use its administrative cost grant or subgrant for activities intrinsic to the processing, transportation, and distribution of TEFAP commodities within its State or service area (7 CFR section 251.8(d)(1)). Such activities are listed at 7 CFR section 251.8(d)(1)(i)(A) through (E). Under certain circumstances, a State agency may also use these funds for: transporting TEFAP commodities to other States; and transporting non-USDA foods in from other States (Emergency Food Assistance Act, as amended by section 871(c) of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996).

An EFO that receives USDA non-program commodities under 7 CFR part 250 as well as TEFAP commodities, may use its administrative cost subgrant for the distribution of both classes of commodities. In addition, an EFO may use its administrative funds for certain activities associated with the distribution of non-USDA foods donated by private individuals and organizations (7 CFR section 251.8(d)(ii)).

B. Allowable Costs/Cost Principles

While regulations issued under previous legislation had required State agencies and EFOs to use TEFAP administrative funds solely for direct costs, the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 expressly identified State level indirect costs as allowable costs (Personal Responsibility and Work Opportunity Reconciliation Act of 1996, section 202A(c)(1)).

E. Eligibility

1. Eligibility for Individuals

a. Receipt of Commodities for Household Use - An EFO certifies households eligible to receive TEFAP commodities for household consumption by applying income eligibility criteria established by the State agency. (7 CFR section 251.5(b)) These criteria are approved in advance by FNS as part of the State agency's distribution plan (7 CFR section 251.6(a)(1)).

b. Receipt of Prepared Meals - There is no means test for eligibility of persons receiving meals at congregate feeding sites. Their eligibility is derived from the eligibility of the organization operating the feeding site to receive and use TEFAP commodities.

2. Eligibility for Group of Individuals or Area of Service Delivery - Not applicable.

3. Eligibility for Subrecipients

To receive commodities and TEFAP administrative funds, a public or non-profit private organization must have entered into an agreement with the State agency binding it to perform the duties of an EFO (7 CFR sections 251.2(c) and 251.5(a)). The State agency's distribution plan identifies the classes of organizations with which it will enter into such agreements.

G. Matching, Level of Effort, Earmarking

1. Matching

A State agency must match each Federal dollar expended for State level TEFAP administrative costs with a dollar from non-Federal sources (7 CFR section 251.9(a)).

Exceptions - The following States are exempted from the matching requirement in any fiscal year in which their respective required matching contributions would have fallen below $200,000: American Samoa, Guam, the Virgin Islands, and the Commonwealth of the Northern Marianas (7 CFR section 251.9(b)).

Acceptable Matching Contributions - A State agency's distribution plan must include a plan for meeting the matching requirement (7 CFR section 251.9(e)). Acceptable matching contributions include:

(a) Cash expenditures by the State agency for allowable State or local level TEFAP administrative costs (7 CFR section 251.9(c)(1); and

(b) Certain non-cash contributions. These may include: (1) the value of goods and services specifically identifiable with allowable State administrative costs, (2) the value of goods and services contributed by the State agency to an EFO, which are specifically identifiable with allowable local-level administrative costs; and (3) the value of third-party in-kind contributions, provided such contributions support functions meeting criteria stated in the program regulations (7 CFR section 251.9(c)(2)).

2. Level of Effort - Not Applicable

3. Earmarking

A State agency must use at least 40 percent of its TEFAP administrative cost grant for EFO-level costs. The State agency may do this by awarding subgrants directly to EFOs, and/or by incurring costs the EFOs would otherwise have had to pay themselves (7 CFR section 251.8(d)(3)).

L. Reporting

1. Financial Reporting

a. SF-269, Financial Status Report - Not Applicable

b. SF-270, Request for Advance or Reimbursement - Not Applicable

c. SF-271, Outlay Report and Request for Reimbursement for Construction Programs - Not Applicable

d. SF-272, Federal Cash Transactions Report - Not Applicable

e. FCS-667, Report of Storage and Distribution Costs (TEFAP) (OMB No. 0584-0385) - This report captures the status of a State's TEFAP administrative cost grant in a manner that identifies the portions applied to State level costs, costs paid by the State on behalf of EFOs, and costs paid by the EFOs themselves. It thus facilitates the monitoring of a State's compliance with the State matching and 40 percent pass-through requirements. The State agency requires EFOs under its oversight to submit any information it deems necessary to complete this report (7 CFR section 251.10(d)).

Key line items - The following line items contain critical information.

1. Line c. - Net Outlays to Date

2. Line f. - Total State Agency's Share of Net Outlays

3. Line k. - Total Federal Share

2. Performance Reporting - Not Applicable

3. Special Reporting

FCS-155, Inventory Management Register (OMB No. 0584-0293) - The State agency uses this semiannual report to document the number of households receiving TEFAP benefits. EFOs submit whatever information the State agency deems necessary to complete the report (7 CFR section 251.10(d)(3)(i)).

Key Line Item - The following line item contains critical information: Item 5 - TEFAP Household Participation

M. Subrecipient Monitoring

A State agency must make on-site reviews of EFOs under its oversight, and of distribution sites operated by such EFOs, in accordance with its distribution plan. At a minimum, the State agency's annual review coverage must include 25 percent of its EFOs and one-third or 50 (whichever is less) of the distribution sites in the State. To the maximum extent practicable, review scheduling should enable State agency staff to observe TEFAP commodity issuance and congregate meal service operations (7 CFR section 251.10(e)).

N. Special Tests and Provisions

1. Accountability for Commodities

Compliance Requirement - Accurate and complete records shall be maintained with respect to the receipt, distribution/use, and inventory of donated foods including end products processed from donated foods. Failure to maintain records required by section 250.16 shall be considered prima facie evidence of improper distribution or loss of donated foods, and the agency, processor, or entity is liable for the value of the food or replacement of the food in kind (7 CFR sections 250.16(a)(6) and 250.15(c)). Distributing and recipient agencies shall take a physical inventory of all storage facilities. Such inventory shall be reconciled annually with the storage facility's inventory records and maintained on file by the agency which contracted with or maintained the storage facility. Corrective action shall be taken immediately on all deficiencies and inventory discrepancies and the results of the corrective action forwarded to the distributing agency (7 CFR section 250.14(e)).

Audit Objective - Determine whether an appropriate accounting was maintained for donated food commodities, that an annual physical inventory was taken, and the physical inventory was reconciled with inventory records.

Suggested Audit Procedures

a. Determine storage facility, processing, and end use locations of all donated food commodities, including end products processed from donated foods. Determine the commodity records maintained by the entity and obtain a copy of procedures for conducting the required annual physical inventory. Obtain a copy of the annual physical inventory results.

b. Perform analytical procedures, obtain explanation and documentation for unusual or unexpected results. Consider the following:

(1) Compare receipts, usage/distribution, losses and ending inventory of donated foods for the audit period to the previous period.

(2) If auditing at the distributing agency level, compare distribution by entity for the audit period to the previous period.

(3) If auditing at the EFO level, compare relationship of usage of donated foods to production, meals served, or similar activity reports for the audit period to the same relationship for the previous period.

c. Ascertain the validity of the required annual physical inventory. Consider performing the following steps, as appropriate:

(1) Observe the annual inventory process at selected locations and recount a sample of commodity items.

(2) If the annual inventory process is not observed, select a sample of significant commodities on hand as of the physical inventory date and, using the commodity records, "roll forward" the balance on hand to the current balance observed.

(3) On a test basis, recompute physical inventory sheets and related summarizations.

(4) Ascertain that the annual physical inventory was reconciled to commodity records. Investigate any large adjustments between the physical inventory and the commodity records.

d. On a sample basis, test the mathematical accuracy of the commodity records and related summarizations. From the commodity records, vouch a sample of receipts, usage/distributions, and losses to supporting documentation. Ascertain that activity is properly recorded, including correct quantity, proper period and, if applicable, correct EFO.

UNITED STATES DEPARTMENT OF AGRICULTURE

CFDA 10.570 NUTRITION PROGRAM FOR THE ELDERLY (COMMODITIES)

I. PROGRAM OBJECTIVES

The objectives of the Nutrition Program for the Elderly (NPE) is to improve the diets of elderly persons and increase the market for domestically produced foods acquired under surplus removal programs.

II. PROGRAM PROCEDURES

Section 311(a)(4) of the Older Americans Act of 1965 (OAA), as amended, (42 USC section 3030a(a)(4)) authorizes the U.S. Department of Agriculture (USDA) to donate food commodities to States for use in providing nutrition services as authorized under Title III, Part C of the OAA. FNS enters into agreements with State distributing agencies for the distribution of USDA donated commodities. The State distributing agencies, in turn, enter into agreements with local program operators known as "recipient agencies." A State may designate a recipient agency to perform its storage and distribution duties. In the case of NPE, the State distributing agencies generally distribute the commodities to area agencies on the aging, which, in turn, distribute them to local service outlets. These entities use the commodities in preparing meals to be served to eligible persons in congregate feeding sites or delivered to eligible individuals' homes.

To the extent funds are available, a State's eligibility for NPE entitlement commodities is determined by multiplying the number of meals served to eligible persons by a per-meal payment rate established by FNS. Bonus commodities are provided in addition to the State's entitlement, and do not count against it.

Under section 311(b)(1) of the OAA (42 USC section 3030a(b)(1)), a State may elect to receive any portion of its NPE entitlement in cash. The State agency on aging makes this determination, and FNS disburses the cash in lieu of NPE commodities to that State agency. The State agency, in turn, passes the cash through to area agencies on aging. Cash in lieu of NPE commodities must be used to purchase food for use in Title III elderly feeding operations.

III. COMPLIANCE REQUIREMENTS

In developing the audit procedures to test compliance with the requirements for a Federal program, the auditor should first look to Part 2, Matrix of Compliance Requirements, to identify which of the 14 types of compliance requirements described in Part 3 are applicable and then look to Parts 3 and 4 for the details of the requirements.

A. Activities Allowed or Unallowed

Commodities donated by USDA must be used in the preparation of meals served under Special Programs for the Aging, Title III, Part C (Nutrition Services). Cash paid in lieu of commodities must be used to purchase food for use in such meals (7 CFR section 250.42(c)(5)(ii)).

E. Eligibility

1. Eligibility for Individuals - Not Applicable

2. Eligibility for Area of Service Delivery - Not Applicable

3. Eligibility for Subrecipients

A State may provide USDA donated commodities and cash in lieu thereof only to area agencies on aging that operate Special Programs for the Aging under Title III, Part C of the OAA. An area agency on aging, in turn, may provide NPE assistance only to agencies that are under the jurisdiction, control, management, and audit authority of the network of State and area agencies on aging (7 CFR section 250.42(a)).

L. Reporting

1. Financial Reporting

a. SF-269, Financial Status Report - Applicable

b. SF-270, Request for Advance or Reimbursement - Not Applicable

c. SF-271, Outlay Report and Request for Reimbursement for Construction Program - Not Applicable

d. SF-272, Federal Cash Transactions Report - Not Applicable

2. Performance Reporting - Not Applicable

3. Special Reporting

FCS-586A, Monthly Report of Meal Counts for Title III Nutrition Program for the Elderly (OMB No. 0584-0293) - This report documents the number of meals served to elderly persons in congregate meal settings and by home delivery, respectively. Data gathered via this report form the basis for the State's entitlement to USDA donated commodities (and to cash in lieu thereof) under the NPE (7 CFR section 250.17(e)).

Key Line Items - The following line items contain critical information: Items 5 through 7.

M. Subrecipient Monitoring

Under 7 CFR section 250.19(b)(1), a State agency must make quadrennial reviews of each commodity recipient agency under its oversight. At least 25 percent of such agencies must be reviewed in each year of this quadrennial review cycle.

N. Special Tests and Provisions

1. Accountability for Commodities

Compliance Requirement - Accurate and complete records shall be maintained with respect to the receipt, distribution/use, and inventory of donated foods including end products processed from donated foods. Failure to maintain records required by section 250.16 shall be considered prima facie evidence of improper distribution or loss of donated foods, and the agency, processor, or entity is liable for the value of the food or replacement of the food in kind (7 CFR sections 250.16(a)(6) and 250.15(c)). Distributing and recipient agencies shall take a physical inventory of all storage facilities. Such inventory shall be reconciled annually with the storage facility's inventory records and maintained on file by the agency which contracted with or maintained the storage facility. Corrective action shall be taken immediately on all deficiencies and inventory discrepancies and the results of the corrective action forwarded to the distributing agency (7 CFR section 250.14(e)).

Audit Objective - Determine whether an appropriate accounting was maintained for donated food commodities, that an annual physical inventory was taken, and the physical inventory was reconciled with inventory records.

Suggested Audit Procedures

a. Determine storage facility, processing, and end use locations of all donated food commodities, including end products processed from donated foods. Determine the commodity records maintained by the entity and obtain a copy of procedures for conducting the required annual physical inventory. Obtain a copy of the annual physical inventory results.

b. Perform analytical procedures, obtain explanation and documentation for unusual or unexpected results. Consider the following:

(1) Compare receipts, usage/distribution, losses and ending inventory of donated foods for the audit period to the previous period.

(2) If auditing at the distributing agency level, compare distribution by entity for the audit period to the previous period.

(3) If auditing at the recipient agency level, compare relationship of usage of donated foods to production, meals served, or similar activity reports for the audit period to the same relationship for the previous period.

c. Ascertain the validity of the required annual physical inventory. Consider performing the following steps, as appropriate:

(1) Observe the annual inventory process at selected locations and recount a sample of commodity items.

(2) If the annual inventory process is not observed, select a sample of significant commodities on hand as of the physical inventory date and, using the commodity records, "roll forward" the balance on hand to the current balance observed.

(3) On a test basis, recompute physical inventory sheets and related summarizations.

(4) Ascertain that the annual physical inventory was reconciled to commodity records. Investigate any large adjustments between the physical inventory and the commodity records.

d. On a sample basis, test the mathematical accuracy of the commodity records and related summarizations. From the commodity records, vouch a sample of receipts, usage/distributions, and losses to supporting documentation. Ascertain that activity is properly recorded, including correct quantity, proper period and, if applicable, correct recipient agency.

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