Introduction

The OMB Circular A-133 Compliance Supplement, Part 6, provides auditees and auditors with guidance to obtain an understanding of and evaluate the adequacy of internal control.  These characteristics are described for 13 of the 14 types of compliance requirements identified in Part 3 of the Compliance Supplement (See Chapter 2 for additional detail).  In using the following characteristics Part 6 of the Supplement provides:

"This Part 6 is intended to assist non-federal entities and their auditors in complying with these [testing requirements of OMB Circular A-133] by describing, for each type of compliance requirement, the objectives of internal control, and certain characteristics of internal controls that, when present and operating effectively, may ensure compliance with program requirements.  However, the categorizations reflected in this Part 6 may not necessarily reflect how an entity considers and implements internal control [i.e., depending on the organization’s structure, functions, etc.].  Also, this part is not a checklist of required internal control characteristics.  Non-federal entities could have adequate internal control even though some or all of the characteristics included in Part 6 are not present.  Further, non-federal entities could have other appropriate internal controls operating effectively that have not been included in this Part 6.  Non-federal entities and their auditors will need to exercise judgment in determining the most cost effective internal control in a given environment or circumstance to provide reasonable assurance for compliance with federal [or state] program requirements."

The characteristics in Part 6 of the OMB Circular A-133 Compliance Supplement are carried into the Financial Manual for Grants and Contracts in this Appendix for the purpose of providing Contractors and monitors with guidelines for evaluating internal control. This Appendix organizes the 13 types of compliance requirements for which characteristics of internal control are discussed as shown below, retaining the same format as used in the Compliance Supplement.

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Activities Allowed or Unallowed & Allowable Costs

Control Objectives – To provide reasonable assurance that federal awards are expended only for allowable activities and that the costs of goods and services charged to federal awards are allowable and in accordance with the applicable cost principles.

Control Environment

  • Management sets reasonable budgets for federal and non-federal programs so that no incentive exists to miscode expenditures
  • Management enforces appropriate penalties for misappropriation or misuse of funds
  • Organization-wide cognizance of need for separate identification of allowable federal costs
  • Management provides personnel approving and pre-auditing expenditures with a list of allowable and unallowable expenditures

Risk Assessment

  • Process for assessing risks resulting from changes to cost accounting systems
  • Key manager has a sufficient understanding of staff, processes, and controls to identify where unallowable activities or costs could be charged to a federal program and not be detected

Control Activities

  • Accountability provided for charges and costs between federal and non-federal activities
  • Process in place for timely updating of procedures for changes in activities allowed and cost principles
  • Computations checked for accuracy
  • Supporting documentation compared to list of allowable and unallowable expenditures
  • Adjustments to unallowable costs made where appropriate and follow-up action taken to determine the cause
  • Adequate segregation of duties in review and authorization of costs
  • Accountability for authorization is fixed in an individual who is knowledgeable of the requirements for determining activities allowed and allowable costs

Information & Communication

  • Reports, such as a comparison of budget to actual provided to appropriate management for review on a timely basis
  • Establishment of internal and external communication channels on activities and costs allowed
  • Training programs, both formal and informal, provide knowledge and skills necessary to determine activities and costs allowed
  • Interaction between management and staff regarding questionable costs
  • Grant agreements (including referenced program laws, regulations, handbooks, etc.) and cost principles circulars available to staff responsible for determining activities allowed and allowable costs under federal awards

Monitoring

  • Management reviews supporting documentation of allowable cost information
  • Flow of information from federal agency to appropriate management personnel
  • Comparisons made with budget and expectations of allowable costs
  • Analytic reviews (e.g., comparison of budget to actual or prior year to current year) and audits performed

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Cash Management

Control Objectives – To provide reasonable assurance that the draw down of federal cash is only for immediate needs and recipients limit payments to subrecipients to immediate cash needs.

Control Environment

  • Appropriate assignment of responsibility for approval of cash drawdowns and payments to subrecipients
  • Budgets for drawdowns are consistent with realistic cash needs

Risk Assessment

  • Mechanisms exist to anticipate, identify, and react to routine events that affect cash needs
  • Routine assessment of adequacy of subrecipient cash needs
  • Management has identified programs that receive cash advances and is aware of cash management requirements

Control Activities

  • Cash flow statements by program are prepared to determine essential cash flow needs
  • Accounting system is capable of scheduling payments for accounts payable and requests for funds from Treasury to avoid time lapse between draw down of funds and actual disbursements of funds
  • Appropriate level of supervisory review of cash management activities
  • Written policy that provides:

Information & Communication

  • Variance reporting of expected versus actual cash disbursements of federal awards and drawdowns of federal funds
  • Established channel of communication between pass-through entity and subrecipients regarding cash needs

Monitoring

  • Periodic independent evaluation (e.g. by internal audit, top management) of entity cash management, budget and actual results, repayment of excess interest earnings, and federal draw down activities
  • Subrecipients’ requests for federal funds are evaluated
  • Review of compliance with Treasury-State agreements

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Davis-Bacon Act

Control Objectives – To provide reasonable assurance that contractors and subcontractors were properly notified of the Davis-Bacon Act requirements and the required certified payrolls were submitted to the non-federal entity.

Control Environment

  • Management understands and communicates to staff, contractors, and subcontractors the requirements to pay wages in accordance with the Davis-Bacon Act
  • Management understands its responsibility for monitoring compliance

Risk Assessment

  • Mechanisms in place to identify contractors and subcontractors most at risk of non-compliance
  • Management identified how compliance will be monitored and the related risks of failure to monitor for compliance with Davis-Bacon Act

Control Activities

  • Contractors informed in the procurement documents of the requirements for prevailing wage rates
  • Contractors and subcontractors are required by contract to submit certifications and copies of payrolls
  • Contractors’ and subcontractors’ payrolls monitored to ensure certified payrolls are submitted

Information & Communication

  • Prevailing wage rates requirements are appropriately communicated
  • Reports provide sufficient information to determine if requirements are being met
  • Channels are established for staff to report non-compliance

Monitoring

  • Management reviews to ensure that contractors and subcontractors are properly notified of the Davis-Bacon Act requirements
  • Management reviews to ensure that certified payrolls are properly received

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Eligibility

Control Objectives – To provide reasonable assurance that only eligible individuals and organizations receive assistance under federal award programs, that subawards are made only to eligible subrecipients, and that amounts provided to or on behalf of eligibles were calculated in accordance with program requirements.

Control Environment

  • Staff size and competence provides for proper making of eligibility determinations
  • Realistic caseload/performance targets established for eligibility determinations
  • Lines of authority clear for determining eligibility

Risk Assessment

  • Identification of risk that eligibility information prepared internally or received from external sources could be incorrect
  • Conflict-of-interest statements are maintained for individuals who determine eligibility
  • Process for assessing risks resulting from changes to eligibility determination systems

Control Activities

  • Written policies provide direction for making and documenting eligibility determinations
  • Procedures to calculate eligibility amounts consistent with program requirements
  • Eligibility objectives and procedures clearly communicated to employees
  • Authorized signatures (manual or electronic) on eligibility documents periodically reviewed
  • Access to eligibility records limited to appropriate persons
  • Manual criteria checklists or automated process used in making eligibility determinations
  • Process for periodic eligibility re-determinations in accordance with program requirements
  • Verification of accuracy of information used in eligibility determinations
  • Procedures to ensure the accuracy and completeness of data used to determine eligibility requirements

Information & Communication

  • Information system meets needs of eligibility decision-makers and program management
  • Processing of eligibility information subject to edit checks and balancing procedures
  • Training programs inform employees of eligibility requirements
  • Channels of communication exist for people to report suspected eligibility improprieties
  • Management receptive to suggestions to strengthen eligibility determination process
  • Documentation of eligibility determinations in accordance with program requirements

Monitoring

  • Periodic analytical reviews of eligibility determinations performed by management
  • Program quality control procedures performed
  • Periodic audits of detailed transactions

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Equipment & Real Property Management

Control Objectives – To provide reasonable assurance that proper records are maintained for equipment acquired with federal awards, equipment is adequately safeguarded and maintained, disposition or encumbrance of any equipment or real property is in accordance with federal requirements, and the federal awarding agency is appropriately compensated for its share of any property sold or converted to non-federal use.

Control Environment

  • Management committed to providing proper stewardship for property acquired with federal awards
  • No incentives exist to under-value assets at time of disposition
  • Sufficient accountability exists to discourage temptation of misuse of federal assets

Risk Assessment

  • Procedures to identify risk of misappropriation or improper disposition of property acquired with federal awards
  • Management understands requirements and operations sufficiently to identify potential areas of noncompliance (e.g., decentralized locations, departments with budget constraints, transfers of assets between departments)

Control Activities

  • Accurate records maintained on all acquisitions and dispositions of property acquired with federal awards
  • Property tags are placed on equipment
  • A physical inventory of equipment is periodically taken and compared to property records
  • Property records contain description (including serial number or other identification number), source, who holds title, acquisition date and cost, percentage of federal participation in the cost, location, condition, and disposition data
  • Procedures established to ensure that the federal awarding agency is appropriately reimbursed for dispositions of property acquired with federal awards
  • Policies and procedures in place for responsibilities of recordkeeping and authorities for disposition

Information & Communication

  • Accounting system provides for separate identification of property acquired wholly or partly with federal funds and with non-federal funds
  • A channel of communication exists for people to report suspected improprieties in the use or disposition of equipment
  • Program managers are provided with applicable requirements and guidelines

Monitoring

  • Management reviews the results of periodic inventories and follows up on inventory discrepancies
  • Management reviews dispositions of property to ensure appropriate valuation and reimbursement to federal awarding agencies

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Matching, Level of Effort, Earmarking

Control Objectives – To provide reasonable assurance that matching, level of effort, or earmarking requirements are met using only allowable funds or costs which are properly calculated and valued.

Control Environment

  • Commitment from management to meet matching, level of effort, and earmarking requirements (e.g., adequate budget resources to meet a specified matching requirement or maintain a required level of effort)
  • Budgeting process addresses/provides adequate resources to meet matching, level of effort, or earmarking goals
  • Official written policy exists outlining:

Risk Assessment

  • Identification of areas where estimated values will be used for matching, level of effort, or earmarking
  • Management has sufficient understanding of the accounting system to identify potential recording problems

Control Activities

  • Evidence obtained such as a certification from the donor, or other procedures performed to identify whether matching contributions:
  • Adequate review of monthly cost reports and adjusting entries

Information & Communication

  • Accounting system capable of:

Monitoring

  • Supervisory review of matching, level of effort, or earmarking activities performed to assess the accuracy and allowability of transactions and determinations, e.g., at the time reports on federal awards are prepared

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Period of Availability

Control Objectives – To provide reasonable assurance that federal funds are used only during the authorized period of availability.

Control Environment

  • Management understands and is committed to complying with period of availability requirements
  • Entity’s operations are such that it is unlikely there will be federal funds remaining at the end of the period of availability

Risk Assessment

  • The budgetary process considers period of availability of federal funds as to both obligation and disbursement
  • Identification and communication of period of availability cut-off requirements as to both obligation and disbursement

Control Activities

  • Accounting system prevents obligation or expenditure of federal funds outside of the period of availability
  • Review of disbursements by person knowledgeable of period of availability of funds
  • End of grant period cut-offs are met by such mechanisms as advising program managers of impending cut-off dates and review of expenditures just before and after cut-off date
  • Cancellation of unliquidated commitments at the end of the period of availability

Information & Communication

  • Timely communication of period of availability requirements and expenditure deadlines to individuals responsible for program expenditure, including automated notifications of pending deadlines
  • Periodic reporting of unliquidated balances to appropriate levels of management and follow up

Monitoring

  • Periodic review of expenditures before and after cut-off date to ensure compliance with period of availability requirements
  • Review by management of reports showing budget and actual for period

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Procurement, Suspension & Debarment

Control Objectives – To provide reasonable assurance that procurement of goods and services are made in compliance with the provisions of the A-102 Common Rule or OMB Circular A-110, as applicable, and that covered transactions (as defined in the suspension and debarment common rule) are not made with a debarred or suspended party.

Control Environment

  • Existence and implementation of codes of conduct and other policies regarding acceptable practice, conflicts-of-interest, or expected standards of ethical and moral behavior for making procurements
  • Procurement manual that incorporated federal requirements
  • Absence of pressure to meet unrealistic procurement performance targets
  • Management’s prohibition against intervention or overriding established procurement controls
  • Board or governing body oversight required for high dollar, lengthy, or other sensitive procurement contracts
  • Adequate knowledge and experience of key procurement managers in light of responsibilities for procurements for federal awards
  • Clear assignment of authority for issuing purchasing orders and contracting for goods and services

Risk Assessment

  • Procedures to identify risks arising from vendor inadequacy, e.g., quality of goods and services, delivery schedules, warranty assurances, user support
  • Procedures established to identify risks arising from conflicts-of-interest, e.g., kickbacks, related party transactions, bribery
  • Management understands the requirements for procurement and suspension and debarment, and, given the organization’s staff, departments, and processes, has identified where noncompliance could likely occur
  • Conflict-of-interest statements are maintained for individuals with responsibility for procurement of goods or services

Control Activities

  • Job descriptions or other means of defining tasks that comprise particular procurement jobs
  • Contractor’s performance with the terms, conditions, and specifications of the contract is monitored and documented
  • Establish segregation of duties between employees responsible for contracting and accounts payable and cash disbursing
  • Procurement actions appropriately documented in the procurement files
  • Supervisors review procurement and contracting decisions for compliance with federal procurement policies
  • Procedures established to verify that vendors providing goods and services under the award have not been suspended or debarred by the federal government
  • Official written policy for procurement and contracts establishing:
  • Official written policy for suspension and debarment that:

Information & Communication

  • A system in place to assure that procurement documentation is retained for the time period required by the A-102 Common Rule, OMB Circular A-110, award agreements, contracts, and program regulations. Documentation includes:
  • Employees’ procurement duties and control responsibilities are effectively communicated
  • Procurement staff are provided a current hard-copy EPLS or have on-line access
  • Channels of communication are provided for people to report suspected procurement and contracting improprieties

Monitoring

  • Management periodically conducts independent reviews of procurements and contracting activities to determine whether policies and procedures are being followed as intended

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Program Income

Control Objectives – To provide reasonable assurance that program income is correctly earned, recorded, and used in accordance with the program requirements.

Control Environment

  • Management recognizes its responsibilities for program income
  • Management’s prohibition against intervention or overriding controls over program income
  • Realistic performance targets for the generation of program income

Risk Assessment

  • Mechanisms in place to identify the risk of unrecorded or miscoded program income
  • Variances between expected and actual income analyzed

Control Activities

  • Pricing and collection policies procedures clearly communicated to personnel responsible for program income
  • Mechanism in place to ensure that program income is properly recorded as earned and deposited in the bank as collected
  • Policies and procedures provide for correct use of program income in accordance with federal program requirements

Information & Communication

  • Information systems identify program income collections and usage
  • A channel of communication for people to report suspected improprieties in the collection or use of program income

Monitoring

  • Internal audit of program income
  • Management compares program income to budget and investigates significant differences

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Real Property Acquisition & Relocation Assistance

Control Objectives – To provide reasonable assurance of compliance with the real property acquisition, appraisal, negotiation, and relocation requirements.

Control Environment

  • Management committed to ensuring compliance with the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, as amended (URA)
  • Written policies exist for handling relocation assistance and real property acquisition

Risk Assessment

  • Identification of risk that relocation will not be conducted in accordance with the URA, e.g., improper payments will be made to individuals or businesses that relocate

Control Activities

  • Employees handling relocation assistance and real property acquisition have been trained in the requirements of the URA
  • Review of expenditures pertaining to real property acquisition and relocation assistance by employees knowledgeable in the URA

Information & Communication

  • A system is in place to adequately document relocation assistance and real property acquisition

Monitoring

  • Management monitors relocation assistance and real property acquisition for compliance with the URA

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Reporting

Control Objectives – To provide reasonable assurance that reports of federal awards submitted to the federal awarding agency or pass-through entity include all activity of the reporting period, are supported by underlying accounting or performance records, and are fairly presented in accordance with program requirements.

Control Environment

  • Persons preparing, reviewing, and approving the reports possess the required knowledge, skills, and abilities
  • Management’s attitude toward reporting promotes accurate and fair presentation
  • Appropriate assignment of responsibility and delegation of authority for reporting decisions

Risk Management

  • Mechanisms exist to identify risks of faulty reporting caused by such items as lack of current knowledge of, inconsistent application of, or carelessness or disregard for standards and reporting requirements of federal awards
  • Identification of underlying source data or analysis for performance or special reporting that may not be reliable

Control Activities

  • Written policy exists that establishes responsibility and provides the procedures for periodic monitoring, verification, and reporting of program progress and accomplishments
  • Tracking system which reminds staff when reports are due
  • The general ledger or other reliable records are the basis for the reports
  • Supervisory review of reports performed to assure accuracy and completeness of data and information included in the reports
  • The required accounting method is used (e.g., cash or accrual)

Information & Communication

  • An accounting or information system that provides for the reliable processing of financial and performance information for federal awards

Monitoring

  • Communications from external parties corroborate information included in the reports for federal awards
  • Periodic comparison of reports to supporting records

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Subrecipient Monitoring

Control Objectives – To provide reasonable assurance that federal award information and compliance requirements are identified to subrecipients, subrecipient activities are monitored, subrecipient audit findings are resolved, and the impact of any subrecipient noncompliance on the pass-through entity is evaluated. Also, the pass-through entity should perform procedures to provide reasonable assurance that the subrecipient obtained required audits and takes appropriate corrective action on audit findings.

Control Environment

  • Establishment of “tone at the top” of management’s commitment to monitoring subrecipients
  • Management’s intolerance of overriding established procedures to monitor subrecipients
  • Entity’s organizational structure and its ability to provide the necessary information flow to monitor subrecipients are adequate
  • Sufficient resources dedicated to subrecipient monitoring
  • Knowledge, skills, and abilities needed to accomplish subrecipient monitoring tasks defined
  • Individuals performing subrecipient monitoring possess knowledge, skills, and abilities required
  • Subrecipients demonstrate that:

Risk Assessment

  • Key managers understand the subrecipient’s environment, systems, and controls sufficient to identify the level and methods of monitoring required
  • Mechanisms exist to identify risks arising from external sources affecting subrecipients, such as risks related to:
  • Mechanisms exist to identify and react to changes in subrecipients, such as:

Control Activities

  • Identify to subrecipients the federal award information (e.g., CFDA title and number, award name, name of federal agency, amount of award) and applicable compliance requirements
  • Include in agreements with subrecipients the requirement to comply with the compliance requirements applicable to the federal program, including the audit requirements of OMB Circular A-133
  • Subrecipients’ compliance with audit requirements monitored using techniques such as the following:
  • Subrecipient’s compliance with federal program requirements monitored using such techniques as the following:
  • Official written policies and procedures exist establishing:

Information & Communication

  • Standard award documents used by the non-federal entity contain:
  • A recordkeeping system is in place to assure that documentation is retained for the time period required by the recipient
  • Procedures are in place to provide channels for subrecipients to communicate concerns to the pass-through entity

Monitoring

  • Establish a tracking system to assure timely submission of required reporting, such as: financial reports, performance reports, audit reports, onsite monitoring reviews of subrecipients, and timely resolution of audit findings
  • Supervisory reviews performed to determine the adequacy of subrecipient monitoring

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