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Safe Harbor" Status of the Compliance SupplementPart 1 of the Compliance Supplement notes that use of the Supplement is mandatory," and that auditors mustadhere to the Supplement to satisfy OMB Circular A 133 requirements. Part 1 also addresses the safe harbor"status of the Compliance Supplement. Specifically, it states that due to the diversity of programs and administeringentities, the suggested audit procedures are general in nature. Because the Compliance Supplement only provides suggested" audit procedures, it cannot be used as a safe harbor for determining the specific audit procedures toapply in a particular situation. Thus, auditors must use judgment in determining whether such procedures aresufficient to achieve the stated audit objectives, or whether alternative audit procedures are necessary. While OMBstates that the Compliance Supplement is not a safe harbor" for identifying the audit procedures that must beapplied in a single audit, it clarifies that the Compliance Supplement can be considered a safe harbor" foridentification of compliance requirements to be tested for programs included in the Compliance Supplement if theauditor both: Performs reasonable procedures to ensure that the requirements in the Compliance Supplement are currentand to determine whether there are any additional provisions of contract and grant agreements that should becovered by the audit. Updates or augments the requirements contained in the Compliance Supplement as appropriate.Sample SizeOMB Circular A 133 requires, for certain of its suggested audit procedures, that the auditor select a sample."However, minimum sample" sizes and acceptable selection methods are not specified. OMB Circular A 133currently permits these matters to be determined based on the auditor's professional judgment. The authorsbelieve that a sample" as used here does not necessarily mean use of sampling. In many instances because ofother procedures performed, low inherent and control risk of noncompliance, and/or small population sizes,sampling may not be necessary. The authors have developed the worksheet, Planning Worksheet to DetermineExtent of Substantive Procedures," (GSA CX 8.1, ALG CX 8.1 in PPC's Guide to Audits of Local Governments, andNPO CX 8.1 in PPC's Guide to Audits of Nonprofit Organizations) to aid the auditor in determining whether samplingis necessary. Planning the extent of substantive tests of compliance is discussed at Chapter 5 (section 503) inPPC's Guide to Single Audits, Chapter 13 in PPC's Guide to Audits of Local Governments, and Chapter 14 of PPC'sGuide to Audits of Nonprofit Organizations.In 2009, the AICPA developed extensive new guidance on sampling in an OMB Circular A 133 audit of compliancethat provides suggested minimum sample sizes as well as new methods for determining sample size, includingdifferent tables and methods for tests of controls than for tests of compliance. This guidance is provided in Chapter11, Audit Sampling Considerations of Circular A 133 Compliance Audits," of the GAS/A 133 AICPA Audit Guide.This sampling guidance has been incorporated in Chapter 5 and the sampling related practice aids in this Guide.A. ACTIVITIES ALLOWED OR UNALLOWED (See Gov. Doc. No. 9, Part 3, Section A.) This Section is N/A Compliance RequirementsThis compliance requirement specifies the activities that can or cannot be funded under a specific program andalmost always applies to federal programs. The specific requirements for activities allowed or unallowed are uniqueto each federal program and are found in the laws, regulations, and the provisions of contracts or grant agreementspertaining to each program. For programs listed in the Compliance Supplement, these specific requirements areincluded in Part 4 Agency Program Requirements or Part 5 Clusters of Programs, as applicable. (See Gov. Doc.No. 9, Part 4.)In addition, a cross cutting unallowable activity has been established for all Recovery Act funded awards. Pursuantto Section 1604 of the Recovery Act, none of the funds appropriated or otherwise made available by the RecoveryAct may be used by any State or local government, or any private entity, for any casino or other gamblingestablishment, aquarium, zoo, golf course, or swimming pool.Source of Governing Requirements

The requirements for activities allowed or unallowed are contained in program legislation or, as applicable, theRecovery Act, federal awarding agency regulations, and the terms and conditions of the award.Audit Objectives1. Obtain an understanding of internal control, assess risk, and test internal control as required by OMBCircular A 133 § .500(c).2. Determine whether federal awards were expended only for allowable activities.Suggested Audit ProceduresInternal Control1. Using the guidance provided in Part 6 Internal Control of the ComplianceSupplement at Gov. Doc. No. 9, perform procedures to obtain an understand ing of internal control sufficient to plan the audit to support a low assessed levelof control risk for the program.2. Plan the testing of internal control to support a low assessed level of control riskfor activities allowed or unallowed and perform the testing of internal control asplanned. If internal control over some or all of the compliance requirements islikely to be ineffective, see the alternative procedures in § .500(c)(3) of OMBCircular A 133, including assessing the control risk at high and consideringwhether additional compliance tests and reporting are required because ofineffective internal control.3. Consider the results of the testing of internal control in assessing the risk ofnoncompliance. Use this as the basis for determining the nature, timing, andextent (e.g., number of transactions to be selected) of substantive tests ofcompliance.Compliance4. Identify the types of activities which are either specifically allowed or prohibitedby the laws, regulations, and the provisions of contracts or grant agreementspertaining to the program.5. When allowability is determined based upon summary level data, performprocedures to verify that the activities were allowable and that the individualtransactions were properly classified and accumulated into the activity total.6. When allowability is determined based upon individual transactions, select asample of transactions and perform procedures to verify that the transactionwas for an allowable activity.Practical Considerations: Transaction testing is included as a suggested audit procedure in several of the suggestedaudit procedures, including this step. To aid the auditor in coordinating and completing theseprocedures more efficiently, the authors have developed the worksheet at GSA CX 10.1. Part 3, Section D of the Compliance Supplement notes that auditors are not expected todetermine whether prevailing wage rates were paid.7. The auditor should be alert for large transfers of funds from program accountswhich may have been used to fund unallowable activities.N/APerformed byand DateWorkpa per Index

B. ALLOWABLE COSTS /COST PRINCIPLES (See Gov. Doc. No. 9, Part 3, Section B.) This Section is N/A Allowable Costs/Cost Principles almost always applies since most federal programs have charges for goods orservices. However, if a program only involves benefits to eligible recipients, with no administrative costs, purchasesof goods or services (including salaries and overhead), or allocated costs, then allowable costs may not apply.Applicability of OMB Cost Principles CircularsThe OMB cost principles circulars prescribe the cost accounting policies associated with the administration ofFederal awards. The cost principles applicable to a non federal entity apply to all federal awards received by theentity, regardless of whether the awards are received directly from the federal government or indirectly through apass through entity. The circulars describe selected cost items, allowable and unallowable costs, and standardmethodologies for calculating indirect costs rates (e.g., methodologies used to recover facilities and administrativecosts (F&A) at institutions of higher education). Federal awards include federal programs and cost type contractsand may be in the form of grants, contracts, and other agreements.Source of Governing RequirementsThe requirements for allowable costs/cost principles are contained in the A 102 Common Rule (§ .22) (Gov.Doc. No. 10), OMB Circular A 110 (2 CFR section 215.27) (Gov. Doc. No. 6), program legislation, federal awardingagency regulations, and the terms and conditions of the award.The three cost principles circulars are as follows: OMB Circular A 87, Cost Principles for State, Local, and Indian Tribal Governments (2 CFR part 225) (Gov. Doc.No. 4). OMB Circular A 122, Cost Principles for Non Profit Organizations (2 CFR part 230) (Gov. Doc. No. 7). OMB Circular A 21, Cost Principles for Educational Institutions (2 CFR part 220) (Gov. Doc. No. 3).Although the circulars have been reissued in Title 2 of the CFR for ease of use, the Compliance Supplementcontinues to refer to them by circular name and number.The cost principles articulated in the three OMB cost principles circulars are in most cases substantially identical,but a few differences do exist. These differences are necessary because of the nature of the federal/state/local/non profit organizational structures, programs administered, and breadth of services offered by some grantees and notothers. Exhibit 1 of Part 3 of the Compliance Supplement, Selected Items of Cost," lists the treatment of theselected cost items in the different circulars. (Gov. Doc. No. 9 contains a link to the Compliance Supplement.)In order to recover indirect costs, organizations must prepare cost allocation plans (CAPs) or indirect cost rateproposals (ICRPs) in accordance with the guidelines provided in OMB Circular A 21, A 87, or A 122. (Only states,local, and Indian tribal governments prepare CAPs.) States, major local governments, Indian tribal governments,institutions of higher education, and nonprofit organizations must submit CAPs or ICRPs to the federal cognizantcost negotiation agency for approval. (A listing of local governments that have been designated as major localgovernments" by OMB is posted on the OMB website at www.whitehouse.gov/omb/management.) Otherorganizations, such as smaller local governments, must prepare the appropriate CAPs or ICRPs and maintain themon file for review. Those other organizations may use the allocation methods and indirect costs rate maintained onfile for cost recovery.Organization by OMB Cost Principle CircularThe following audit objectives and suggested audit procedures are organized by applicable OMB Cost Circular(i.e., A 87, A 122, and A 21).OMB CIRCULAR A 87 This Section (on Circular A 87) is N/A

Audit Objectives State/Local wide Central Service Costs1. Obtain an understanding of internal control over the compliance requirements for central service costs, assessrisk, and test internal control as required by OMB Circular A 133 § .500(c) (Gov. Doc. No. 8).2. Determine whether the governmental unit complied with the provisions of OMB Circular A 87 (Gov. Doc. No. 4)as follows:a. Direct charges to Federal awards were for allowable costs.b. Charges to cost pools allocated to Federal awards through the central service CAPs were for allowablecosts.c. The methods of allocating the costs are in accordance with the applicable cost principles, and producean equitable and consistent distribution of costs, which benefit from the central service costs beingallocated (e.g., cost allocation bases include all activities, inclu

determining major programs; lowrisk auditee status and appropriate compliance requirements, objectives, and audit procedures; and preparing the compliance audit program and schedule of expenditures of federal awards. PPC’s SMART Single Audit can be obtained by calling PPC at (800) 4319025.