[Code of Federal Regulations]

[Title 7, Volume 4]

[Revised as of January 1, 2006]

From the U.S. Government Printing Office via GPO Access

[CITE: 7CFR277.17]



[Page 900-902]

 

                          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 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



[[Page 901]]



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.

    (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.



[[Page 902]]



    (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.