[Code of Federal Regulations]
[Title 7, Volume 4]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR277.17]

[Page 887-889]
 
                          TITLE 7--AGRICULTURE
 
    CHAPTER II--FOOD AND NUTRITION SERVICE, DEPARTMENT OF AGRICULTURE
 
PART 277--PAYMENTS OF CERTAIN ADMINISTRATIVE COSTS OF STATE AGENCIES--Table of Contents
 
Sec. 277.17  Audit requirements.

    (a) General. This section sets forth the audit requirements for 
State agencies that receive FNS program funds. Audits shall be conducted 
on an organization-wide basis. Such audits are to determine whether:
    (1) Financial operations are conducted properly;
    (2) The financial statements are presented fairly;
    (3) The organization has complied with laws and regulations 
affecting the expenditure of Federal funds;
    (4) Internal procedures have been established to meet the objectives 
of federally assisted programs; and
    (5) Financial reports to the Federal Government contain accurate and 
reliable information.

Except where required by law, no additional requirements for audit will 
be imposed by FNS unless approved by the Office of Management and Budget 
(OMB). The provisions of this section do not limit the authority of FNS 
to make audits of State agencies, their subdivisions, and subcontracts. 
However, if independent audits arranged for

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by State agencies meet the requirements prescribed herein, FNS shall 
rely on them, and any additional audit work already done.
    (b) Audit standards. (1) State agencies shall use their own 
procedures to arrange for independent audits, and to prescribe the scope 
of audits, provided that the audits comply with the requirements set 
forth in this section. Where contracts are awarded for audit services, 
the contracts shall include a reference to OMB Circular A-102, 
Attachment P.
    (2) Audits shall be made in accordance with the General Accounting 
Office ``Standards for Audit of Governmental Organizations, Programs, 
Activities, and Functions, the Guidelines for Financial and Compliance 
Audits of Federally Assisted Program,'' and any compliance supplements 
approved by OMB, and generally accepted auditing standards established 
by the American Institute of Certified Public Accountants.
    (c) Purpose of audit. Audits will include, at a minimum, an 
examination of the systems of internal control, systems established to 
ensure compliance with laws and regulations affecting the expenditure of 
Federal funds, financial transactions and accounts, and financial 
statements and reports of State agencies. These examinations are to 
determine whether:
    (1) There is effective control over and proper accounting for 
revenues expenditures, assets, and liabilities.
    (2) The financial statements are presented fairly in accordance with 
generally accepted accounting principles.
    (3) The Federal financial reports (including Financial Status 
Reports, Cash Reports, and claims for advances and reimbursements) 
contain accurate and reliable financial data; and are presented in 
accordance with the terms of applicable agreements, and in accordance 
with Attachment H of OMB Circular A-102.
    (4) Federal funds are being expended in accordance with the terms of 
applicable agreements and those provisions of Federal law or regulations 
that could have a material effect on the financial statements or on the 
awards tested.
    (d) Audit coverage. A representative number of charges to Federal 
funds shall be tested. The test shall be representative of:
    (1) The universe of Federal funds received, and
    (2) All cost categories that materially affect the award. The test 
is to determine whether the charges:
    (i) Are necessary and reasonable for the proper administration of 
the program;
    (ii) Conform to any limitations or exclusions in the award;
    (iii) Were given consistent accounting treatments and applied 
uniformly to both federally assisted and other activities of the State 
agency;
    (iv) Were net of applicable credits;
    (v) Did not include costs property chargeable to other federally 
assisted programs;
    (vi) Were properly recorded (i.e., correct amount, date) and 
supported by source documentation;
    (vii) Were approved in advance, if subject to prior approval in 
accordance with Financial Management Circular 74-4;
    (viii) Were incurred in accordance with competitive purchasing 
procedures, if covered by OMB Circular A-102, Attachment O; and
    (ix) Were allocated equitably to benefiting activities, including 
non-Federal activities.
    (3) Audits usually will be made annually, but not less frequently 
than every two years.
    (4) If the auditors become aware of irregularities in the State 
agency, subagency or subcontractor, the auditor shall promptly notify 
the cognizant agency and State agency management officials above the 
level of involvement. Irregularities include such matters as conflict of 
interest, falsification of records or reports, and misappropriation of 
funds and other assets.
    (e) Audit report. The audit report shall include:
    (1) Financial statements, including footnotes, of the State agency, 
subagency, or subcontractor organization.
    (2) The auditor's comments on the financial statements which should:
    (i) Identify the statements examined and the period covered.

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    (ii) Identify the various programs under which the organization 
received Federal funds, and the amounts received for each program.
    (iii) State that the audit was done in accordance with paragraph (d) 
of this section.
    (iv) Express an opinion as to whether the financial statements are 
fairly presented in accordance with generally accepted accounting 
principles. If an unqualified opinion cannot be expressed, state the 
nature of the qualification.
    (3) The auditor's comments on compliance and internal control which 
should:
    (i) Include comments on weaknesses in and noncompliance with the 
systems of internal control, separately identifying material weaknesses.
    (ii) Identify the nature and impact of any noted instances of 
noncompliance with the terms of agreements and those provisions of 
Federal law or regulation that could have a material effect on the 
financial statements and reports.
    (iii) Contain an expression of positive assurance with respect to 
compliance with requirements for tested items, and negative assurance 
for untested items.
    (4) Comments on the accuracy and completeness of financial reports 
and claims for advances or reimbursements to Federal agencies.
    (5) Comments on corrective action taken or planned by the State 
agency.
    (f) Record retention. Work paper and reports shall be retained for a 
minimum of three years from the date of the audit report unless the 
auditor is notified in writing by the cognizant agency of the need to 
extend the retention period. The audit workpapers shall be made 
available upon request to the cognizant agency or its designees and the 
General Accounting Office or its designees.
    (g) Cognizant agency responsibilities. The cognizant agency shall 
have the following responsibilities:
    (1) Obtain or make quality assessment reviews of the work of non-
Federal audit organizations, and provide the results to other interested 
audit agencies. If a non-Federal audit organization is responsible for 
audits of State agencies that have different cognizant audit agencies, a 
single quality assessment review will be arranged.
    (2) Assure that all audit reports of State agencies that affect 
federally assisted programs are received, reviewed, and distributed to 
appropriate Federal audit officials. These officials will be responsible 
for distributing audit reports to their program officials.
    (3) Whenever significant inadequacies in an audit are disclosed, the 
State agency will be advised and the auditor will be called upon to take 
corrective action. If corrective action is not taken, the cognizant 
agency shall notify the State agency and Federal awarding agencies of 
the facts and its recommendation. Major inadequacies or repetitive 
substandard performance of independent auditors shall be referred to 
appropriate professional bodies.
    (4) Assure that satisfactory audit coverage is provided in a timely 
manner and in accordance with the provisions of this section.
    (5) Provide technical advice and act as a liaison between Federal 
agencies, independent auditors and State agencies.
    (6) Maintain a followup system on audit findings and investigative 
matters to assure that audit findings are resolved.
    (7) Inform other affected audit agencies of irregularities 
uncovered. The audit agencies, in turn, shall inform all appropriate 
officials in their agencies. State or local government law enforcement 
and prosecuting authorities shall also be informed of irregularities 
within their jurisdiction.
    (8) Recipients shall require subrecipients that are local 
governments of Indian tribal governments to adopt the requirements in 
paragraphs (d) through (f) of this section. The recipient shall ensure 
that the subrecipient audit reports are received as required, and shall 
submit the reports to the cognizant agency. The cognizant agency will 
have the responsibility for those reports described in paragraph (g) of 
this section.

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