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Applying the 50% rule in a single audit.


The Single Audit Act and circular A-128 require the auditor to determine and report on whether an entity has internal accounting and administrative control systems to provide reasonable assurance that it's managing federal financial programs in compliance with applicable laws and regulations. The auditor must make this determination regardless of whether he or she intends to rely on such systems.

A literal interpretation of this requirement would have the auditor study and evaluate each system the client uses, whatever the dollar amount of federal expenditures. The AICPA guide, however, provides a cost-effective way to meet this requirement--the 50% rule.

The 50% rule applies only to the auditor's study and evaluation of the entity's internal controls used in administering federal financial assistance. It does not apply to testing compliance with laws and regulations. Here's how it works.


A study and evaluation (including testing) of the significant internal control systems used to administer each major program must be performed. The results of this study provide the basis for the auditor's report on internal controls and may be used to restrict the substantive testing of individual major program transactions (that is, tests of compliance with laws and regulations). The significant controls tested generally include internal controls relevant to compliance with both the general and specific rules of the major programs.

If total cash and noncash expenditures of the major federal programs included in the study and evaluation equal or exceed 50% of total expenditures for all federal programs, the auditor should perform a preliminary review (as described in AU section 320.53 of the AICPA Professional Standards) of the internal accounting and administrative controls relating to all nonmajor programs.


If total cash and noncash expenditures under all major federal programs don't equal or exceed 50% of all federal expenditures, the auditor should include in the study and evaluation (including testing) the largest nonmajor programs until the 50% threshold is met. If a nonmajor program is used to meet the 50% requirement, the review of administrative controls for that program should include controls over both its general and specific requirements.

The auditor's report should list nonmajor program controls that were studied, evaluated and tested. The results of the study and evaluation of the controls over the chosen nonmajor programs provide support for the auditor's report on internal controls. Although the nonmajor programs are treated like major programs for these purposes, no separate sample of transactions is required to be selected or tested substantively for compliance with laws and regulations.

All other nonmajor programs that weren't used to meet the 50% requirement still would be subject to the preliminary review procedures described above.


If an entity has no major federal financial assistance programs, the auditor should perform a study and evaluation (including testing) of the internal accounting and administrative controls over the largest nonmajor programs, until total cash and noncash expenditures of these chosen federal programs meet 50% of the total expenditures of all federal programs. All of the other nonmajor programs would be subject to preliminary review procedures.


Auditors of states and other large government units may benefit from the President's Council on Integrity and Efficiency Standards Committee position statements nos. 2 and 3. These indicate that, under certain specific circumstances, performing the required preliminary review over the nonmajor programs can be done cyclically over a number of years. The approach can be justified only if there are a large number of nonmajor programs and these programs are administered by a number of operating components of the entity. At a minimum, for a cyclical approach to be acceptable, each program should be covered once every three years.

If a cyclical approach is used, the auditor's report should be modified to describe clearly the coverage provided for nonmajor programs. This cyclical approach has very limited application and is not intended for use on the majority of single audit engagements.


The AICPA government accounting and auditing committee is developing a statement of position that will update the 50% rule provisions of the guide. The update will reflect the requirements of several standards issued since the guide was published, including the 1988 edition of Government Auditing Standards, issued by the U.S. Comptroller General; Statement on Auditing Standards no. 55, Consideration of the Internal Control Structure in a Financial Statement Audit; SAS no. 60, Communication of Internal Control Structure Related Matters Noted in an Audit; and SAS no. 63, Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance.
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Author:McNamee, Patrick
Publication:Journal of Accountancy
Date:May 1, 1990
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