[Code of Federal Regulations]
[Title 38, Volume 2]
[Revised as of July 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 38CFR41.8]

[Page 734-735]
 
            TITLE 38--PENSIONS, BONUSES, AND VETERANS' RELIEF
 
          CHAPTER I--DEPARTMENT OF VETERANS AFFAIRS (CONTINUED)
 
PART 41--AUDITING REQUIREMENTS--Table of Contents
 
Sec. 41.8  Internal control and compliance reviews.

    The Single Audit Act requires that the independent auditor determine 
and report on whether the organization has internal control systems to 
provide reasonable assurance that it is managing Federal assistance 
programs in compliance with applicable laws and regulations.
    (a) Internal control review. In order to provide this assurance the 
auditor must make a study and evaluation of internal control systems 
used in administering Federal assistance programs. The study and 
evaluation must be made whether or not the auditor intends to place 
reliance on such systems. As part of this review, the auditor shall:
    (1) Test whether these internal control systems are functioning in 
accordance with prescribed procedures.
    (2) Examine the recipient's systems for monitoring subrecipients and 
obtaining and acting on subrecipient audit reports.
    (b) Compliance review. The law also requires the auditor to 
determine whether the organization has complied with laws and 
regulations that may have a material effect on each major Federal 
assistance program.
    (1) In order to determine which major programs are to be tested for 
compliance, State and local governments shall identify in their accounts 
all Federal funds received and expended and the programs under which 
they were received. This shall include funds received directly from 
Federal agencies and through other State and local governments.
    (2) The review must include the selection and testing of a 
representative number of charges from each major Federal assistance 
program. The selection and testing of transactions shall be based on the 
auditor's professional judgment considering such factors as the amount 
of expenditures for the program and the individual awards; the newness 
of the program or changes in its conditions; prior experience with the 
program, particularly as revealed in audits and other evaluations (e.g., 
inspections, program reviews); the extent to which the program is 
carried out through subrecipients; the extent to which the program 
contracts for goods or services; the level to which the program is 
already subject to program reviews or other forms of independent 
oversight; the adequacy of the controls for ensuring compliance; the 
expectation of adherence or lack of adherence to the applicable laws and 
regulations; and the potential impact of adverse findings.
    (i) In making the test of transactions, the auditor shall determine 
whether:
    (A) The amounts reported as expenditures were for allowable 
services, and
    (B) The records show that those who received services or benefits 
were eligible to receive them.
    (ii) In addition to transaction testing, the auditor shall determine 
whether:
    (A) Matching requirements, levels of effort and earmarking 
limitations were met,
    (B) Federal financial reports and claims for advances and 
reimbursements contain information that is supported by the books and 
records from which the basic financial statements have been prepared, 
and
    (C) Amounts claimed or used for matching were determined in 
accordance with OMB Circular A-87, ``Cost principles for State and local 
governments,'' and Attachment F of Circular A-102, ``Uniform 
requirements for grants to State and local governments.''
    (iii) The principal compliance requirements of the largest Federal 
aid programs may be ascertained by referring to the Compliance 
Supplement for Single Audits of State and Local Governments, issued by 
OMB and available from the Government Printing Office. For those 
programs not covered in the Compliance Supplement, the auditor may 
ascertain compliance requirements by researching the statutes, 
regulations, and agreements governing individual programs.

[[Page 735]]

    (3) Transactions related to other Federal assistance programs that 
are selected in connection with examinations of financial statements and 
evaluations of internal controls shall be tested for compliance with 
Federal laws and regulations that apply to such transactions.

(Authority: Pub. L. 98-502)