Spring 2012 issue of Horizons

It is very important for government finance officials responsible for the external audit to be familiar with the independence rules their auditors are required to follow. The effective date of the new Yellow Book standards is for period ending on or after December 15, 2012 and early implementation is not permitted. Expected Changes to the A-133 Threshold and the Compliance Supplement Currently, state and local governments expending over $500,000 in federal financial assistance are required to undergo an audit in accordance with OMB Circular A-133, otherwise known as a “Single Audit.”

In addition, the proposed rule changes include a new category of reporting for those entities expending between $1 and $3 million. For these entities, major program audit procedures would focus on testing only two compliance requirements – allowable and unallowable costs and one additional requirement that would be selected by the federal agency responsible for the program. The proposed changes are silent regarding the level of testing of internal control over compliance that would be expected. For entities expending more than $3 million in federal awards, a full Single Audit would be required. Under the proposed changes, the revised compliance supplement would have streamlined compliance requirements, there would be more audit follow-up by federal agencies, and there is a reduced burden on pass-through entities and subrecipients. With this pending threshold change on the horizon, it is still important to continue to monitor spending of federal funds and to implement strong internal control procedures to prevent the unauthorized use of these monies in the event an A-133 audit is required and also to protect your organization.

The Single Audit Act Amendments of 1996 included a requirement for the director of the OMB to review this threshold every two years. This Single Audit threshold was last increased in June of 2003 from $300,000 to $500,000. When this change was implemented for June 30 and December 31, 2003 audits, several local governments were exempted from the A-133 provisions, which in some cases resulted in cost savings for the entity. However, in recent years, as federal funding (specifically American Recovery and Reinvestment Act (ARRA) assistance) was distributed, many local governments such as smaller school districts that had previously not met the threshold, found themselves required to receive a Single Audit. OMB has recently issued proposed rule changes for Single Audits that would increase the threshold to $1,000,000; however, they may still require some type of audit for entities expending federal financial assistance between $500,000 and the new threshold. Should this threshold be increased substantially, some local governments may no longer require an A-133 audit of the federal funds expended.

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