Subrecipient Monitoring
from the Auditee and
Auditor Perspective
A Governmental Audit Quality Center Web Event
March 7, 2012
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Governmental Audit Quality Center
Kevin W. Smith, CPA
Joel M. Black, CPA
Quality Center
American Institute
of CPAs
What will we cover
Roles & Responsibilities
The Subaward Agreement
The Risk Assessment
Monitoring Procedures
Monitoring Follow-Up
Auditor Review of Monitoring Activities
Governmental Audit Quality Center
Roles & Responsibilities
Quality Center
American Institute
of CPAs
Understanding Compliance
Grants funded by the federal government must be
administered according to federal regulations, state laws,
and specific terms and conditions of the award
As a prime recipient of funding, the grant recipient is
responsible for:
Complying with laws, regulations, rules, and procedures;
Monitoring contractors and sub-recipients;
Fulfilling required reporting;
Accomplishing the goals and objectives of the grant and the awarding
agency; and
• Communication.
Governmental Audit Quality Center
Prime recipients are responsible for subrecipients and contractors.
Regulatory compliance;
Ensuring reporting is completed timely;
Data accuracy and completeness;
Prevention of misuse of funds;
Key steps:
• Appropriately define an organization as a sub-recipient or
• Communicate applicable responsibilities and regulations; and
• Act promptly when issues are observed.
Governmental Audit Quality Center
Subrecipient / Vendor Determination
All characteristics need not be present
Judgment should be used in the determination
Governmental Audit Quality Center
Subrecipient Characteristics
Provider determines eligibility.
Provider has performance measured against federal
program objectives.
Provider responsible for programmatic decisions.
Provider responsible for federal program
compliance requirements.
Provider uses federal funds to carry out its own
Governmental Audit Quality Center
Vendor Characteristics
Organization provides the goods and services
within normal business operations.
Organization provides similar goods or services to
many different purchasers.
Organization operates in a competitive environment.
Organization provides goods or services that are
ancillary to the operation of the federal program.
Organization is not subject to compliance
requirements of the federal program.
Governmental Audit Quality Center
The Subaward Agreement
Quality Center
American Institute
of CPAs
Subaward Agreements
Agreements shall outline:
Scope of Work
Performance Requirements
Program Authorizing Legislation
Program Regulations
Must also include:
CFDA Title and Number (
Award Name
Name of Federal Agency
Applicable Compliance Requirements
Notification of Annual Risk Assessment
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Subaward Agreements, Cont.
Key provisions must include minimum
administrative requirements:
Financial Management
Financial Reports
Program Reports
Records Retention
Cost Allocation
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Period of Availability
Program Income
Real Property
Sub-granting and Sub-contracting Federal
Department of Energy Example
• Contract provisions
- All contracts must include specific language pertaining to, but not
limited to, the following areas:
- Contract Work Hours and Safety Standards Act
- Equal Employment Opportunity
- Byrd Anti-Lobbying Amendment
- Clean Air Act
- ARRA-specific language
- Buy America requirements
- Davis-Bacon applicability
- Limits on use of funds
- Reporting requirements
- Ownership of materials and products
Governmental Audit Quality Center
The Risk Assessment
Quality Center
American Institute
of CPAs
What is a Risk Assessment?
Risk assessment is completed annually.
Risk assessment measures two quantities:
• Magnitude of the potential loss
• Probability that the loss will occur
What is the overall risk assessment for the
• Determines frequency of monitoring
• Determines depth of monitoring
Governmental Audit Quality Center
Identify and Limit Risk
Understand sub-recipients’ familiarity with the program and
applicable regulations;
Design contracts in accordance with federal regulations and to
account for all data and reporting requirements;
Incorporate contract language that allows your organization to
amend contracts as additional guidance from the federal
government is received;
Review the results of previous audits for any findings that may
have resulted; and
Submit timely, detailed enforcement reports to the federal
government to demonstrate that sub-recipient monitoring is a
priority and is being executed when issues are observed.
Governmental Audit Quality Center
Risk Assessment May Include…
Size of the award
Percentage of award vs. total federal awards
received by the agency
Complexity of award requirements
Single or multi-year award
Subrecipient experience
Prior monitoring / audit results
Governmental Audit Quality Center
Additional Items to Consider…
Provider History
Policies and Procedures
Financial Stability
Management Systems
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Risk Assessment
The output should be a report indicating where gaps or
deficiencies exist and recommendations for
What might be found?
• Current procurement policies allow for use of unjustified sole sourcing
of vendors;
• No sub-recipient monitoring plan exists so the organization is unsure
when to review sub-recipients and what should be reviewed when onsite;
• Financial management systems do not allow for the use of subaccounts;
• Time reporting policies exist, but no one reviews them for accuracy;
• Pre-approval from the federal government for the purchase of
equipment and real property was not obtained in all circumstances.
Governmental Audit Quality Center
Monitoring Procedures
Quality Center
American Institute
of CPAs
Subrecipient Monitoring
Compliance Requirements - A pass-through entity is
responsible for:
Award Identification
During-the-Award Monitoring
Subrecipient Audits
Ensuring Accountability of For-Profit Subrecipients
Pass-Through Entity Impact
Central Contractor Registration
Governmental Audit Quality Center
What, Why, Who, and When?
What is monitoring?
• A process that evaluates how a grantee is administering a grant according to
the requirements of the grant:
- Eligibility Determination
- Allowability of Services
- Allowable Costs
- Internal Management Systems
- Procurement Policy
- Other
Why is monitoring important?
• Ensure compliance with federal rules and regulations
• Ensure services are provided in accordance with subaward agreement
What is the role of a monitor?
• Notification of review
• Request necessary policies and documents
• Provide technical assistance as needed
When do you monitor?
• As deemed necessary based on annual risk assessment
Governmental Audit Quality Center
Monitoring Plan
Clearly identify necessary activities and responsible
Review debarment lists;
Allow for consistency throughout monitoring
Characteristics include:
• Data quality reviews;
• Required progress reporting;
• Site and desk reviews, potentially
critical for large-scale projects;
• Compliance auditing; and
• Develop corrective action plans.
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Monitoring Plan
Once the process has concluded, develop and
implement an internal action plan:
• Revise policies and procedures;
• Enforce compliance with the internal requirements; and
• Execute ongoing monitoring.
Utilize your internal auditors to conduct regular,
detailed reviews; and
Know where others have faltered.
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How Do You Monitor?
Techniques for conducting monitoring activities
• Desk reviews
- Executed at the pass-through entity’s site (i.e. not at the subrecipient’s location);
- May include, at a minimum, financial reviews for allowability prior
to invoicing the federal government, reviews of progress reports,
and assessments of the sub-recipient’s independent audit.
• On-site field reviews
- Executed periodically and may follow a risk-based approach for
- Should include sampling contracts, transactions, reviewing
supporting documentation, and assessing documented policies
and procedures; and
- Should involve technical experts if the project is of a technical
nature (e.g. construction or energy engineering).
Governmental Audit Quality Center
Eligibility Determination
Verify that eligibility was properly determined.
Suggested activities:
• Review program forms to ensure they capture accurate eligibility
• Review case files, completed applications, and other program
records and forms to determine that the subrecipient is
appropriately assessing eligibility criteria.
Governmental Audit Quality Center
Allowability of Services
Verify that services provided were allowable under
grant rules and were provided as billed.
Suggested activities:
• Review program records as well as brochures and any other
materials disseminated to the public.
• Review program forms to ensure they capture accurate program
• Review program records to ensure documentation of service
Governmental Audit Quality Center
Allowable Costs
Verify that the cost of goods, services, and property
are allowable, in accordance with federal
regulations, and expenditures appear to be within
the submitted budget.
Suggested activities:
• Review purchasing records.
• Review monthly expenditure reports.
• Review invoices and budgets.
Governmental Audit Quality Center
Cost Allocation
Verify financial records to assure accounting
records identify the source of funds and provide for
accurate division of charges and cost as related to
the subaward agreement.
Suggested activities:
• Review cost allocation methodology.
• Observe use of acquired assets to verify they are being used as
Governmental Audit Quality Center
Cash Management
Verify cash management system provides
reasonable assurance that federal funds are drawn
down only for immediate needs. (Not applicable for
reimbursement basis agreements.)
Suggested activities:
• Review start up funds.
• Review funding requests vs. expenditures.
Governmental Audit Quality Center
Program Income
Verify that program income practice provides
reasonable assurance income is correctly earned,
recorded and used in accordance with the program
Suggested activity:
• Review records to ensure that program income was:
- Recorded as earned.
- Deposited as collected.
Governmental Audit Quality Center
Internal Management Systems
Verify that sufficient internal management systems
are in place to ensure subrecipient has effective
control over and accountability for all funds,
property, and other assets.
Suggested activities:
• Review subrecipient’s procedure manual and or operating
• Review subrecipient’s inventory report/listing.
• Review prior audits and corrective action plans.
Governmental Audit Quality Center
Procurement Policy
Verify that the subrecipient’s procurement policy
represents an acceptable level of internal control
and is in accordance with federal procurement
Suggested activities:
• Review any codes of conduct.
• Review transactions
Governmental Audit Quality Center
During-the-Award Monitoring
Factors that may affect the nature, timing, and extent
of during-the-award monitoring:
Program complexity
Percentage passed through
Amount of awards
Subrecipient risk
Governmental Audit Quality Center
Agreed-upon Procedures Engagements
A pass-through entity may arrange for agreed-upon
procedures engagements for certain aspects of
subrecipient activities, such as eligibility
Since the pass-through entity determines the
procedures to be used and compliance areas to be
tested, these agreed-upon procedures engagements
enable the pass-through entity to target the coverage
to areas of greatest risk.
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Verify financial and other reports are supported by
underlying accounting or performance records and
are submitted in accordance with the provisions of
the subaward agreement.
Suggested activity:
• Review records to ensure:
- Timeliness
- Accuracy
- Completeness
Governmental Audit Quality Center
Sub-granting and Sub-contracting Federal
Progress reports and performance metrics are
frequently being required.
Recipients must report on progress toward
achieving objectives and provide justification for
variation from identified milestones.
Consider the Performance Metrics and Benefits
Plan for the SGIG
• Must specify two types of measures: build and impact metrics;
• Report to the Data Hub; and
• DOE may be involved to ensure alignment with federal goals
and objectives.
Governmental Audit Quality Center
Sub-granting and Sub-contracting Federal
• Examples of Reporting Systems
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Monitoring Results
Upon conclusion of monitoring:
• Findings will be completed by the reviewer and signed by the
director of the agency or designee.
• A copy will be mailed to the subrecipient identifying any
• Immediate action should be taken to correct issues involving
ineligible uses of federal funds.
• A corrective action plan should be developed by the subrecipient
within 60 days from the issuance of the review findings to
address deficiencies or noncompliance issues.
Governmental Audit Quality Center
Monitoring Results, continued
• Review corrective action plans based on the pass-through
entity’s monitoring work or the results of independent audits;
• Sanction subrecipients as allowed by federal regulations if they
are found to be in noncompliance
- Withhold payments
- Require that sub-recipient reimburse the pass-through
- Terminate the contract
• Report noncompliance or sanctioning activities to the federal
government for follow-up when required.
Document the execution of monitoring activities
and corrective action taken.
Governmental Audit Quality Center
Monitoring Follow-Up
Quality Center
American Institute
of CPAs
Monitoring Follow-Up
Why is follow-up important?
Identify recurring problems to a program
• Example: Incorrect eligibility determinations could result in
unallowable charges to federal program.
Identify recurring problems with a subrecipient
• Example: Subrecipient that fails to correct monitoring findings is
at risk of incurring additional unallowable costs or audit findings.
Governmental Audit Quality Center
Auditor Review of
Monitoring Activities
Quality Center
American Institute
of CPAs
Audit Objectives
Internal Control to support a low control risk
Governmental Audit Quality Center
Audit Planning Considerations
Effect of pass-through awards on the determination
of major programs
• Expenditure is based on when the activity related to the award
• Federal awards are deemed to be expended by the passthrough entity when the funds are disbursed to subrecipients,
regardless of when subrecipients expend the federal funds
• Matter of professional judgment – influenced by the auditor’s
perception of the needs of a reasonable person who will rely
upon the auditor’s work
Governmental Audit Quality Center
Control Objectives
To provide reasonable assurance that Federal award
information and compliance requirements are
identified to subrecipients, subrecipient activities
are monitored, subrecipient audit findings are
resolved, and the impact of any subrecipient
noncompliance on the pass-through entity is
The pass-through entity should perform procedures
to provide reasonable assurance that the
subrecipient obtained required audits and takes
appropriate corrective action on audit findings.
Governmental Audit Quality Center
Control Environment
Establishment of “tone at the top” of management’s commitment
to monitoring subrecipients.
Management’s intolerance of overriding established procedures to
monitor subrecipients.
Entity’s organizational structure and its ability to provide the
necessary information flow to monitor subrecipients are adequate.
Sufficient resources dedicated to subrecipient monitoring.
Knowledge, skills, and abilities needed to accomplish subrecipient
monitoring tasks defined.
Individuals performing subrecipient monitoring possess
knowledge, skills, and abilities required.
Subrecipients demonstrate that:
• They are willing and able to comply with the requirements of the award, and
• They have accounting systems, including the use of applicable cost
principles, and internal control systems adequate to administer the award.
• Appropriate sanctions taken for subrecipient noncompliance.
Governmental Audit Quality Center
Risk Assessment
Key managers understand the subrecipient’s environment, systems, and
controls sufficient to identify the level and methods of monitoring
Mechanisms exist to identify risks arising from external sources
affecting subrecipients, such as risks related to:
Economic conditions.
Political conditions.
Regulatory changes.
Unreliable information.
Mechanisms exist to identify and react to changes in subrecipients,
such as:
Financial problems that could lead to diversion of grant funds,
Loss of essential personnel,
Loss of license or accreditation to operate program,
Rapid growth,
New activities, products, or services, and
Organizational restructuring.
Governmental Audit Quality Center
Control Activities
Identify to subrecipients the Federal award
information (e.g., CFDA title and number, award
name, name of Federal agency, amount of award)
and applicable compliance requirements.
Include in agreements with subrecipients the
requirement to comply with the compliance
requirements applicable to the Federal program,
including the audit requirements of OMB Circular
Subrecipients’ compliance with audit requirements
Governmental Audit Quality Center
Information and Communication
A listing of Federal requirements that the subrecipient must follow.
Items can be specifically listed in the award document, attached as
an exhibit to the document, or incorporated by reference to specific
The description and program number for each program as stated in
the CFDA. If the program funds include pass-through funds from
another recipient, the pass-through program information should also
be identified.
A statement signed by an official of the subrecipient, stating that the
subrecipient was informed of, understands, and agrees to comply
with the applicable compliance requirements.
A recordkeeping system is in place to assure that documentation is
retained for the time period required by the recipient.
Procedures are in place to provide channels for subrecipients to
communicate concerns to the pass-through entity.
Governmental Audit Quality Center
Establish a tracking system to assure timely
submission of required reporting, such as: financial
reports, performance reports, audit reports, onsite
monitoring reviews of subrecipients, and timely
resolution of audit findings.
Supervisory reviews performed to determine the
adequacy of subrecipient monitoring.
Governmental Audit Quality Center
Audit Procedures - Compliance
Gain an understanding of the pass-through entity’s
subrecipient monitoring procedures
Test the pass-through entity’s subaward review and
approval documents to determine whether, before
award, the pass-through entity checked CCR to
determine whether subrecipients were registered.
Test award documents and agreements to ascertain if:
• (a) at the time of award the pass-through entity made subrecipients
aware of the award
• (b) the activities approved in the award documents were allowable
Review the pass-through entity’s documentation of
during-the-award monitoring.
Review the pass-through entity’s follow-up to ensure
corrective action on deficiencies noted in during-theaward monitoring.
Governmental Audit Quality Center
Compliance Continued
Verify that the pass-through entity:
• a.
Ensured that the required subrecipient audits were completed
• b.
Issued management decisions on audit findings within 6 months after
receipt of the subrecipient’s audit report.
• c.Ensured that subrecipients took appropriate and timely corrective action on
all audit findings.
Verify that in cases of continued inability or unwillingness of
a subrecipient to have the required audits, the pass-through
entity took appropriate action using sanctions.
Verify that the effects of subrecipient noncompliance are
properly reflected in the pass-through entity’s records.
Verify that the pass-through entity monitored the activities
of subrecipients not subject to OMB Circular A-133,
including for-profit entities.
Determine if the pass-through entity has procedures that
allow it to identify the total amount provided to
subrecipients from each Federal program.
Governmental Audit Quality Center
When the Subrecipient Monitoring System is
NOT Sufficient
Report a significant deficiency or material weakness
in internal control over compliance
Consider whether the insufficient monitoring
system represents an instance of noncompliance
that should be reported as a compliance finding
(very likely)
Consider the effect of the noncompliance on the
opinion on compliance for major programs
Governmental Audit Quality Center
When the Subrecipient Monitoring System is
NOT Sufficient
Request by pass-through to perform additional
audit procedures
• Expansion of the scope
• Would not remedy the internal control over compliance finding
• May remedy the noncompliance
Potential impact on the financial statements
• Financial statement opinion
• Yellow Book finding
Governmental Audit Quality Center
Reporting Considerations
SEFA should identify the total amount provided to
subrecipients from each federal program
• If unable to identify, determine if a finding in internal control over
compliance or compliance should be reported.
Evaluation of audit findings
• Circular A-133 requires consideration of a finding whether or not
it can be quantified
• Consider whether instances identified should be reported with
respect to subrecipient monitoring
Governmental Audit Quality Center
Reporting Considerations
Effect of subrecipients’ noncompliance on the passthrough entity’s report
• Noncompliance reported in the subrecipients’ audit reports are
not required to be included in the pass-through entity's audit
• Auditor of pass-through should consider the effect of reported
instances that could have a material effect on each of the passthrough entity’s major programs
Adjustment of pass-through entity financial records
and reports
Governmental Audit Quality Center
Audit Considerations of Subrecipients
Additional compliance requirements established by
pass-through entities
Information included in the SEFA
• A-133 requires the name of the pass-through entity and
identifying number assigned by the pass-through
• Subrecipients may choose to provide information requested by
federal awarding agencies and pass-through entities
Audit findings
Submission of the report – A-133 §320(e)
Governmental Audit Quality Center
Where do you look for guidance?
Current OMB Circular A-133 Compliance
AICPA Audit Guide, Government Auditing Standards
and Circular A-133 Audits
Governmental Audit Quality Center
Questions ?????
Quality Center
American Institute
of CPAs
Have more questions?
Kevin Smith
• Email: [email protected]
Joel Black
• Email: [email protected]
Governmental Audit Quality Center
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