PART 3 - COMPLIANCE REQUIREMENTS

The objectives of most compliance requirements for Federal programs administered by States, local governments, Indian tribal governments, and non-profit organizations are generic in nature. For example, most programs have eligibility requirements for individuals or organizations. While the criteria for determining eligibility vary by program, the objective of the compliance requirement that only eligible individuals or organizations participate is consistent across all programs.

Rather than repeat these compliance requirements, audit objectives, and suggested audit procedures, for each of the programs contained in Part 4 - Agency Program Requirements and Part 5 - Clusters of Programs, they are provided once in this part. For each program in this Compliance Supplement (this Supplement), Part 4 or Part 5 contains additional information about the compliance requirements that arise from laws and regulations applicable to each program, including the requirements specific to each program that should be tested using the guidance in this part.

The administrative requirements that apply to most programs arise from two sources: the "Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments" (also known as the "A-102 Common Rule") and OMB Circular A-110, "Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations," and the agencies' codification of OMB Circular A-110. The applicable guidance followed depends on the type of organization undergoing audit. Other administrative compliance requirements unique to a single program or a cluster of programs, are provided in the Special Tests and Provisions sections of Parts 4 and 5.

Governmentwide guidance for administering grants and cooperative agreements to States, local governments, and Indian tribal governments is contained in the A-102 Common Rule which was codified by each Federal funding agency in its volume of the Code of Federal Regulations. The A-102 Common Rule section numbers are referred to without the Federal agency's part number (e.g., §____.37 would refer to sections in all agency regulations). This allows auditors to refer to the same section numbers when discussing administrative issues with different Federal funding agencies.

These requirements apply to all grants and subgrants to governments, except where they are inconsistent with Federal statutes or with regulations authorized in accordance with the exception provision of the A-102 Common Rule. Block grants authorized by the Omnibus Budget Reconciliation Act of 1981 and several other specifically identified grants or payment programs are exempted from the A-102 Common Rule. Appendix I to this Compliance Supplement lists legislation and programs where exclusions exist.

In some cases the A-102 Common Rule permits States to follow their own laws and procedures, e.g., when addressing equipment management. These are noted in the sections that follow. The auditor will have to refer to an individual State's rules in those situations.

The major source of requirements applicable to non-profit organizations is OMB Circular A-110. The provisions of OMB Circular A-110 are codified in agency regulations, generally following the section numbers in the circular. The OMB Circular A-110 section numbers are referred to similar to the A-102 Common Rule references. However, unlike the A-102 Common Rule, agencies with OMB approval, could modify certain provisions of A-110 to meet their special needs. OMB Circular A-110 states "Federal agencies responsible for awarding and administering grants . . . shall adopt the language in the circular unless different provisions are required by Federal statute or are approved by OMB." Subpart A, §____.4, of OMB Circular A-110 states that "Federal awarding agencies may apply more restrictive requirements to a class of recipients when approved by OMB." Federal awarding agencies may apply less restrictive requirements when awarding small awards, except for those requirements which are statutory. Exceptions on a case-by-case basis may also be made by Federal awarding agencies.

Appendix II to this supplement contains a list of agencies that have codified OMB Circular A-110 and the CFR citations for these codifications.

Governmental subrecipients are subject to the provisions of the A-102 Common Rule. However, the A-102 Common Rule permits States to impose their own requirements on their governmental subrecipients, e.g., equipment management or procurement. Thus, in some circumstances, the auditor may need to refer to State rules and regulations rather than Federal requirements.

All non-profit subrecipients, regardless of the type of organization making the subaward, shall follow the provisions of OMB Circular A-110 as implemented by the agency when awarding or administering subgrants except under block grants authorized by the Omnibus Budget Reconciliation Act of 1981 and the Job Training Partnership Act where State rules apply instead.

Auditors shall consider the compliance requirements and related audit objectives in Part 3 and Part 4 or 5 (for programs included in this Supplement) in every audit of non-Federal entities conducted under OMB Circular A-133, with the exception of program-specific audits performed in accordance with a Federal agency's program-specific audit guide. In making a determination not to test a compliance requirement, the auditor must conclude that the requirement either does not apply to the particular non-Federal entity or that noncompliance with the requirement could not have a material effect on a major program (e.g., the auditor would not be expected to test Procurement if the non-Federal entity charges only small amounts of purchases to a major program). The descriptions of the compliance requirements in Parts 3, 4, and 5 are generally a summary of the actual compliance requirements. The auditor should refer to the referenced citations (e.g., laws and regulations) for the complete compliance requirements.

The suggested audit procedures are provided to assist auditors in planning and performing tests of non-Federal entity compliance with the requirements of Federal programs. Auditor judgment will be necessary to determine whether the suggested audit procedures are sufficient to achieve the stated audit objective and whether additional or alternative audit procedures are needed.

The suggested procedures are in lieu of specifying audit procedures for each of the programs included in this Supplement. This approach has several advantages. First, it provides guidelines to assist auditors in designing audit procedures that are appropriate in the circumstance. Second, it helps auditors develop audit procedures for programs that are not included in this Supplement. Finally, it simplifies future updates to this Supplement.

Because of the diversity of systems in place among non-Federal entities, Part 3 does not include suggested audit procedures to test internal control. The auditor must determine appropriate procedures to test internal control on a case by case basis considering factors such as the non-Federal entity's internal control, the compliance requirements, the audit objectives for compliance, the auditor's assessment of control risk, and the audit requirement to test internal control as prescribed in OMB Circular A-133.

The specific requirements for activities allowed or unallowed are unique to each Federal program and are found in the laws, regulations, and the provisions of contract or grant agreements pertaining to the program. For programs listed in the Compliance Supplement, these specific requirements are in Part 4 - Agency Program Requirements or Part 5 - Clusters of Programs, as applicable. This type of compliance requirement specifies the activities that can or cannot be funded under a specific program.

Determine whether Federal awards were expended only for allowable activities.

Suggested Audit Procedures

The following OMB cost principles circulars prescribe the cost accounting policies associated with the administration of Federal awards by non-profit organizations, States, local governments, and Indian tribal governments. However, for block grants authorized by the Omnibus Budget Reconciliation Act of 1981 and the Job Training Partnership Act, State rules for expenditures of State funds apply (Appendix 1). Federal awards include Federal programs and cost-type contracts and may be in the form of grants, contracts, and other agreements.

- OMB Circular A-87, "Cost Principles for State, Local and Indian Tribal Governments"

- OMB Circular A-21, "Cost Principles for Educational Institutions"

- OMB Circular A-122, "Cost Principles for Non-Profit Organizations"

States, local governments, and Indian tribal governments are subject to OMB Circular A-87. All institutions of higher education are subject to the cost principles contained in OMB Circular A-21 which incorporates the four Cost Accounting Standards Board (CASB) Standards and the Disclosure Statement (DS-2) requirements as described in paragraphs C.10 through C.14 and Appendices A and B of OMB Circular A-21. Non-profit organizations are subject to OMB Circular A-122, except those non-profit organizations listed in Attachment C of OMB Circular A-122. These non-profit organizations are not subject to OMB Circular A-122 but are subject to the commercial cost principles contained in the Federal Acquisition Regulation (FAR). Also, by contract terms and conditions, some non-profit organizations may be subject to the CASB's Standards and the Disclosure Statement (DS-1) requirements.

Federal awards administered by publicly-owned hospitals and other providers of medical care are exempt from OMB's cost principles circulars, but are subject to requirements promulgated by the sponsoring Federal agencies (45 CFR part 74, appendix E).

The cost principles applicable to a non-Federal entity apply to all Federal awards received by the entity, regardless of whether the awards are received directly from the Federal Government or indirectly through a pass-through entity.

The circulars describe selected cost items, allowable and unallowable costs, and standard methodologies for calculating indirect costs rates (e.g., methodologies used to recover facilities and administrative costs (F&A) at institutions of higher education).

The cost principles articulated in the three circulars are in most cases substantially identical but a few differences do exist. These differences are necessary because of the nature of the Federal/State/local/non-profit organization relationship, programs administered, and breadth of services offered by some grantees and not others. Exhibit 1, Selected Cost Items Not Treated the Same Among the Circulars, lists selected cost items for which treatment are not substantially identical among the cost principles circulars. Exhibit 2, Selected Unallowable Cost Items, lists selected items that are unallowable in one or more of the cost principles circulars.

The general criteria affecting allowability of costs under Federal awards are:

Indirect costs are those costs that benefit common activities and, therefore, cannot be readily assigned to a specific direct cost objective or project.

In order to recover indirect costs, organizations must prepare cost allocation plans (CAPs) which apply only to States, local and Indian tribal governments or indirect cost rate proposals (IDCRPs) in accordance with the guidelines provided in OMB's circulars. States, major local governments, Indian tribal governments, institutions of higher education, and non-profit organizations must submit CAPs or IDCRPs to the Federal cognizant agency for indirect cost negotiation for approval. Other organizations, such as smaller local governments, must prepare the appropriate CAPs or IDCRPs and maintain them on file for review. These other organizations may use the allocation methods and indirect cost rate maintained on file for cost recovery.

At institutions of higher education, indirect costs include the following categories: building and equipment depreciation or use allowance, operation and maintenance expenses, interest expenses, general administrative expenses, departmental administration expenses, library expenses, and student administration expenses.

At non-profit organizations, indirect costs generally include general administrative costs (e.g., the president's office, payroll, general accounting) and facility costs (e.g., rental costs, operations and maintenance, interest expense) that are not treated as direct costs.

The indirect cost proposals prepared by institutions of higher education and other non-profit organizations are based on the most current financial data supported by the organization's accounting system and audited financial statements. These indirect cost proposals can be used to either establish predetermined or fixed indirect cost rates, or to establish or finalize provisional rates.

There are three types of plans/proposals submitted by States, local governments, and Indian tribal governments:

At States, local governments, and Indian tribal governments, indirect costs are accumulated at two levels: the State/local-wide level and the department/agency level. At the State/local-wide level, indirect costs include: (1) central service costs that are allocated (referred to as Section I costs, which typically include general accounting, personnel, and purchasing); and, (2) central service costs that are billed (referred to as Section II costs, which typically include computer services, motor pool, insurance, and fringe benefits). Certain costs, such as facilities and operations and maintenance, can be classified as Section I or Section II costs by State/local governments.

At State or local governmental departments or agencies, where Federal awards are usually carried out, indirect costs normally include the facilities and administrative costs of each department or agency and the allocated central service costs distributed through the State/local-wide CAP. Additionally, Section II costs are direct charges to these departments or agencies. As such, these direct billings may be charged directly to Federal awards or be included in the department or agency indirect cost pools.

CAPs are comprised of two parts: a narrative section that describe the service cost center and allocation methodologies, and a mathematical allocation of these service center costs to the user departments using the described allocation methods. CAPs and IDCRPs prepared by States, local governments, and Indian tribal governments usually are prepared on a prospective basis using actual financial data for a prior year or budget data for the current year. When the actual costs for the year covered by the CAP (or a rate agreement with respect to a fixed rate) are determined, the difference between the costs recovered based on the CAP (or rate agreement) and the costs that would have been recovered had the CAP or rate agreement been based on actual results is either carried forward to a subsequent CAP or IDCRP or used to adjust individual awards on a retroactive basis, with the approval of the Federal cognizant agency for indirect cost negotiation.

Three different types of indirect cost rates can be used by the Federal cognizant agency for indirect cost negotiation: predetermined, fixed, and provisional/final. Predetermined rates are established for the current or multiple future period(s) based on current data (usually data from the most recently ended fiscal year, known as the base period). Predetermined rates are not subject to adjustment, except under very unusual circumstances. Fixed rates are based on current data in the same manner as predetermined rates, except that the difference between the costs of the base period used to establish the rate and the actual costs of the current period is carried forward as an adjustment to the rate computation for a subsequent period. Provisional rates are temporary rates used for funding and billing indirect costs, pending the establishment of a final rate for a period.

OMB Circular A-21 requires institutions of higher education that receive more than $25 million in Federal funding in a fiscal year to prepare and submit a DS-2 that describes the institution's cost accounting practices. These institutions are required to submit a DS-2 within six months after the end of the institution's fiscal year that begins after May 8, 1996, unless the institution is required to submit a DS-2 earlier due to a receipt of a cost accounting standard covered contract in accordance with 48 CFR section 9903.202-1.

These institutions are responsible for maintaining an accurate DS-2 and complying with disclosed cost accounting practices. They are also responsible for filing amendments to the DS-2 when disclosed practices are changed or modified.

Also, by contract terms and conditions, some non-profit organizations may be subject to the CASB's Standards and the DS-1 requirements.

OMB Circular A-21 requires that for large research facilities (those with construction costs of more than $10 million) of which 40 percent or more of total assignable space is expected for Federal use, an educational institution (institution) must maintain an adequate review and approval process to ensure that construction costs are reasonable. The review process shall address and document relevant factors affecting construction costs, such as:

The approval process shall include review and approval of the projects by the institution's Board of Trustees or other independent entities.

OMB Circular A-21 also requires that for research facilities costing more than $25 million, of which 50 percent or more of total assignable space is expected for Federal use, the institution must document the review steps performed to assure that construction costs are reasonable. The review should include an analysis of construction costs and a comparison of these costs with relevant construction data, including the National Science Foundation data for research facilities based on its biennial survey, "Science and Engineering Facilities at Colleges and Universities."

Determine whether the organization complied with the provisions of the applicable OMB cost principles circulars (OMB Circulars A-87, A-21, A-122) or CASB Standards as follows:

1. Direct charges to Federal awards were for allowable costs.

2. Charges to cost pools used in calculating indirect cost rates were for allowable costs.

3. For States, local governments, and Indian tribal governments, charges to cost pools allocated to Federal awards though CAPs were for allowable costs.

4. The methods of allocating the costs are in accordance with the applicable cost principles or CASB Standards and produce an equitable and consistent distribution of costs (e.g., cost allocation bases include all allowable and unallowable base costs to which allowable indirect costs are allocable and the cost allocation methodology complies with the applicable cost principles and provides equitable and consistent allocation of indirect costs to benefitting cost objectives).

5. Indirect cost rates were applied in accordance with approved rate agreements and associated billings were the result of applying the approved rate to the proper base amount(s).

6. For States, local governments, and Indian tribal governments, cost allocations were in accordance with CAPs approved by the Federal cognizant agency for indirect cost negotiation or, in cases where such plans are not subject to approval, in accordance with the plan on file.

7. Cost accounting practice disclosures, described in the DS-1 or DS-2 (including amendments), represented actual practice consistently applied. This objective only applies to non-Federal entities that are required to submit the DS-1 or DS-2.

8. The institution's review of large research facilities under construction was documented as required.

1. The following procedures apply to direct charges to Federal awards as well as to charges to cost pools that are allocated wholly or partially to Federal awards or used in formulating indirect cost rates used for recovering indirect costs from Federal awards. If the auditor identifies unallowable costs, the auditor should be aware that "directly associated costs" may have been charged. Directly associated costs are costs incurred solely as a result of incurring another cost, and would not have been incurred if the other cost had not been incurred. For example, fringe benefits are "directly associated" with payroll costs. When an unallowable cost is incurred, directly associated costs are also unallowable.

Test a sample of transactions for conformance with the following criteria contained in the "Basic Guidelines" section of applicable OMB cost principles circulars.

2. When material charges are made from internal service, central service, pension, or similar activities or funds, the auditor should verify that the charges from these activities or funds are in accordance with the applicable cost principles. The auditor should consider procedures, such as:

3. The IDCRP is based upon costs charged to cost pools representing costs of a base year. The base year often precedes the year in which the IDCRP is prepared and the year the resulting Indirect Cost Rate Agreement (IDCRA) is used to charge indirect costs. For example, a non-Federal entity may submit an IDCRP in January 1998, based upon costs incurred and charged to cost pools during fiscal year ending June 30, 1997 (1997), the base year. The resulting IDCRA negotiated during the year ending June 30, 1998 (1998) would be used as the basis for charging indirect costs to Federal awards in the year ended June 30, 1999 (1999). For this example, the term IDCRA will also include an IDCRP which is not required to be submitted to the Federal agency for indirect cost negotiation but is retained on file and is used to charge indirect costs to Federal awards the same as an approved plan resulting in an IDCRA.

An audit timing consideration is that the audit for 1997 (which covers the applicable cost pools) may be completed before the IDCRP is submitted. Therefore, as part of the 1997 audit, the auditor cannot complete testing of the IDCRP. Also, if the auditor waits to test the IDCRP until 1999 (the year when this IDCRP is first used to charge Federal awards), the auditor would be testing 1997 records, which would then be two years old.

Continuing this example, when the IDCRA is the basis for material charges to a major program in 1999, the auditor for 1999 is required to obtain appropriate assurance that the costs collected in the cost pools and allocation methods are in compliance with the applicable cost principles. The following are some acceptable options the auditor may use to obtain this assurance:

When the auditee submits the IDCRP, the auditee provides written assurances to the Federal government that the plan includes only allowable costs. Accordingly, any material unallowable costs reflected in the IDCRP should be reported as an audit finding in the year in which they are first found by audit.

An IDCRP may result in an IDCRA that covers only one year, but most often results in a multi-year IDCRA. When an IDCRP has been tested in a prior year and this testing provides the auditor appropriate audit assurance, in subsequent years the auditor is only required to perform tests to ascertain if there have been material changes to the cost accounting practices, including practices that would affect either the cost pools or the allocation base and, if so, that the Federal cognizant agency for indirect cost negotiation has been informed.

The auditor should take appropriate steps to coordinate testing of costs charged to cost pools supporting an IDCRP with the auditee and, as appropriate, with the Federal cognizant agency for indirect cost negotiation. The auditor should consider consulting with the auditee in the base year and the year in which the IDCRP is submitted to determine the best (e.g., most efficient) alternative under the circumstances.

The following procedures are applicable when material charges are made to a major program based upon an IDCRP:

4. Since costs allocated through CAPs may include current year and prior year costs, the auditor should test the costs charged to cost pools supporting CAPs and the methods of allocating costs from CAPs in each year when these costs are material to a major program. The auditor should consider the following procedures:

5. Perform the following procedures to test the application of charges to Federal awards based upon an IDCRA and a CAP.

6. Perform the following procedures for the DS-1 or DS-2, as applicable:

7. Perform the following procedures related to large research facilities:

The following two exhibits provide comparisons between the OMB cost principles circulars. Exhibit 1 lists selected cost items for which treatment are not substantially identical among the three circulars. Exhibit 2 lists selected items that are unallowable in one or more of the cost principles circulars.

Several cost items are unique to one type of entity and not to other entities (e.g., commencement & convocation costs are only applicable to universities). The numbers in parentheses refer to the cost item in the applicable circulars.

When entities are funded on a reimbursement basis, program costs must be paid for by entity funds before reimbursement is requested from the Federal Government. When funds are advanced, recipients must follow procedures to minimize the time elapsing between the transfer of funds from the U.S. Treasury and disbursement. When advance payment procedures are used, recipients must establish similar procedures for subrecipients.

Pass-through entities must establish reasonable procedures to ensure receipt of reports on subrecipients' cash balances and cash disbursements in sufficient time to enable the pass-through entities to submit complete and accurate cash transactions reports to the Federal awarding agency or pass-through entity. Pass-through entities must monitor cash drawdowns by their subrecipients to assure that subrecipients conform substantially to the same standards of timing and amount as apply to the pass-through entity.

Interest earned on advances by local government grantees and subgrantees is required to be submitted promptly, but at least quarterly, to the Federal agency. Up to $100 per year may be kept for administrative expenses. Interest earned by non-State nonprofit entities on Federal fund balances in excess of $250 is required to be remitted to Department of Health and Human Services, Payment Management System, P.O. Box 6021, Rockville, MD 20852.

Treasury regulations at 31 CFR part 205, which implement the Cash Management Improvement Act of 1990 (CMIA) (P.L. 101-453), require State recipients to enter into agreements which prescribe specific methods of drawing down Federal funds (funding techniques) for selected large programs. The agreements also specify the terms and conditions in which an interest liability would be incurred. Programs not covered by a Treasury-State Agreement are subject to procedures prescribed by Treasury in Subpart B of 31 CFR part 205 (Subpart B).

The requirements for cash management are contained in the OMB Circular 102 (Paragraph 2.a.), the A-102 Common Rule (§___.21), OMB Circular A-110 (§___.22), Treasury regulations at 31 CFR part 205, Federal awarding agency regulations, and the terms and conditions of the award.

The U.S. Treasury, Financial Management Service maintains a Cash Management Improvement Act page on the Internet (http://www.fms.treas.gov/cmia/).

Determine whether:

Note: The following procedures are intended to be applied to each program determined to be major. However, due to the nature of cash management and the system of cash management in place in a particular entity, it may be appropriate and more efficient to perform these procedures for all programs collectively rather than separately for each program.

When required by the Davis Bacon Act, the Department of Labor's (DOL) governmentwide implementation of the Davis-Bacon Act, or by Federal program legislation, all laborers and mechanics employed by contractors or subcontractors to work on construction contracts in excess of $2000 financed by Federal assistance funds must be paid wages not less than those established for the locality of the project (prevailing wage rates) by the DOL (40 USC 276a to 276a-7).

The U.S. Department of Labor, Employment Standards Administration, maintains a Davis-Bacon and Related Acts Internet page (http://www.dol.gov/dol/esa/public/programs/dbra/index.html).

Determine whether the non-Federal entity ensured that contractors and subcontractors paid prevailing wage rates for projects covered by the Davis-Bacon Act.

The specific requirements for eligibility are unique to each Federal program and are found in the laws, regulations, and the provisions of contract or grant agreements pertaining to the program. For programs listed in the Compliance Supplement, these specific requirements are in Part 4 - Agency Program Requirements or Part 5 - Clusters of Programs, as applicable. This compliance requirement specifies the criteria for determining the individuals, groups of individuals, or subrecipients that can participate in the program and the amounts for which they qualify.

Determine whether:

2. Subawards were made only to eligible subrecipients.

1. Eligibility for Individuals

2. Eligibility for Group of Individuals or Area of Service Delivery

3. Eligibility for Subrecipients

Title to equipment acquired by a non-Federal entity with Federal awards vests with the non-Federal entity. Equipment means tangible nonexpendable property, including exempt property, charged directly to the award having a useful life of more than one year and an acquisition cost of $5000 or more per unit. However, consistent with a non-Federal entity's policy, lower limits may be established.

A State shall use, manage, and dispose of equipment acquired under a Federal grant in accordance with State laws and procedures. Subrecipients of States who are local governments or Indian tribes shall use State laws and procedures for equipment acquired under a subgrant from a State.

Local governments and Indian tribes shall follow the A-102 Common Rule for equipment acquired under Federal awards received directly from a Federal awarding agency. Non-profit organizations and public institutions of higher education shall follow the provisions of OMB Circular A-110. Basically the A-102 Common Rule and OMB Circular A-110 require that equipment be used in the program which acquired it or, when appropriate, other Federal programs. Equipment records shall be maintained, a physical inventory of equipment shall be taken at least once every two years and reconciled to the equipment records, an appropriate control system shall be used to safeguard equipment, and equipment shall be adequately maintained. When equipment with a current per unit fair market value in excess of $5000, is no longer needed for a Federal program, it may be retained or sold with the Federal agency having a right to a proportionate (percent of Federal participation in the cost of the original project) amount of the current fair market value. Proper sales procedures shall be used that provide for competition to the extent practicable and result in the highest possible return.

The requirements for equipment are contained in the A-102 Common Rule (§___.32), OMB Circular A-110 (§___.34), Federal awarding agency program regulations, and the terms and conditions of the award.

Title to real property acquired by non-Federal entities with Federal awards vests with the non-Federal entity. Real property shall be used for the originally authorized purpose as long as needed for that purpose. For non-Federal entities covered by OMB Circular A-110 and with written approval from the Federal awarding agency, the real property may be used in other federally-sponsored projects or programs that have purposes consistent with those authorized for support by the Federal awarding agency. The non-Federal entity may not dispose of or encumber the title to real property without the prior consent of the awarding agency.

When real property is no longer needed for the federally-supported programs or projects, the non-Federal entity shall request disposition instructions from the awarding agency. (For purposes of this compliance requirement, the awarding agency for recipients under OMB Circular A-110 or the A-102 Common Rule and subrecipients under OMB Circular A-110 is the Federal agency providing the funding. The awarding agency for subrecipients under the A-102 Common Rule is the pass-through entity.) When real property is sold, sales procedures should provide for competition to the extent practicable and result in the highest possible return. If sold, non-Federal entities are normally required to remit to the awarding agency the Federal portion (based on the Federal participation in the project) of net sales proceeds. If retained, the non-Federal entity shall normally compensate the awarding agency for the Federal portion of the current fair market value of the property. Disposition instructions may also provide for transfer of title in which case, the non-Federal entity is entitled to compensation for its percentage share of the current fair market value.

The requirements for real property are contained in the A-102 Common Rule (§___.31), OMB Circular A-110 (§___.32), Federal awarding agency regulations, and the terms and conditions of the award.

Determine whether the:

3. Inventory Management of Equipment

4. Dispositions of Equipment

5. Dispositions of Real Property

The specific requirements for matching, level of effort, and earmarking are unique to each Federal program and are found in the laws, regulations, and the provisions of contract or grant agreements pertaining to the program. For programs listed in the Compliance Supplement, these specific requirements are in Part 4 - Agency Program Requirements or Part 5 - Clusters of Programs, as applicable.

However, for matching, the A-102 Common Rule (§____.24) and OMB Circular A-110 (§___.23) provide detailed criteria for acceptable costs and contributions. The following is a list of the basic criteria for acceptable matching:

Matching, level of effort and earmarking are defined as follows:

1. Matching

2.1 Level of Effort - Maintenance of Effort

2.2 Level of Effort - Supplement Not Supplant

3. Earmarking

Federal awards may specify a time period during which the non-Federal entity may use the Federal funds. Where a funding period is specified, a non-Federal entity may charge to the award only costs resulting from obligations incurred during the funding period and any pre-award costs authorized by the Federal awarding agency . Also, if authorized by the Federal program, unobligated balances may be carried over and charged for obligations of the subsequent funding period. Obligations means the amounts of orders placed, contracts and subgrants awarded, goods and services received, and similar transactions during a given period that will require payment by the non-Federal entity during the same or a future period (A-102 Common Rule, §___.23; OMB Circular A-110, §___.28).

Non-Federal entities subject to the A-102 Common Rule shall liquidate all obligations incurred under the award not later than 90 days after the end of the funding period (or as specified in a program regulation) to coincide with the submission of the annual Financial Status report (SF-269). The Federal agency may extend this deadline upon request (A-102 Common Rule, §___.23).

An example used by a program to determine when an obligation occurs (is made) is found under Part 4, Department of Education, CFDA 84.000 (Cross-Cutting Section).

Determine whether Federal funds were obligated within the period of availability and obligations were liquidated within the required time period.

Compliance Requirements

States, and governmental subrecipients of States, shall use the same policies and procedures used for procurements from non-Federal funds. They also shall ensure that every purchase order or other contract includes any clauses required by Federal statutes and executive orders and their implementing regulations.

Local governments and Indian tribal governments which are not subrecipients of States will use their own procurement procedures provided that they conform to applicable Federal law and regulations and standards identified in the A-102 Common Rule.

Non-profit organizations and public institutions of higher education shall use procurement procedures that conform to applicable Federal law and regulations and standards identified in OMB Circular A-110. All non-Federal entities shall follow Federal laws and implementing regulations applicable to procurements, as noted in Federal agency implementation of the A-102 Common Rule and OMB Circular A-110.

Requirements for procurement are contained in the A-102 Common Rule (§____.36), OMB Circular A-110 (§____.40 through §____.48), Federal awarding agency regulations, and the terms of the award. The specific references for the A-102 Common Rule and OMB Circular A-110, respectively are given for each procedure. (The first number listed refers to the A-102 Common Rule and the second refers to A-110.)

Non-Federal entities are prohibited from contracting with or making subawards under covered transactions to parties that are suspended or debarred or whose principals are suspended or debarred. Covered transactions include procurement contracts for goods or services equal to or in excess of $100,000 and all nonprocurement transactions (e.g., subawards to subrecipients).

Contractors receiving individual awards for $100,000 or more and all subrecipients must certify that the organization and its principals are not suspended or debarred. The non-Federal entities may rely upon the certification unless it knows that the certification is erroneous. Non-Federal entities may, but are not required to, check for suspended and debarred parties which are listed in the List of Parties Excluded From Federal Procurement or Nonprocurement Programs, issued by the General Services Administration (GSA). The information contained on the list is available in printed and electronic formats. The printed version is published monthly. Copies may be obtained by purchasing a yearly subscription from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, or by calling the Government Printing Office Inquiry and Order Desk at (202) 783-3238. The electronic version can be accessed on the Internet (http://www.arnet.gov/epls). Please note that the user will be required to record their name and organization for purposes of the Computer Matching and Privacy Act of 1988.

Requirements for suspension and debarment are contained in the Federal agencies' codification of the governmentwide debarment and suspension common rule (see Appendix II for CFR cites) which implements Executive Orders 12549 and 12689, Debarment and Suspension, and the terms of the award.

Determine whether:

Program income is gross income received that is directly generated by the federally-funded project during the grant period. If authorized by Federal regulations or the grant agreement, costs incident to the generation of program income may be deducted from gross income to determine program income. Program income includes, but is not limited to, income from: fees for services performed, the use or rental of real or personal property acquired with grant funds, the sale of commodities or items fabricated under a grant agreement, and payments of principal and interest on loans made with grant funds. Except as otherwise provided in the Federal awarding agency regulations or terms and conditions of the award, program income does not include interest on grant funds (covered under Cash Management), rebates, credits, discounts, refunds, etc. (covered under Allowable Costs/Cost Principles), or interest earned on any of them (covered under Cash Management). Program income does not include the proceeds from the sale of equipment or real property (covered under Equipment and Real Property Management).

Program income may be used in one of three methods: deducted from outlays, added to the project budget, or used to meet matching requirements. Unless specified in the Federal awarding agency regulations or the terms and conditions of the award, program income shall be deducted from program outlays. However, for research and development activities by colleges and universities and other non-profit organizations, the default method is to add program income to the project budget. Unless Federal awarding agency regulations or the terms and conditions of the award specify otherwise, non-Federal entities have no obligation to the Federal Government regarding program income earned after the end of the grant period.

The requirements for program income are found in the A-102 Common Rule (§___.21(payment) and §____.25), OMB Circular A-110 (§____.2 (program income definition), §____.22(payment), and §____.24), Federal awarding agency laws, program regulations, and the provisions of the contract or grant agreements pertaining to the program.

Determine whether program income is correctly recorded and used in accordance with the program requirements, A-102 Common Rule, and OMB Circular A-110, as applicable.

1. Identify Program Income

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

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

 Compliance Requirements

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

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

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

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

2. Property Acquisitions

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

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

5. Business Relocations -

Recipients should use the standard financial reporting forms or such other forms as may be authorized by OMB (approval is indicated by an OMB paperwork control number on the form). These other forms may include financial, performance, and special reporting. Each recipient must report program outlays and program income on a cash or accrual basis, as prescribed by the Federal awarding agency. If the Federal awarding agency requires accrual information and the recipient's accounting records are not normally maintained on the accrual basis, the recipient is not required to convert its accounting system to an accrual basis but may develop such accrual information through analysis. The awarding agency may accept identical information from the recipient in machine-readable format, computer printouts, or electronic outputs in lieu of the prescribed formats. (The open-ended entitlement programs (Appendix 1) require quarterly reports.)

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

The standard financial reporting forms are as follows:

Electronic versions of these standard forms are located on the OMB's Internet home page (http://www.whitehouse.gov/OMB).

Many recipients utilize the Payment Management System (PMS) operated by the Division of Payment Management (DPM) within the Department of Health and Human Services. After a Federal agency awards a grant, DPM is responsible for controlling payments to the recipient; receiving collections for unexpended funds, duplicate payments, audit disallowances, and interest earned on Federal funds; accounting for disbursement information provided by the recipient; and reporting data equivalent to the SF-272, Federal Cash Transaction Report, to the recipient and Federal agency.

Federal awarding agencies enter authorization amounts in PMS to allow recipients to draw Federal funds. There are three methods by which recipients can request funds: (1) the PMS 270 cash request, (2) SMARTLINK II, or (3) CASHLINE systems. SMARTLINK II enables recipients to request Federal funds through computer link with DPM, while CASHLINE allows funds to be requested via a touch tone telephone. Once a quarter, using the authorization amounts provided by the Federal agency, payments requested by recipients, cash collection activity, and disbursement information provided by recipients, DPM generates PMS 272 reports.

The PMS 272 is a series of reports consisting of:

The reports are either mailed to the recipient or electronically downloaded by the recipient using DPM's Electronic 272 System. Recipients should verify the reported amounts. If discrepancies are noted, the report is annotated (or the PMS 272-C is completed) and returned to DPM. The recipient uses the PMS 272-A to report the amount of disbursements made; then signs, dates, and returns the report to DPM. Recipients may report disbursements data electronically using the Electronic 272 process. PMS 272 reporting requirements do not apply to block grant programs; however, DPM does provide block grant recipients with a PMS 272-E, Major Program Statement, quarterly. This report is provided solely for information and no action is required by the recipient.

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

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

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

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

Reporting requirements are contained in the following documents:

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

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

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

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

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

4. Test the selected reports for completeness.

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

A pass-through entity is responsible for:

Factors such as the size of awards, percentage of the total program's funds awarded to subrecipients, and the complexity of the compliance requirements may influence the extent of monitoring procedures.

Monitoring activities may take various forms, such as reviewing reports submitted by the subrecipient, performing site visits to the subrecipient to review financial and programmatic records and observe operations, arranging for agreed-upon procedures engagements for certain aspects of subrecipient activities, such as eligibility determinations, reviewing the subrecipient's single audit or program-specific audit results and evaluating audit findings and the subrecipient's corrective action plan.

The requirements for subrecipient monitoring are contained in the A-102 Common Rule (§___.37 and §___.40(a)), OMB Circular A-110 (§___.50(a), Federal awarding agency program regulations, and the terms and conditions of the award.

Determine whether the pass-through entity:

(Note: The auditor may consider coordinating the tests related to subrecipients performed as part of Cash Management (tests of cash reports submitted by subrecipients), Eligibility (tests that subawards were made only to eligible subrecipients), and Procurement (tests of suspension and debarment certifications) with the testing of Subrecipient Monitoring.)

The specific requirements for Special Tests and Provisions are unique to each Federal program and are found in the laws, regulations, and the provisions of contract or grant agreements pertaining to the program. For programs listed in this Supplement, the compliance requirements, audit objectives, and suggested audit procedures for Special Tests and Provisions are in Part 4 - Agency Program Requirements or Part 5 - Clusters of Programs. For programs not listed in this Supplement, the auditor shall review the program's contract and grant agreements and referenced laws and regulations to identify the compliance requirements and develop the audit objectives and audit procedures for Special Tests and Provisions which could have a direct and material effect on a major program. The auditor should also inquire of the non-Federal entity to help identify and understand any Special Tests and Provisions.

Additionally, for both programs included and not included in this Supplement, the auditor shall identify any additional compliance requirements which are not based in law or regulation (e.g., were agreed to as part of audit resolution of prior audit findings) which could be material to a major program. Reasonable procedures to identify such compliance requirements would be inquiry of non-Federal entity management and review of the contract and grant agreements pertaining to the program. Any such requirements which may have a direct and material on a major program shall be included in the audit.

The Year 2000 (Y2K) problem stems from the use in many computer systems of a two-digit dating system that assumes the first two digits of the year are 1 and 9, a convention adopted years ago when coding space was a premium. Without corrective action, the systems may recognize "00" date not as 2000 but as 1900, which could cause systems to shut down or malfunction. On August 19, 1998, OMB issued an "Advisory to Federal Grantees on Responsibility to Address Year 2000 Issue," which included guidance related to Federal awards. This advisory is located under the grants management heading on OMB's Internet home page (http://www.whitehouse.gov/OMB) and a copy is also included as Appendix VI to this Supplement.

Many Federal agencies have included in the provisions of contracts and grant agreements requirements relative to the Y2K problem (e.g., the non-Federal entity should make specified progress towards becoming Y2K compliant; meet specified Y2K performance requirements; use, develop, or acquire equipment and systems that are Y2K compliant; or develop Y2K contingency plans). The auditor is not expected to plan and perform procedures to determine whether a non-Federal entity is in compliance with these Y2K compliance provisions.

However, as with any other issue affecting a non-Federal entity's ability to comply with the requirements related to Federal awards, auditors will need to consider the effect of the Y2K issue when performing tests of compliance during the audit period. This will be particularly important when the audit period or dates affecting compliance (e.g., eligibility calculations) include dates after December 31, 1999.