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Subrecipient Monitoring from the Auditee and Auditor Perspective

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1 Subrecipient Monitoring from the Auditee and Auditor Perspective
A Governmental Audit Quality Center Web Event March 7, 2012

2 Administrative Notes Troubleshooting Tips No Audio?
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3 Administrative Notes We encourage you to submit your technical questions – please limit your questions to the content of today’s program Submit your questions during the Web event by clicking on the “Q & A” tab on the lower right portion of your screen and then clicking on “Ask Question” You can also download slides in PDF or PowerPoint by clicking on “Handouts” tab This event is being recorded and will be posted in an archived format to the GAQC Web site

4 Continuing Professional Education
There will be a total of 8 participation pop-up markers during the event (i.e., about 1 every 15 minutes) To obtain CPE, you must click “OK” on 75% of the participation pop-up markers (i.e., 6 of 8) To track your progress, click on the “Participation” tab on the lower right- portion of your screen to see how many markers have been issued and how many you have clicked on If you are not receiving CPE for this event, ignore the pop-up markers if they appear

5 Kevin W. Smith, CPA & Joel M. Black, CPA

6 What will we cover Roles & Responsibilities The Subaward Agreement
The Risk Assessment Monitoring Procedures Monitoring Follow-Up Auditor Review of Monitoring Activities

7 Roles & Responsibilities

8 Understanding Compliance
Grants funded by the federal government must be administered according to federal regulations, state laws, and specific terms and conditions of the award As a prime recipient of funding, the grant recipient is responsible for: Complying with laws, regulations, rules, and procedures; Monitoring contractors and sub-recipients; Fulfilling required reporting; Accomplishing the goals and objectives of the grant and the awarding agency; and Communication.

9 Prime recipients are responsible for sub-recipients and contractors.
Regulatory compliance; Ensuring reporting is completed timely; Data accuracy and completeness; Prevention of misuse of funds; Key steps: Appropriately define an organization as a sub-recipient or vendor; Communicate applicable responsibilities and regulations; and Act promptly when issues are observed.

10 Subrecipient / Vendor Determination
All characteristics need not be present Judgment should be used in the determination process

11 Subrecipient Characteristics
Provider determines eligibility. Provider has performance measured against federal program objectives. Provider responsible for programmatic decisions. Provider responsible for federal program compliance requirements. Provider uses federal funds to carry out its own program.

12 Vendor Characteristics
Organization provides the goods and services within normal business operations. Organization provides similar goods or services to many different purchasers. Organization operates in a competitive environment. Organization provides goods or services that are ancillary to the operation of the federal program. Organization is not subject to compliance requirements of the federal program.

13 The Subaward Agreement

14 Subaward Agreements Agreements shall outline: Must also include:
Scope of Work Budget Performance Requirements Program Authorizing Legislation Program Regulations Must also include: CFDA Title and Number ( Award Name Name of Federal Agency Applicable Compliance Requirements Notification of Annual Risk Assessment

15 Subaward Agreements, Cont.
Key provisions must include minimum administrative requirements: Period of Availability Financial Management Program Income Procurement Real Property Financial Reports Equipment Program Reports Supplies Records Retention Monitoring Cost Allocation Audits Payment Other Matching

16 Sub-granting and Sub-contracting Federal Awards
Department of Energy Example Contract provisions All contracts must include specific language pertaining to, but not limited to, the following areas: Contract Work Hours and Safety Standards Act Equal Employment Opportunity Byrd Anti-Lobbying Amendment Clean Air Act ARRA-specific language Buy America requirements Davis-Bacon applicability Limits on use of funds Reporting requirements Ownership of materials and products

17 The Risk Assessment

18 What is a Risk Assessment?
Risk assessment is completed annually. Risk assessment measures two quantities: Magnitude of the potential loss Probability that the loss will occur What is the overall risk assessment for the subrecipient? Determines frequency of monitoring Determines depth of monitoring

19 Identify and Limit Risk
Understand sub-recipients’ familiarity with the program and applicable regulations; Design contracts in accordance with federal regulations and to account for all data and reporting requirements; Incorporate contract language that allows your organization to amend contracts as additional guidance from the federal government is received; Review the results of previous audits for any findings that may have resulted; and Submit timely, detailed enforcement reports to the federal government to demonstrate that sub-recipient monitoring is a priority and is being executed when issues are observed.

20 Risk Assessment May Include…
Size of the award Percentage of award vs. total federal awards received by the agency Complexity of award requirements Single or multi-year award Subrecipient experience Prior monitoring / audit results

21 Additional Items to Consider…
Provider History Policies and Procedures Financial Stability Management Systems

22 Risk Assessment The output should be a report indicating where gaps or deficiencies exist and recommendations for improvement: What might be found? Current procurement policies allow for use of unjustified sole sourcing of vendors; No sub-recipient monitoring plan exists so the organization is unsure when to review sub-recipients and what should be reviewed when on-site; Financial management systems do not allow for the use of sub-accounts; Time reporting policies exist, but no one reviews them for accuracy; and Pre-approval from the federal government for the purchase of equipment and real property was not obtained in all circumstances.

23 Monitoring Procedures

24 Subrecipient Monitoring
Compliance Requirements - A pass-through entity is responsible for: Award Identification During-the-Award Monitoring Subrecipient Audits Ensuring Accountability of For-Profit Subrecipients Pass-Through Entity Impact Central Contractor Registration

25 What, Why, Who, and When? What is monitoring?
A process that evaluates how a grantee is administering a grant according to the requirements of the grant: Eligibility Determination Allowability of Services Allowable Costs Internal Management Systems Procurement Policy Other Why is monitoring important? Ensure compliance with federal rules and regulations Ensure services are provided in accordance with subaward agreement What is the role of a monitor? Notification of review Request necessary policies and documents Provide technical assistance as needed When do you monitor? As deemed necessary based on annual risk assessment

26 Monitoring Plan Clearly identify necessary activities and responsible parties; Review debarment lists; Allow for consistency throughout monitoring activities; Characteristics include: Data quality reviews; Required progress reporting; Site and desk reviews, potentially critical for large-scale projects; Compliance auditing; and Develop corrective action plans.

27 Monitoring Plan Once the process has concluded, develop and implement an internal action plan: Revise policies and procedures; Enforce compliance with the internal requirements; and Execute ongoing monitoring. Utilize your internal auditors to conduct regular, detailed reviews; and Know where others have faltered.

28 How Do You Monitor? Techniques for conducting monitoring activities
Desk reviews Executed at the pass-through entity’s site (i.e. not at the sub-recipient’s location); May include, at a minimum, financial reviews for allowability prior to invoicing the federal government, reviews of progress reports, and assessments of the sub-recipient’s independent audit. On-site field reviews Executed periodically and may follow a risk-based approach for scheduling; Should include sampling contracts, transactions, reviewing supporting documentation, and assessing documented policies and procedures; and Should involve technical experts if the project is of a technical nature (e.g. construction or energy engineering).

29 Eligibility Determination
Verify that eligibility was properly determined. Suggested activities: Review program forms to ensure they capture accurate eligibility requirements. Review case files, completed applications, and other program records and forms to determine that the subrecipient is appropriately assessing eligibility criteria.

30 Allowability of Services
Verify that services provided were allowable under grant rules and were provided as billed. Suggested activities: Review program records as well as brochures and any other materials disseminated to the public. Review program forms to ensure they capture accurate program services. Review program records to ensure documentation of service delivery.

31 Allowable Costs Verify that the cost of goods, services, and property are allowable, in accordance with federal regulations, and expenditures appear to be within the submitted budget. Suggested activities: Review purchasing records. Review monthly expenditure reports. Review invoices and budgets.

32 Cost Allocation Verify financial records to assure accounting records identify the source of funds and provide for accurate division of charges and cost as related to the subaward agreement. Suggested activities: Review cost allocation methodology. Observe use of acquired assets to verify they are being used as charged.

33 Cash Management Verify cash management system provides reasonable assurance that federal funds are drawn down only for immediate needs. (Not applicable for reimbursement basis agreements.) Suggested activities: Review start up funds. Review funding requests vs. expenditures.

34 Program Income Verify that program income practice provides reasonable assurance income is correctly earned, recorded and used in accordance with the program requirements. Suggested activity: Review records to ensure that program income was: Recorded as earned. Deposited as collected.

35 Internal Management Systems
Verify that sufficient internal management systems are in place to ensure subrecipient has effective control over and accountability for all funds, property, and other assets. Suggested activities: Review subrecipient’s procedure manual and or operating policies. Review subrecipient’s inventory report/listing. Review prior audits and corrective action plans.

36 Procurement Policy Verify that the subrecipient’s procurement policy represents an acceptable level of internal control and is in accordance with federal procurement requirements. Suggested activities: Review any codes of conduct. Review transactions

37 During-the-Award Monitoring
Factors that may affect the nature, timing, and extent of during-the-award monitoring: Program complexity Percentage passed through Amount of awards Subrecipient risk

38 Agreed-upon Procedures Engagements
A pass-through entity may arrange for agreed-upon procedures engagements for certain aspects of subrecipient activities, such as eligibility determinations. Since the pass-through entity determines the procedures to be used and compliance areas to be tested, these agreed-upon procedures engagements enable the pass-through entity to target the coverage to areas of greatest risk.

39 Reports Verify financial and other reports are supported by underlying accounting or performance records and are submitted in accordance with the provisions of the subaward agreement. Suggested activity: Review records to ensure: Timeliness Accuracy Completeness

40 Sub-granting and Sub-contracting Federal Awards
Progress reports and performance metrics are frequently being required. Recipients must report on progress toward achieving objectives and provide justification for variation from identified milestones. Consider the Performance Metrics and Benefits Plan for the SGIG Must specify two types of measures: build and impact metrics; Report to the Data Hub; and DOE may be involved to ensure alignment with federal goals and objectives.

41 Sub-granting and Sub-contracting Federal Awards
Examples of Reporting Systems

42 Monitoring Results Upon conclusion of monitoring:
Findings will be completed by the reviewer and signed by the director of the agency or designee. A copy will be mailed to the subrecipient identifying any deficiencies. Immediate action should be taken to correct issues involving ineligible uses of federal funds. A corrective action plan should be developed by the subrecipient within 60 days from the issuance of the review findings to address deficiencies or noncompliance issues.

43 Monitoring Results, continued
Review corrective action plans based on the pass-through entity’s monitoring work or the results of independent audits; Sanction subrecipients as allowed by federal regulations if they are found to be in noncompliance Withhold payments Require that sub-recipient reimburse the pass-through entities Terminate the contract Report noncompliance or sanctioning activities to the federal government for follow-up when required. Document the execution of monitoring activities and corrective action taken.

44 Monitoring Follow-Up

45 Monitoring Follow-Up Why is follow-up important?
Identify recurring problems to a program Example: Incorrect eligibility determinations could result in unallowable charges to federal program. Identify recurring problems with a subrecipient Example: Subrecipient that fails to correct monitoring findings is at risk of incurring additional unallowable costs or audit findings.

46 Auditor Review of Monitoring Activities

47 Audit Objectives Internal Control to support a low control risk assessment. Compliance

48 Audit Planning Considerations
Effect of pass-through awards on the determination of major programs Expenditure is based on when the activity related to the award occurs Federal awards are deemed to be expended by the pass-through entity when the funds are disbursed to subrecipients, regardless of when subrecipients expend the federal funds Materiality Matter of professional judgment – influenced by the auditor’s perception of the needs of a reasonable person who will rely upon the auditor’s work

49 Control Objectives To provide reasonable assurance that Federal award information and compliance requirements are identified to subrecipients, subrecipient activities are monitored, subrecipient audit findings are resolved, and the impact of any subrecipient noncompliance on the pass-through entity is evaluated. The pass-through entity should perform procedures to provide reasonable assurance that the subrecipient obtained required audits and takes appropriate corrective action on audit findings.

50 Control Environment Establishment of “tone at the top” of management’s commitment to monitoring subrecipients. Management’s intolerance of overriding established procedures to monitor subrecipients. Entity’s organizational structure and its ability to provide the necessary information flow to monitor subrecipients are adequate. Sufficient resources dedicated to subrecipient monitoring. Knowledge, skills, and abilities needed to accomplish subrecipient monitoring tasks defined. Individuals performing subrecipient monitoring possess knowledge, skills, and abilities required. Subrecipients demonstrate that: They are willing and able to comply with the requirements of the award, and They have accounting systems, including the use of applicable cost principles, and internal control systems adequate to administer the award. Appropriate sanctions taken for subrecipient noncompliance.

51 Risk Assessment Key managers understand the subrecipient’s environment, systems, and controls sufficient to identify the level and methods of monitoring required. Mechanisms exist to identify risks arising from external sources affecting subrecipients, such as risks related to: Economic conditions. Political conditions. Regulatory changes. Unreliable information. Mechanisms exist to identify and react to changes in subrecipients, such as: Financial problems that could lead to diversion of grant funds, Loss of essential personnel, Loss of license or accreditation to operate program, Rapid growth, New activities, products, or services, and Organizational restructuring.

52 Control Activities Identify to subrecipients the Federal award information (e.g., CFDA title and number, award name, name of Federal agency, amount of award) and applicable compliance requirements. Include in agreements with subrecipients the requirement to comply with the compliance requirements applicable to the Federal program, including the audit requirements of OMB Circular A-133. Subrecipients’ compliance with audit requirements monitored.

53 Information and Communication
A listing of Federal requirements that the subrecipient must follow. Items can be specifically listed in the award document, attached as an exhibit to the document, or incorporated by reference to specific criteria. The description and program number for each program as stated in the CFDA. If the program funds include pass-through funds from another recipient, the pass-through program information should also be identified. A statement signed by an official of the subrecipient, stating that the subrecipient was informed of, understands, and agrees to comply with the applicable compliance requirements. A recordkeeping system is in place to assure that documentation is retained for the time period required by the recipient. Procedures are in place to provide channels for subrecipients to communicate concerns to the pass-through entity.

54 Monitoring Establish a tracking system to assure timely submission of required reporting, such as: financial reports, performance reports, audit reports, onsite monitoring reviews of subrecipients, and timely resolution of audit findings. Supervisory reviews performed to determine the adequacy of subrecipient monitoring.

55 Audit Procedures - Compliance
Gain an understanding of the pass-through entity’s subrecipient monitoring procedures Test the pass-through entity’s subaward review and approval documents to determine whether, before award, the pass-through entity checked CCR to determine whether subrecipients were registered. Test award documents and agreements to ascertain if: (a) at the time of award the pass-through entity made subrecipients aware of the award (b) the activities approved in the award documents were allowable Review the pass-through entity’s documentation of during-the-award monitoring. Review the pass-through entity’s follow-up to ensure corrective action on deficiencies noted in during-the-award monitoring.

56 Compliance Continued Verify that the pass-through entity:
a. Ensured that the required subrecipient audits were completed b. Issued management decisions on audit findings within 6 months after receipt of the subrecipient’s audit report. c. Ensured that subrecipients took appropriate and timely corrective action on all audit findings. Verify that in cases of continued inability or unwillingness of a subrecipient to have the required audits, the pass-through entity took appropriate action using sanctions. Verify that the effects of subrecipient noncompliance are properly reflected in the pass-through entity’s records. Verify that the pass-through entity monitored the activities of subrecipients not subject to OMB Circular A-133, including for-profit entities. Determine if the pass-through entity has procedures that allow it to identify the total amount provided to subrecipients from each Federal program.

57 When the Subrecipient Monitoring System is NOT Sufficient
Report a significant deficiency or material weakness in internal control over compliance Consider whether the insufficient monitoring system represents an instance of noncompliance that should be reported as a compliance finding (very likely) Consider the effect of the noncompliance on the opinion on compliance for major programs

58 When the Subrecipient Monitoring System is NOT Sufficient
Request by pass-through to perform additional audit procedures Expansion of the scope Would not remedy the internal control over compliance finding May remedy the noncompliance Potential impact on the financial statements Financial statement opinion Yellow Book finding

59 Reporting Considerations
SEFA should identify the total amount provided to subrecipients from each federal program If unable to identify, determine if a finding in internal control over compliance or compliance should be reported. Evaluation of audit findings Circular A-133 requires consideration of a finding whether or not it can be quantified Consider whether instances identified should be reported with respect to subrecipient monitoring

60 Reporting Considerations
Effect of subrecipients’ noncompliance on the pass-through entity’s report Noncompliance reported in the subrecipients’ audit reports are not required to be included in the pass-through entity's audit report Auditor of pass-through should consider the effect of reported instances that could have a material effect on each of the pass-through entity’s major programs Adjustment of pass-through entity financial records and reports

61 Audit Considerations of Subrecipients
Additional compliance requirements established by pass-through entities Information included in the SEFA A-133 requires the name of the pass-through entity and identifying number assigned by the pass-through Subrecipients may choose to provide information requested by federal awarding agencies and pass-through entities Audit findings Submission of the report – A-133 §320(e)

62 Where do you look for guidance?
Current OMB Circular A-133 Compliance Supplement AICPA Audit Guide, Government Auditing Standards and Circular A-133 Audits

63 Questions ????? 63

64 Have more questions? Kevin Smith Joel Black
Joel Black .

65 How do I get my CPE certificate?
Just follow these steps: Go to Click on “My Account” at the top of the page and enter your CPA2Biz/AICPA username and password Click on “My Web Events” tab Click on “AICPA Learning Center Transcripts and Certificates” link (a new window or tab will open) On the AICPA Learning Center, click on “My Transcripts” in the left-hand menu Locate your completed course and click on “Go” to retrieve your certificate. If you need assistance with locating your certificate, please contact the AICPA Service Center at or

66 Evaluations
Please take a few minutes to let us know what you thought about today’s Web event Click on the link below to begin a short evaluation

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