Audit of Federal Fund Recipients

Who Audits Grants and Why?

There is no single, simple answer to either the “who” or the “why” of this question.  Most frequently, the audit of federal fund recipients occurs under an organization-wide or single audit under the Office of Management and Budget Circular A-133 which implements the Single Audit Act (31 USC §§7501-7507).  In addition to the A-133 audit, other audits are conducted by federal and non-federal auditors of financial statements, internal controls, financial capability, and other key areas such as performance under the awards.  Audits may be conducted by the office of Inspector General, Government Accountability Office, and the Defense Contract Audit Agency, as well as various branches of each program agency, its representatives, or by auditors retained by recipients under the terms and conditions of the awards.

Auditors conduct audits for multiple reasons.  Here are several of them:
•    To ensure that funds are expended in the manner and for the purpose they have been awarded
•    To ascertain that funds are properly managed and controlled
•    To determine that reports are properly prepared and represent the actual transactions and events that occurred related to the projects
•    To protect the welfare and interests of the public whose funds are being used

An Audit is Not an Audit If. . .

Audits vary in nature, scope, and purpose.  They also vary depending upon the standards under which they are conducted.  Due to the diversity of audits, a federal funds recipient who has received a “clean audit” opinion by one audit group should not assume there are no issues in the organization – or that the organization is in compliance. One audit by one group does not a compliant organization make!

The first thing to understand is what an audit encompasses.  An audit in general examines a “representative sample” of the organization’s activities to determine if those activities “match” what the organization says is taking place.  For instance, if the audit relates to the financial statements, do the financial statements match the actual financial activities of the organization and the period being reported?  The auditor examines transactional documents and records to determine what the financial statements should be and determines if they are accurate – and issues an opinion.  The examination of the transactions will include looking at the accounting records, support documentation, banking records, and many more items.  It will include verifying the existence of assets and liabilities.  On the other hand, a government audit of indirect rates will require the financial statements AND an analysis of the classification of the line items on those financial statements into cost categories – direct, indirect overhead, indirect general and administrative, unallowable, and other subcategories – to enable the calculation of cost pools and bases.  The audit will also require an examination of costs across projects, periods, and categories to determine consistency of treatment.  Further, recordkeeping, documentation, and other requirements related to allowability would be examined.  So a federal funds recipient could under go an annual audit of financial statements and receive an unqualified audit opinion on those financial statements and in the next week, be visited by a government auditor who reviews the indirect rate submission and determines that indirect rates are improperly calculated.

An audit must meet certain standards of performance to “count”.  Under the requirements for mandatory audits (where a federal funds recipient must cause an audit to occur if federal funds of at least $500,000 are received and expended in a single year), the audit must satisfy one of two criteria:

•    Meet the Single Audit Act (A-133) standard
•    Financial audit conducted under the Generally Accepted Government Auditing Standards (GAGAS) – Yellow Book

What do these two audits have in common?  Well, they both are comprehensive.  They both examine the organization and how the activities of the organization impact the utilization and safeguarding of federal funds.  For example, did the recipient manage and use the funds with due care?  Did the recipient perform the work expected with the funds?  What results were achieved?  What controls and oversight were exercised?  How were costs managed?

You may be thinking that performance audits aren’t required under the Single Audit Act.  You are correct!  They usually comprise a significant part of the Inspector General’s audit activities, however, and, as a result, are ultimately part of the audit equation of any federal funds recipient.  Funding is, after all, about an organization performing some activity on behalf of the government – and because of the Government Performance and Results Act (GPRA), performance is part of the equation for any recipient under any comprehensive audit.

Who Pays for the Audit?

An audit is paid for by the recipient when the recipient retains an auditor to conduct the audit.  When an organization hires an independent audit firm to conduct a financial audit or any other audit to meet the mandatory annual audit requirement, the company picks up the bill.  An organization is not charged for a government audit.  The organization is, however, responsible for any fees associated with consultants, accountants, advisors, etc. related to activity in support of an audit being conducted by government auditors.  This means you don’t get a bill from the government for an audit by the Office of Inspector General, Program Office, Indirect Cost Branch, Defense Contract Audit Agency,  and other agencies.  Those are your tax dollars at work!  You do get billed by your CPA, bookkeeper, or other parties who provide services to support you during the audit – those are your costs.

When to Audit

For any year that you meet the mandatory audit threshold, the audit must be completed and submitted within nine months of the end of a program or the organization’s end of fiscal year OR six months after the end of a period if you have an approved indirect rate agreement.

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