4. Basic Financial Management Principles: Federal Financial Management Requirements

Audits

Agencies that expend more than $300,000 in Federal cash are required to have an audit completed each year. The audit is referred to as a "Single Audit," as the auditor will review all programs. The OMB Circular A-133 and the OMB Circular A-133 Compliance Supplement help the auditors in fulfilling their responsibilities and define compliance issues for each program. The audit, which is completed by an independent auditor, will help to determine:

• Whether the agency's financial statements are accurate;
• Whether the agency is complying with the terms and conditions of the grant;
• Whether appropriate financial and administrative procedures and controls have been installed and are operating effectively; and
• Whether the agency is complying with laws, regulations, and the provisions of contracts or grant agreements.

A financial audit is a process for testing the accuracy and completeness of information presented in an organization's financial statements as well as evaluating the financial systems used to gather this information. This testing process enables an independent certified public accountant (CPA) to issue what is referred to as "an opinion" on how fairly the agency's financial statements represent its financial position and whether they comply with Generally Accepted Accounting Principles (GAAP).

The audit team also will develop an opinion regarding the internal control structure of the agency. The team may test program data to ensure compliance with regulations. During the audit, the auditor may determine that there are "disallowed costs" or costs which were not appropriate under the terms of the grant. For example, fundraising costs are specifically unallowable and may not be paid with Federal funds. Significant findings will be written up in the audit report. Audit findings are sent to the funding agency and disallowance of Federal funds or a financial penalty(ies) may result.

Per the OMB Circular A-133, the auditor(s) will:

• Perform an audit of the financial statement(s) for the Federal program in accordance with Generally Accepted Government Auditing Standards (GAGAS) (A-133.235(b)(3)(i));
• Perform procedures to determine whether the auditee has complied with laws, regulations, and the provisions of contracts or grant agreements that could have a direct and material effect on the Federal program consistent with the requirements for a major program (A-133.235(b)(3)(iii)); and
• Follow up on prior audit findings, perform procedures to assess the reasonableness of the summary schedule of prior audit findings prepared by the auditee, and report, as a current year audit finding, when the auditor concludes that the summary schedule of prior audit findings materially misrepresents the status of any prior audit finding in accordance with the requirements (A-133.235(b)(3)(iv)).

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