By Bob Durak, CPA, CGMA, Director of AICPA Center for Plain English Accounting
The Office of Management and Budget has issued information about new regulations related to entities and audits of entities that expend federal awards.
In addition, there is information about the most frequent violations found in the financial statements of governments and not-for-profit entities.
New Uniform Grant Guidance Effective
The Office of Management and Budget (OMB) has issued final guidance, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Grant Guidance). The guidance establishes uniform cost principles and audit requirements for federal awards to nonfederal entities and administrative requirements for all federal grants and cooperative agreements.
Upon the effective date of this guidance, a number of OMB circulars will be superseded, including OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations (OMB Circular A-133).
Effective Date and Timing for Nonfederal Entities. Nonfederal entities will need to implement the new administrative requirements and cost principles for all new federal awards and additional funding to existing awards (referred to as funding increments) made after Dec. 26, 2014.
Changes Affecting Audit Requirements. The changes affecting the auditor performing, and the auditee undergoing, a single audit are numerous. The requirements of OMB Circular A-133 are now found in Subpart F, Audit Requirements, of the Uniform Grant Guidance. Some of the more significant changes found in Subpart F relate to the following:
- Single audit threshold increased. Nonfederal entities that expend $750,000 (increased from $500,000) or more of federal awards in a year will be required to have a single audit or program-specific audit.
- Changes to the major program determination process:
- The minimum threshold for Type A/B major program determination increases from $300,000 to $750,000.
- Criteria for the determination of low-risk Type A programs are revised.
- The selection of high-risk Type B programs to be tested is revised.
- Risk assessments on small Type B programs will be required to be performed on Type B programs that exceed 25 percent of the Type A threshold.
- The percentage of coverage required in a single audit is revised to 40 percent (non-low-risk auditee) and 20 percent (low-risk auditee).
- Criteria for a low-risk auditee:
- The criteria for low-risk auditee status adds a requirement that, for each of the two preceding audit periods, the auditor did not report a substantial doubt about the auditee's ability to continue as a going concern.
- The low-risk auditee criteria was revised to require that the financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP), or based on accounting prescribed by applicable state law.
- Certain waivers that existed under OMB Circular A-133 have been removed.
- Schedule of Expenditures of Federal Awards (SEFA). All expenditures of federal awards will be required to be reported on the face of the SEFA.
A number of other revisions that affect reporting by the auditor or auditee in a single audit have been made as well, including:
- Auditees and auditors must ensure that their respective parts of the reporting package do not include protected personally identifiable information.
- Subrecipients are no longer required to submit a reporting package to a pass-through entity.
- Federal agencies no longer will have the authority to grant extensions of the due date of reports.
Frequent Violations Found in Financial Statements of Governments and Not-for-Profits
The following information is based on investigations conducted by the AICPA Professional Ethics Division of governmental and not-for-profit audits over the last two years. Financial statement preparers and auditors of those statements are well-advised to pay careful attention to these matters:
- The financial statements of not-for-profits (NFPs) omitted fair value disclosures required by FASB Accounting Standards Codification (FASB ASC) 820, Fair Value Measurement, or made errors in the disclosure, such as the level of investment.
- The financial statements did not make the subsequent events disclosures required by FASB ASC 855, Subsequent Events, and more specifically, FASB ASC 855-10-50.
- The financial statements of NFPs did not report expenses by their functional classification, when a statement of functional expenses was required.
- The statement of cash flows of both NFP and governmental entities contain misclassifications among the sources of cash.
- Interfund and intrafund balances and transactions were not eliminated in governmental entities.
- The financial statements did not disclose the nature and amount of donor-imposed restrictions related to temporarily or permanently restricted net assets in NFP entities.
- The statement of activities does not report all expenses as decreases in unrestricted net assets.
- The financial statements of NFP entities reported donated services that do not meet the requirements of U.S. generally accepted accounting principles.
- The Management Discussion and Analysis in governmental entities was missing required elements or was not presented as required, and the auditor's opinion was not modified.
- The Statement of Revenues, Expenditures, and Changes in Fund Balances in governmental entities did not properly classify revenues by fund and source or expenditures by function or character.