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FEDERAL LAW ON AUDIT REQUIREMENT
Disclaimer: If your charitable nonprofit receives federal monies of a certain amount in a single fiscal year, there are complicated regulations that apply requiring an independent financial audit. (Various state and local laws may also require an independent financial audit for charitable nonprofits that receive funds from state and local governments. Read about state law requirements.) Failing to follow the regulations can result in significant adverse consequences for the nonprofit. This Guide only touches on the basic information. Consequently the National Council of Nonprofits encourages nonprofits that may require a single audit to seek professional guidance.
Background on the federal law governing nonprofit audits
The government passed the Single Audit Act of 1984 to ensure that those organizations receiving substantial federal funds use the funds in compliance with the federal government’s funding requirements. The Act refers to a “single audit” because one of the objectives of the law is to replace the need for the federal government to audit the same non-governmental organization multiple times. The stated purpose of the law is to promote sound financial management of government funds by non-federal organizations, promote uniform guidelines for audits, and reduce burdens on government and nonprofits by promoting “efficient and effective use of audit resources.” The OMB explains it this way: "A single audit is intended to provide a cost-effective audit for non-Federal entities in that one audit is conducted in lieu of multiple audits of individual programs." (Source: White House Office of Management and Budget)
In December of 2013, the Office of Management and Budget (OMB) issued new guidance, the “Uniform Guidance.” This uniform guidance supersedes what had been previously contained in eight separate OMB Circulars. Prior to the issuance of the Uniform Guidance, OMB Circular A-133 governed the audit requirements under the Single Audit Act. Subpart F of the Uniform Guidance supersedes Circular A-133, thus we now say goodbye to A-133 and hello to Subpart F.
Subpart F, Audit Requirements, applies to audits of non-Federal entity fiscal years beginning on or after December 26, 2014 (the first fiscal year that begins after December 26, 2014). For a calendar year end entity, these requirement become effective for December 31, 2015 year end audits.
A full comparison of audit requirements under OMB Circular A-133 and Uniform Guidance Subpart F can be found here: Audit Requirements Comparison Chart (Source: COFAR).
Does our nonprofit need a "single audit"?
Beginning with the implementation of the Uniform Guidance, all non-federal government agencies and nonprofit organizations that expend $750,000 or more in federal awards in a given fiscal year are required to conduct a single audit, also known as a “Single Audit” or "Subpart F Audit." Prior to the new guidance, OMB Circular A-133 governed the audit requirement for Single Audits, with a threshold of $500,000. The increased threshold is expected to reduce the number of required audits by about 5,000.
The requirement for a nonprofit to conduct a Single Audit is triggered when a nonprofit receives federal funds from either one or several government funding sources (whether in the form of a government contract or a grant) AND when that nonprofit expends $750,000 or more in federal funding in a single year.
Federal funding means either money that originated directly from the federal government, or funds that came to the nonprofit from a “pass-through entity,” such as a state or local government agency. This is called a sub-recipient relationship. In determining the total amount of federal funds expended, funds directly from federal agencies, as well as those federal funds received from pass-through entities, such as state government or other non-federal recipients, are included.
How is a single audit different from a regular independent audit? What is its scope?
A single audit covers the entire scope of the organization’s financial operations, ensuring that:
The financial statements are presented fairly;
The organization has an adequate internal control structure, and that;
The organization is in compliance with any special government regulations/laws that apply to the specific type of federal funding the audit covers.
A Single Audit is significantly more detailed than a regular independent audit.
Compliance with the Single Audit Act requires nonprofit organizations and their auditors to conduct an audit in accordance with the new Uniform Guidance.
Auditors performing Single Audits are required to receive a heightened level of certification in order to perform such audits.
There are specific and higher levels of testing that must be done on expenses to ensure that the federal funds have been used properly, as well as documented and reported correctly in the nonprofit's financial statements.
Additionally, auditors are required to verify compliance with regulations specific to the program or grant for which funds were expended.
What triggers the requirement for a single audit?
The chart below explains how to determine when federal funds are “expended” for Subpart F purposes, which is important so that the nonprofit can determine whether a Single Audit is required.
Type of Federal Funds Received
Basis for Determining When Expended
Grants, cost reimbursement contracts, cooperative agreements, and direct appropriations
When the expenditure or expense occurs
Amounts passed through to sub-recipients
When the disbursement is made to the sub-recipient
Loan and loan guarantees
When the loan proceeds are used
Donated property, including surplus property
When the property is received
When the food commodities are distributed or consumed
When amounts are disbursed entitling the entity to an interest subsidy
When the insurance is in force
Remember that the single audit requirement only kicks in when an organization has expended $750,000 of federal funds in their first fiscal year after December 26, 2014. Prior to that, the threshold was $500,000, annually.
In order to be certain all federal funds are accounted for in determining whether you meet the threshold for a single audit, your auditor should obtain documentation from pass-through entities sufficient to determine whether any of the funds you received as payment for services were federal, and if so how much.
The single audit must be completed and submitted in machine-readable format to the Federal Audit Clearinghouse either 30 days after receiving the auditor’s report, or nine months after the end of the nonprofit’s fiscal year, whichever comes earlier.
The single audit also must be submitted to any pass-through entity, if applicable, and
Copies of the audit report must be made available to the public.
CFR Section 200.514(b) requires that a Single Audit must include a determination of whether the financial statements of the auditee are presented in accordance with generally accepted accounting principles. The costs of auditing the financial statements are allowable in-direct costs for non-federal entities subject to the requirements of the Single Audit Act.