Introduction

This chapter compiles the applicable federal, state and agency audit requirements for entities that receive funds administered by the Agency.

Record retention and access requirements are provided in Appendix K to this manual. All financial and programmatic records, supporting documents, statistical records, and other records pertaining to an award of federal or state funds must be retained and made available to authorized entities or their representatives in accordance with applicable administrative requirements.

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General

States, local governments, and non-profit organizations that expend $500,000 or more ($300,000 or more for fiscal years ending on or before December 31, 2003) in federal and/or state awards in that entity’s fiscal year must have a single or program-specific audit performed by an independent auditor.

States, local governments, and non-profit organizations that receive federal and/or state funds must comply with the audit requirements in OMB Circular A-133 and/or the State of Texas Single Audit Circular, as applicable. Unless otherwise required, for-profit/commercial entities are not subject to these requirements (see Program Specific Considerations). Contracts with for-profit/commercial entities should establish audit requirements that may include pre- and post- audits, and contract monitoring.

Audit Frequency. Audits must be conducted annually in accordance with OMB Circular A-133 and/or the State of Texas Single Audit Circular unless otherwise required by the constitution, charter, ordinance or statute. Otherwise, a biennial audit that covers both years within the biennial period must be performed.

Basis for Expenditure Determination. The determination of when an award is expended should be based on when the related activity occurs. The basis for determining federal and/or state awards expended is described in OMB Circular A-133 §__.205 and the Uniform Grant Management Standards (UGMS) Part IV §__.205. Generally, expenditures relating to events that must comply with laws, regulations, and contract provisions or grant agreements are counted toward the $500,000 ($300,000 for fiscal years ending on or before December 31, 2003) expenditure level. In accordance with the State of Texas Single Audit Circular, any program income that is considered to be a federal award under OMB Circular A-133 is not considered a state award.

Single or Program Specific Audit. States, local governments, and non-profit organizations that expend $500,000 or more ($300,000 or more for fiscal years ending on or before December 31, 2003) in that entity’s fiscal year in federal funds must have a single audit conducted. Entities that expend federal and/or state awards under only one program, and who are not required by law, regulation, or grant agreement to have a financial audit, may have a program-specific audit performed in accordance with OMB Circular A-133 §__.235 and the State of Texas Single Audit Circular §__.235. (The State of Texas Single Audit Circular is published as Part of the Uniform Grant Management Standards.).

Vendor and Subrecipient Determination. Contractors that meet the definition of “subrecipient” are subject to the audit requirements in OMB Circular A-133 and/or the State of Texas Single Audit Circular, but Contractors that meet the definition of “vendor” are not. The following guidance should be used for determining whether an entity is a vendor or a subrecipient. If unusual circumstances or exceptions exist, judgment must be exercised in making the determination. In making the determination of whether a subrecipient or vendor relationship exists, the substance of the relationship is more important than the form of the agreement.

A subrecipient:

  • Determines who is eligible to receive what financial assistance
  • Has its performance measured against whether the objectives of the program are met
  • Is responsible for programmatic decision making
  • Is responsible for adherence to applicable state program compliance requirements
  • Uses funds to carry out a program of the organization as compared to providing goods or services for a program of the pass-through entity

A vendor:

  • Provides the goods and services within normal business operations
  • Provides similar goods or services to many different purchasers
  • Operates in a competitive environment
  • Provides goods or services that are ancillary to the operation of the state program
  • Is not subject to compliance requirements of the state program

Relation to Other Audit Requirements. Generally, an audit performed in accordance with OMB Circular A-133 and/or the State of Texas Single Audit Circular will be accepted under federal and/or state awards. If an awarding entity imposes audit requirements that are additional to OMB Circular A-133 and State of Texas Single Audit Circular requirements, the additional audit work must build upon the work performed by other auditors. Funding for the additional work must be arranged by the entity requesting the additional audit.

Audit Costs. Unless prohibited by law, the cost of audits made in accordance with the provisions of OMB Circular A-133 and/or the State of Texas Single Audit Circular are allowable charges to federal and/or state awards as a direct or indirect costs. The Agency’s share of the allowable audit cost may be reimbursed to audited entities if:

  • Funding is available and reimbursement is permitted by applicable funding sources
  • The audit is found to be acceptable upon review by the Agency
  • The audit and reimbursement request follow Agency policies and procedures

The costs of audits that are not conducted in accordance with OMB Circular A-133 requirements are not allowable under federal awards.

Program Specific Consideration:

Workforce Investment Act (WIA). For-profit/commercial entities that receive WIA Title I funds and expend more than the minimum level specified in OMB Circular A-133 must have either an organization-wide audit conducted in accordance with OMB Circular A-133 or a program-specific compliance audit.

Entity Specific Consideration:

Local Workforce Development Boards. When a Board serves as the fiscal agent for one or more of its contracted service providers, the audit of the service provider may not be included in the audit of the Board. The contracted service provider must have a separate audit performed.

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Reporting Package

The Single Audit reporting package must be submitted to the oversight entity within the earlier of 30 days after receipt of the auditor’s report(s) or nine months after the end of the audit period, unless a longer period is agreed to in advance by the oversight entity. However, for fiscal years beginning on or before June 30, 1998, the audit shall be completed and the reporting package shall be submitted within the earlier of 30 days after receipt of the auditor’s report(s), or 13 months after the end of the audit period.

At least one copy of the reporting package must be submitted to the entity that has oversight responsibility; however, additional copies may be required as necessary. The reporting package must include the elements described below.

  • Financial Statements. The entity being audited must prepare financial statements that reflect its financial position, results of operations or changes in net assets, and where appropriate, cash flows for the fiscal year audited. When applicable, the financial statements must be prepared in accordance with Governmental Accounting Standards Board (GASB) Statement 34, and other relevant GASB Statements. The financial statements must be for the same organizational unit and fiscal year that is being audited. Organization-wide financial statements may also include departments, agencies, and other organization units that have separate audits and prepare separate financial statements.
  • Schedule(s) of Expenditures of Federal and/or State Awards. The entity being audited must prepare a Schedule of Expenditures of Federal Awards and/or Schedule of Expenditures of State Awards for the period covered by its financial statements. The schedules may, but are not required to, include additional information requested by the awarding entities that make the schedules easier to use. At a minimum, the schedules must:
  • Summary Schedule of Prior Audit Findings. The entity being audited must prepare a Summary Schedule of Prior Audit Findings showing the status of all audit findings included in the prior audit’s Schedule of Findings and Questioned Costs relative to federal and/or state awards. The schedule should include the reference numbers the auditor assigns to audit findings and the fiscal year in which the finding initially occurred. It must also include audit findings reported in the prior audit’s Summary Schedule of Prior Audit Findings except audit findings listed as corrected, or no longer valid or not warranting further action. Additionally:
  • Auditor’s Report. The audit report must state that the audit was conducted in accordance with OMB Circular A-133 and/or State of Texas Single Audit Circular, and it must include the following:
  • Corrective Action Plan. The entity being audited must prepare a Corrective Action Plan for current year audit findings that includes the reference numbers the auditor assigns to audit findings. The corrective action plan must provide the name(s) of the contact person(s) responsible for corrective action, the corrective action planned, and the anticipated completion date. If the entity that is being audited does not agree with the audit findings or believes corrective action is not required, the Corrective Action Plan must include an explanation and specific reasons.

NOTE: Entities that are audited to comply with the audit requirements of OMB Circular A-133 are also required to submit a copy of the reporting package along with the data collection form described in OMB Circular A-133 §__.320 to the federal clearinghouse designated by the OMB. This submission requirement is in addition to the requirement to submit a copy of the reporting package to the oversight entity. (The data collection form is only required to be submitted to the federal clearinghouse, not to the oversight entity.) The same timeframes that apply to the submission of the reporting package to the oversight entity also apply when submitting the required documents to the federal clearinghouse. The audited entity is responsible for submitting the data collection form and a copy of the reporting package to the federal clearinghouse within required timeframes.

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Oversight Responsibilities

An entity that passes federal and/or state funds through to a subrecipient to carry out a federal and/or state program must assume oversight responsibilities for those funds.

A state, local government, or non-profit organization that expends federal and/or state funds to carry out a federal and/or state program must submit audits required by OMB Circular A-133 and/or State of Texas Single Audit Circular to the entity’s federal cognizant agency for audit, state single audit coordinating agency, or state oversight agency for single audit, as applicable. If a state, local government, or non-profit organization that receives federal and/or state funds passes such funds through to an entity, that meets the definition of a subrecipient, to carry out a federal and/or state program, the pass-through entity must assume the following responsibilities for the awards it makes:

  • Inform each subrecipient of the following: When some of this information is not available, the pass-through entity must provide the best information available to describe the federal and/or state award.
  • Advise subrecipients of requirements imposed on them by federal and/or state laws, regulations, and the provisions of contracts or grant agreements as well as any supplemental requirements imposed by the pass-through entity. For state awards, the requirements must either be stated or included by specific reference in the contracts or grant agreements.
  • Monitor the activities of subrecipients as necessary to ensure that performance goals are achieved and federal and/or state awards are used for authorized purposes in compliance with laws, regulations, and the provisions of contracts or grant agreement.
  • Ensure subrecipients expending $500,000 or more ($300,000 or more for fiscal years ending before December 31, 2003) in federal and/or state awards during the subrecipient’s fiscal year have met the audit requirements of OMB Circular A-133 and the State of Texas Single Audit Circular for that fiscal year.
  • Issue a management decision on audit findings within six months after receipt of the subrecipient’s audit report and ensure that the subrecipient takes appropriate and timely corrective action (see Section 20.4 of this manual).
  • Consider whether subrecipient audits necessitate adjustment of the pass-through entity’s own records.
  • Require each subrecipient to permit the pass-through entity and auditors to have access to the records and financial statements as necessary for the pass-through entity to comply with OMB Circular A-133 and the State of Texas Single Audit Circular. The State of Texas Single Audit Circular is published as Part IV of the Uniform Grant Management Standards.
  • When state awards are made with federal awards to a subrecipient, as required match, inform the subrecipient of the proportion of federal and state funds disbursed to the subrecipient to facilitate the subrecipient’s separate calculations of expenditures of federal awards and state awards for its fiscal year.
  • When state awards are made to a subrecipient to supplement federal awards, the state awards are not used to meet a federal matching requirement, and requirements of the state award differ from the requirements of the federal award (e.g., different activities are allowed or disallowed, or different allowable costs or cost principles are used), the pass through entity shall also provide information as to the amount of each award to the recipient at the time the award is made to facilitate the subrecipient’s accounting for and compliance with the requirements of each award during the term of such award.
  • Identify, at the time of award, any state awards made which are part of a state cluster of programs.

Each entity with oversight responsibility may establish a sanction policy that includes the option to impose sanctions on an audited entity for the failure to resolve administrative issues, audit findings, or questioned costs within specified timeframes. Each entity has local flexibility in establishing a sanction policy. For reference, the Agency’s sanction policy is established by rule at 40 TAC Chapter 802, Subchapter G.

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Management Decision

Within six months of the date that the entity with oversight responsibility receives the audit reporting package, a Management Decision must be issued to the audited entity.

The audited entity should initiate corrective action within six months of the date that it receives the audit report and proceed as rapidly as possible to correct administrative issues, findings, and questioned costs. While the audited entity takes corrective action, the entity with oversight responsibility must conduct a desk review of the report and may request additional information or documentation.

Upon completion of the desk review, a Management Decision must be issued. The Management Decision must be issued within six months of the date that the entity with oversight responsibility received the audit. The Management Decision must include the reference numbers the auditor assigned to each audit finding and clearly state:

  • Whether each audit finding is sustained
  • The reasons for the decision
  • A requirement to repay disallowed costs, make financial adjustments, or take other action

If corrective action has not been completed as of the issue date of the Management Decision letter, a timetable for follow-up should be given. The Management Decision letter should describe an appeal process available to the audited entity.

The sequence of letters that the Agency uses during and after the desk review are described below, however, Contractors with oversight responsibilities have local flexibility in the establishment of their own procedures as long as they meet the requirements above.

Prior Notice Letter. Reminds the subrecipient that an audit report package must be submitted to the oversight entity by a specified date. It is sent to subrecipients prior to the audit reporting package due date.

Delinquent Letter. Notifies the subrecipient that its audit reporting package was not received by the oversight entity by the due date and that, if not received within 60 days from the due date of the audit, sanctions may be imposed.

Extension Request Letter. Notifies the subrecipient that its request for an extension for single audit submission has been granted or denied.

Initial Resolution Letter. Initiates resolution of administrative issues, findings, and questioned costs for which corrective action has not yet been taken, and requires that specified information be submitted to the oversight entity within 30 days of the date of the Initial Resolution Letter.

No Response Letter. Notifies the subrecipient that the oversight entity has not received a response to an Initial Resolution Letter, and sanctions may be imposed if a response or explanation for the delay is not received within fifteen days of the date of letter.

Follow-up Letter. Notifies the subrecipient that the oversight entity has received a response to the Initial Resolution Letter and requires additional information and/or documentation be submitted to the oversight entity within 15 days of the date of the letter.

The letters above relate to the receipt and review of the audit and occur within the six-month timeframe prior to the release of a Management Decision. The following three Agency letters that may be used by the oversight entity, relate to the Management Decision and to unresolved administrative issues, findings, and questioned costs that remain outstanding after the six-month period.

Acceptance Letter (Management Decision). Notifies the subrecipient that the oversight entity has accepted the audit report and the audit file is closed.

Initial Determination Letter. Notifies the subrecipient that questioned costs in a specified amount have not been resolved within the six-month time period and allows the subrecipient thirty days from the date of the Initial Determination Letter to informally resolve the questioned costs.

Final Determination Letter. Establishes a debt against the subrecipient for questioned costs that were not resolved as a result of the Initial Determination Letter and notifies the subrecipient of appeal procedures. If the determination is not appealed within ten days of receipt of the Final Determination Letter, the debt must be paid to the oversight entity using non-federal and/or non-state funds.

Contractors with oversight responsibilities should develop local procedures for the prompt collection of debts. Cash is the preferred method of recovery; however, debt may also be settled by withholding amounts due or use of stand-in costs. Stand-in costs are discussed below under Other Special Considerations.

Program Specific Considerations:

Workforce Investment Act (WIA). If corrective action for a substantial violation of a specific provision of Title I of WIA does not occur within the specified timeframe, sanctions under 40 TAC Chapter 802Subchapter G may be imposed. Sanctions may also be imposed if an entity does not comply with applicable OMB uniform administrative requirements.

Other Special Considerations:

Stand-in Costs. Stand-in costs are non-federal, non-state costs that may be substituted for disallowed grant costs when certain conditions are met. In order to be considered stand-in costs, the proposed stand-in costs must meet the following criteria:

  • Must have been allowable costs incurred under the grant, but not charged to the federal program (or any other program administered by the Agency)
  • Must have been included within the scope of the audit
  • Must have been accounted for in the auditee’s financial system
  • May include cash match (expenditures of the organization used as match) that exceeds match requirements under the grant
  • Must come from the same year as the costs that were proposed to be replaced
  • Must not cause costs to exceed administrative or other cost limitations

Stand-in costs do not include in-kind match; uncompensated overtime; unbilled premises costs associated with fully depreciated publicly owned buildings; allocated costs derived from an improper allocation methodology; or discounts, refunds or rebates.

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