Prior to 1984, each Federal agency was responsible for the audits of their own programs. As a result, grantee agencies receiving funds from more than one Federal agency were subject to multiple audits in a single year. Not only did this process create a burden on grantee agencies, it created conflict between Federal agencies. In an attempt to resolve the situation, Congress passed the Single Audit Act of 1984.

The Single Audit Act of 1984 set forth requirements for audits of state, local and Indian tribal governments that receive Federal awards. In 1990, the Office of Management and Budget (OMB) included, through the administrative process, non-profit organizations in the single audit requirement. This requirement was incorporated into law in 1996 through the Single Audit Amendments. The OMB issued a revised Circular A-133 in 1997 to implement the amendments and provide one circular for all entities having an audit.

The Federal requirements for audits are contained in:

• 45 CFR Part 74 (Uniform Administrative Requirements for Awards and Subawards to Institutions of Higher Education, Hospitals, Other Non-profit Organizations, and Commercial Organizations; and Certain Grants and Agreements with States, Local Governments and Indian Tribal Governments)
  
• 45 CFR Part 92 (Uniform Administration Requirements for Grants and Cooperative Agreements to State and Local Governments)
  
• OMB Circular A-133 - Revised June 24, 1997 (Audits of States, Local Governments and Non-Profit Organizations)
  
• OMB Circular A-133, Appendix A - Data Collection Form (Form SF-SAC)
  
• OMB Circular A-133 Compliance Supplement

The Single Audit Act and the Circular changed the way Federal agencies do business. The Circular states that the single audit will replace any financial audit required under individual Federal awards, and that Federal agencies will rely upon and use these audits. Federal agencies may conduct or arrange for additional audits if the need arises. Any additional audits must build upon work previously performed, and the Federal agency must pay for the cost of the additional audit work.

In lieu of another audit, a Federal agency may request that a grantee agency be audited as a major program (major program is defined in the next section). If the program(s) would not be audited as a major program(s) and the Federal agency agrees to pay the full incremental costs, the grantee agency will have the program(s) audited as a major program(s).

Prior to the Act, the period covered during the audit usually was the Federal fiscal year. Now the period covered is the grantee agency's fiscal year. Also, prior to the revised A-133, the determination of whether or not an audit was required was based on Federal funds received. The revised A-133 changed the determination to Federal funds expended. An award is expended when charges for activities related to the terms and conditions of an award occur.

The change was made because no Federal award is legally "received" until the grantee agency or delegate agency has used it for program purposes. Federal assistance includes non-cash assets, such as USDA commodities, transferred by the Federal government. These non-cash assets are "expended" when used for program purposes.

The Circular does allow for program specific audits. When a grantee agency or a delegate agency expends awards under only one Federal program and the program laws, regulations or grant agreements do not require a financial statement audit, the grantee agency or delegate agency may elect to have a program specific audit. Therefore, this provision will reduce the cost of the audit for those grantee agencies that only expend Head Start funds.

ACF means the Administration for Children and Families

Auditee means any non-Federal entity whose level of expenditures of Federal funds requires an audit.

Audit finding means deficiencies that the auditor is required by section 510a of A-133 to report in the schedule of findings and questioned costs.

Award means financial assistance that provides support or stimulation to accomplish a public purpose. Awards include grants and other agreements in the form of money or property in lieu of money by the Federal government to an eligible recipient.

CFDA number means the number assigned to a Federal program in the Catalog of Federal Domestic Assistance.

Compliance requirements refer to the types of compliance requirements listed in the Head Start audit compliance supplement or requirements that originate in Federal law or regulation.

Compliance supplement refers to the OMB Circular A-133 Compliance Supplement.

Corrective action means action taken that corrects identified deficiencies, produces recommended improvements or demonstrates that audit findings are either invalid or do not warrant action.

HHS means the U.S. Department of Health and Human Services.

Delegate agency means a sub-recipient to which a grantee has delegated all or part of its responsibility for operating a Head Start or EHS program.

Federal financial assistance means assistance that grantee agencies receive or administer in the form of grants, property (including donated surplus property), food commodities and other assistance.

Federal program means all Federal awards assigned a single number in the CFDA. When no CFDA number is assigned, all Federal awards from the same agency made for the same purpose should be combined and considered one program.

Major program means a Federal program determined by the auditor to be major based on dollars expended and a risk analysis.

Management decision means the evaluation by the Federal agency or the grantee agency for delegate agencies of the audit findings, the corrective action plan and the issuance of a written decision on the proposed corrective action.

OMB means the Office of Management and Budget.

Pass-through entity means a non-Federal entity that provides a Federal award to a sub-recipient to carry out a Federal program.

Program-specific audit means an audit of one Federal program.

Questioned cost means a cost that is questioned as allowable by the auditor or the Federal agency because of an audit finding that resulted from a violation or possible violation of a law or regulation. Questioned costs also occur where costs are not supported by adequate documentation; or where the costs incurred appear unreasonable and do not reflect the actions a prudent person would take in the circumstances.

Recipient or grantee agency is the non-Federal entity that receives financial assistance in the form of a grant directly from the Federal government.

Single audit means an audit that includes the entity's financial statements and the Federal awards as described in OMB A-133.105(d); and covers the entire operation of the grantee agency.

Sub-recipient is the non-Federal entity to which a subaward is made and which is accountable to the recipient for use of the funds provided in carrying out a Federal program. A sub-recipient may also be a recipient of other Federal awards.

Vendor means an entity providing goods or services that are required for the conduct of a Federal program by the recipient.

Audit Process

Currently, grantee agencies that expend $500,00 or more in a Federal award(s) for fiscal years beginning after 2003 (previously was $300,000) must have a single or program-specific audit conducted for that year.

On June 27, 2003 OMB issued the final revisions to Circular A-133 increasing the threshold for audit to $500,000. The $500,000 will apply to audits of grantee agencies' fiscal years ending after December 31, 2003.

An auditee may be a recipient and/or a sub-recipient. Head Start grantee agencies are recipients because they receive the award directly from ACF. Grantee agencies may elect to pass funds to a sub-recipient, otherwise know as a delegate agency. Delegate agencies also may be recipients if they receive funds directly from the Federal government for other programs. The single audit is ideal for these entities in that it meets the requirements of the Federal government and the grantee agency.

Vendors are not subject to the single audit requirements. When determining if an entity is a vendor or a delegate agency, the type of the relationship rather than the written agreement is more important.

A delegate agency usually determines who is eligible for program benefits, has its performance measured against the standards, and is responsible for programmatic decisions. Delegate agencies are responsible for complying with program requirements and using the funds to carry out the Head Start program rather than providing goods or services. Generally, a delegate agency also has a Policy Committee that exercises oversight of the delegate agency’s programs.

Vendors provide goods and services usually within normal business operations. Grantee agencies and delegate agencies use vendors to provide transportation; meals; education, health or disability services. The contract with the vendors may require compliance with program requirements. However, grantee agencies or delegate agencies have final responsibility for program compliance. When these vendor activities are part of a major program, the auditor must also determine if these transactions comply with the Head Start Program Performance Standards.

The cost of a single audit or a program-specific audit may be charged to Federal grants either as a direct or indirect cost if the audit meets all of the requirements of OMB Circular A-133. If a grantee agency or delegate agency is exempt from the A-133 audit requirements, it may not charge the cost of any audit to Federal grants unless approved by the Federal agency. However, grantee agencies may charge Head Start funds for the cost of limited scope audits used to monitor delegate agencies if the delegate agency(s) is exempt from the A-133 requirements.

When procuring audit services grantee agencies and delegate agencies should follow their established procurement procedures. Efforts should be made to utilize small businesses, minority-owned firms, and women's business enterprises.

The proposal for audit services should clearly state the objectives and the scope of the audit. When reviewing auditors' responses, factors such as responsiveness, experience, availability of staff with professional qualifications and technical abilities, and quality control reviews of the audit firm should be considered along with price.

Grantee agencies and delegate agencies must:

• Identify all Federal awards received and expended in their accounts.
  
  
• Maintain internal controls of Federal programs.
  
  
• Comply with laws, regulations, and the terms and conditions of the grant.
  
  
• Prepare or have prepared financial statements.
  
  
• Ensure that audits are properly performed and submitted when due.
  
  
• Follow-up and take corrective action on audit findings.

When identifying Federal awards in the accounts, grantee agencies and delegate agencies should include the CFDA title and number, award number and year and the name of the Federal agency. Delegate agencies should include the name of the grantee agency. This same information should be included on the schedule of Federal expenditures.

The financial statements must include the schedule of expenditures of Federal awards. The statements shall also reflect the grantee or delegate agency's financial situation, the results of operations or changes in net assets and cash flow for the fiscal year audited.

A schedule of Federal expenditures should list individual programs by Federal agencies. The schedule should include an explanation by utilizing notes to describe the significant accounting policies used in preparing the schedule, and grantee agencies should identify the total amount of Head Start funds provided to delegate agencies.

Grantee agencies and delegate agencies also should include in the schedule or a note to the schedule, the value of Federal non-cash assistance, such as USDA commodities, expended. If a note to the schedule is used, the value of the non-Federal share should be included in the note.

Follow-up and corrective action on audit findings is the responsibility of the grantee agency or delegate agency. As part of this responsibility, they must prepare a summary schedule of prior audit findings using the reference numbers the auditor assigned. If there are audit findings from more than one year, the schedule should include the fiscal year in which the finding first occurred.

Entities that elect program-specific audits must prepare a financial statement that includes, at a minimum, a schedule of expenditures for the Head Start and/or Early Head Start program, a summary schedule of prior audit findings and, if required, a corrective action plan. These items must conform to the same requirements as those for a single audit.

If grantee or delegate agencies agree with current year audit findings, they should prepare a corrective action plan for each finding. Prior to issuance of the final report, agencies have an opportunity to respond to findings, which, if received in a timely manner, will be included in the final audit report by the auditors. If possible, the response also should detail the corrective action plan(s). This will speed the audit resolution process.

The reason(s) for disagreeing with an audit finding also should be part of the response. The auditor will, if received in a timely manner, include the views of responsible grantee or delegate agency officials in the audit report.

The complete audit-reporting package should be sent to:

The audit-reporting package must include:

• The Data Collection Form for Single (SF-SAC) signed by the chief executive officer or financial officer. Without this form, the reporting package will be returned.
  
  
• The audit report and schedule of findings and question costs.
  
  
• The following items prepared by the grantee or delegate agency:
  
  
  1. Financial statements and schedule of Federal expenditures
     
  2. Summary schedule of prior audit findings
     
  3. A corrective action plan if required.

The SF-SAC must indicate the Federal agency(s) and the Federal program(s) that have findings. The Federal Audit Clearing House will only forward audits with findings or question costs indicated on the SF-SAC to the affected Federal agencies. Federal agencies whose programs do not have findings or questioned costs will not receive a copy of the audit.

ACF uses audit reports for other purpose such as closing grants. Grantee agencies should submit a copy of the audit report, regardless of findings or questioned costs, to ACF at the same time the audit package is sent to the audit clearing house.

Delegate agencies must submit a copy of the reporting package to the grantee agency if there are findings and questioned costs. If not, the delegate agency should submit written notification that an audit was conducted. The notification should state that there were no findings or questioned costs pertaining to Head Start or Early Head Start and the summary of prior audit findings did not report any findings related to Head Start or Early Head Start. Delegates may use the reporting package for this notification.

Audit Resolution

Audits are considered resolved when a final decision is reached regarding questioned costs and a satisfactory corrective action plan including timetables has been developed. ACF also must clear the report from the internal tracking session.

Audit reports with Head Start findings are sent to the HHS Office of the Inspector General (OIG), National External Audit Review in Kansas City, MO., where the findings are reviewed and assigned to the appropriate office. A copy also is sent to the grantee agency. The transmittal letter informs the grantee agency that they have 30 days to respond to ACF. If the initial response is included in the audit report, this provides the grantee agency an additional opportunity to provide information regarding the findings.

When received in ACF, the audit report is reviewed to determine the acceptability of the audit findings based on regulations, laws, OMB circulars and policies and procedures. If the response to the audit findings is contained in the audit report and is determined inadequate, ACF will advise the grantee agency in writing and offer an opportunity to provide additional information.

If a grantee agency does not respond within the specified time frames, ACF will send a delinquency letter. This letter will request a response within 60 days of the date of the OIG transmittal letter. The letter also will tell the grantee agency that if they again fail to respond, ACF will make a decision and take what action is necessary to protect Federal funds. Grantee agencies may request an additional 30 days to develop the response.

ACF will attempt to reach agreement with the grantee agency on actions necessary to correct deficiencies. The agreement will be confirmed in writing (audit determination letter) and include the deficiency(s), corrective action, and the date for completing the action.

If the determination includes disallowed costs, the letter will state:

• The reason for the disallowance with appropriate citations
  
  
• The grant number and audit control number
  
  
• The dollar amount and how it was computed
  
  
• Instructions on how payment is to be made
  
  
• The interest rate if not paid in a timely manner.
  
  
• Appeal rights and appeal procedures

Grantee agencies should establish procedures for audit findings at the delegate agency level since they are responsible for resolving the findings.

If a grantee or delegate agency is unwilling or unable to correct deficiencies within a reasonable period of time, ACF or the grantee agency should take action to safeguard Federal funds.