OMB changes audit requirements for recipients of federal financial assistance.

The Office of Management and Budget has changed the audit requirements for not-for-profits that receive federal financial assistance. The revisions to OMB Circular A-133, Audits of Institutions of Higher Education and Other Non-Profit Institutions, will be effective for audits of fiscal years ending on or after June 30, 1997. Significant changes to circular A-133 include an increase in the dollar threshold used to determine which entities require an audit, a new risk-based approach to select major programs and a reduction in the number of months an entity has to submit the single audit report.

The OMB has been seeking to combine the audit requirements under circular A-133 with those of Circular A-128, Audits of State and Local Governments. EfForts are under way in both the House and Senate to amend the Single Audit Act of 1984, in part, to facilitate this change. Congress has drafted revisions to the Single Audit Act that await floor votes and presidential signature. It is likely that the act will be amended, and the OMB is expected to rescind circular A-128 and extend the provisions of circular A-133 to state and local governments, colleges and universities and not-for-profit organizations, including not-for-profit hospitals.

"Basic audit requirements should be the same for all recipients of federal awards," said Sheila O. Conley, of the OMB's Office of Federal Financial Management. "That is what the OMB is trying to achieve with the revisions to A-133."

Eyeing larger entities

Perhaps the most significant change to circular A-133 was the increase in the audit threshold--from $25,000 to $300,000--used to determine the entities to be audited. The revision is expected to reduce audit costs while providing an appropriate level of audit coverage of federal programs. "If your organization expends $300,000 or more in federal awards in your fiscal year, you have an audit requirement under A-133," said Conley. "It is not cost-effective for entities that expend less than $300,000 to have comprehensive A-133 audits."

She said the threshold increase would not relieve pass-through entities from the responsibility for monitoring their subrecipients that expend less than $300,000. "Pass-through entities must design more targeted and focused subrecipient monitoring programs to gain the assurances they need;' said CoNey.

Choosing a major program

The revised A-133 implements a risk-based approach to determine major programs. "The manner in which major programs are determined is important because the primary focus of an A-133 audit is now on the major programs," said Conley. Before the revisions, major programs were determined solely on the basis of federal expenditures. Now, the auditor will determine a major program on the basis of its prior audit history, federal oversight and the inherent risk of the program.

"The monetary value of the federal program always will be an important indicator of risk, but it will no longer be the only criterion used to select major programs. This approach will focus audit resources on the areas of greatest risk," said CoNey.

The American Institute of CPAs opposed the concept of having the auditor perform the risk assessment, suggesting instead that the federal agency determine the major federal financial assistance programs that should be tested. The AICPA also said the cost to perform the risk assessments would not be offset by the savings gained by reducing the number of tested programs.

Nonetheless, the OMB said the auditor was best suited to determine the major programs and adopted the revision. However, to assist the auditor, the revision includes objective criteria for determining risk, Also, the auditor's judgment in applying the risk-based approach is presumed correct if performed and documented in accordance with the circular. "We felt the auditors were best suited to determine major programs because they make judgments about risk throughout the audit process" said CoNey.

Other notable revisions to A-133

Circular A-133 shortened the due date for A-133 audit reports from 13 to 9 months. Although many respondents to the proposed revision were concerned about the 9-month deadline, most program managers were very supportive.

The OMB also adopted a recommendation by the General Accounting Office to include in the A-133 audit a summary of the auditor's results. Auditors will have to summarize, among other things, the type of report the auditor issued on the financial statements, such as an unqualified, qualified or adverse opinion, and whether the report on internal control reflects reportable conditions.

The revised circular prohibits auditors that prepare indirect cost proposals and cost allocation plans for an entity that recovers over $1 million in indirect costs from also performing circular A-133 audits for that entity. "The federal agencies were concerned that the perception of auditor independence was impaired when the auditor that performed the A-133 audit also prepared the indirect cost proposal," said Conley.

The new A-133 requires an opinion on major program compliance, and it requires the auditor to test internal controls. "The revisions clarify the required level of internal control testing," said Conley. "In the past, we wanted internal control testing, but we did not prescribe how much;'

A copy of circular A-133 can be obtained by calling the OMB fax information hotline at [phone], document no. 1133, or on the Internet at http://www.whitehouse.gov/ WH/EOP/omb.