Now you have successfully received notification of your USAID award, you will soon find yourself spending hours reading up on all the compliance rules and implementation guidelines attached to the grant. Eventually, the need for a project audit will arise.
The Single Audit Act Amendment of 1996 and the Office of Management and Budget (OMB) prescribe USAID awards to have a financial audit. This ensures consistency, establishes sound internal controls and ascertains value for money. In order to comply with the above, recipients of USAID awards must appoint independent auditors to perform annual financial audits consistent with Title 2 U.S. Code of Federal Regulations Part 200 (2 CFR 200).
Audit Eligibility
For Federal financial assistance awards, the audit requirement threshold in 2 CFR 200.501[1] is $750,000 in your fiscal year. Not the U.S. fiscal year but your own. This is typically April – March in the U.K. but can be January – December as well. This is an important distinction to note. The direct quote states, “A non-Federal entity that expends $750,000 or more during the non-Federal entity’s fiscal year in Federal awards must have a single or program-specific audit conducted for that year in accordance with the provisions of this part.”
If you expend less than $750,000, you are generally exempt from a federal audit. Still, you must have records available in the event that the federal agency requires a review or audit. There are scenarios where an audit will still be required even if you fall under the $750,000 threshold. These are explained in 2 CFR 200.503[2].
Auditors Responsibility
Once you have determined that you require an audit, there are at least five things that you should expect from your auditor:
(I) To perform an audit of the financial statement(s) for the program in accordance with Generally Accepted Government Auditing Standards[3] (GAGAS).
(ii) To obtain an understanding of internal controls and perform tests of internal controls over the Federal program consistent with the requirements of 2 CFR 200.514 [4]Scope of audit, paragraph (c) for a major program.
(iii) To perform procedures to determine whether the auditee has complied with Federal statutes, regulations, and the terms and conditions of Federal awards that could have a direct and material effect on the Federal program consistent with the requirements of 2 CFR 200.514 Scope of audit, paragraph (d).
(iv) To follow up on prior audit findings, perform procedures to assess the reasonableness of the summary schedule of previous audit findings prepared by the auditee per the requirements of 2 CFR 200.511. Audit findings follow-up, and report, as a current year audit finding when the auditor concludes that the summary schedule of prior audit findings that do not represent the status of any prior audit finding materially.
(v) To report any audit findings consistent with the requirements of 2 CFR 200.516 Audit findings.
Selecting Your Auditor
Since it is likely the total cost for your annual audit (assuming multi-year funding) will be in the thousands, it is recommended to run a formal procurement process such as a tender to select an auditor.
Remember that when procuring audit services, the objective is to obtain high-quality audits. In requesting proposals for audit services, the objectives and scope of the audit must be made clear, and the non-Federal entity must request a copy of the audit organization’s peer review report which the auditor is required to provide under GAGAS.
Upon receipt of proposals, the following factors should be considered:
- The audit firm meets ability to produce reports in English.
- The audit firm has sufficient quality control program in place that meets the GAGAS quality control and external peer review standards.
- The audit firm has received a passing quality control review within three years.
- The audit firm is a good standing member of the American Institute of Certified Public Accountants AICPA or the country’s public accounting organization (PAO), which complies with the statements of membership obligations of IFAC, or another internationally recognized standard-setting body.
- The audit firm has been in operation at least three years, or its partners have previous acceptable experience with USAID-funded audits.
- The audit firm requires continuing professional education (CPE) meeting GAGAS for audit partners and audit staff.
- The audit firm senior staff has a Chartered Accountants or Certified Public Accountant designation.
- Other possible considerations: a. Affiliation with an international audit firm. b. Continuing Professional Education Program, differing from GAGAS. c. Recent experience with USAID audits.
- Price (Auditor’s fee is reasonable)
You should then prepare appropriate financial statements, including the schedule of expenditures of Federal awards in accordance with 2 CFR 200.510 Financial statements. The next step would be to provide the auditor with access to personnel, accounts, books, records, supporting documentation, and other information as needed for the auditor to perform the audit.
An auditor who prepares the indirect cost proposal or cost allocation plan may not also be selected to perform the audit required by this part when the indirect costs recovered by the auditee during the prior year exceeded $1 million. This restriction applies to the base year used in the preparation of the indirect cost proposal or cost allocation plan and any subsequent years in which the resulting indirect cost agreement or cost allocation plan is used to recover costs.
Emphasis on the underlined word ‘prepares’! If you have prepared your own NICRA, then the same auditor that audits your NICRA can audit your awards too.
Timeline
It is crucial to note that the procurement and contracting process can take a significant amount of time, especially if you are appointing a U.S. auditor for the first time. The whole process can take up to three months as shown in the draft timeline below:
|
Function |
Who |
Timeline |
|
Step 1: Draft Tender |
Logistics/Procurement Teams |
1-2 weeks |
|
Step 2: Approval and Publish Tender |
Logistics/Procurement Teams |
1 week |
|
Step 3: Close Tender and Collate Responses |
Logistics/Procurement Teams |
1 week |
|
Step 4: Clarification Questions |
USAID/Finance Team |
1 week |
|
Step 5: Review Committee and Evaluation Meetings |
USAID/Finance Team |
2 weeks |
|
Step 6: Appoint Auditor |
Finance Team |
1 week |
|
Step 7: Contract Auditor |
Procurement/Finance Team |
2 weeks |
You also do not need to “play it safe” by paying the most expensive audit firm. If a firm can demonstrate these basic key competencies, by definition, they can audit your U.S. funded projects. Poor planning and lack of appreciation of the tender process can also make the process of selecting an auditor daunting at first. For small and medium-sized NGOs, U.S. government funding represents a great funding option with a high compliance tag. Audits do not have to be as daunting as they look once you familiarize yourself with the basic approach.
I hope that this article has been able to shed more light on the subject of selecting a U.S. auditor using general guidance from 2 CFR 200.500. If you have further questions or comments, please feel free to reach out to me via LinkedIn. If there are any topics, you’d like to get my perspective on, please let me know.
Anjie Enabor started Findev Consulting Ltd in 2016. A qualified chartered accountant with The Association of Chartered Certified Accountants (ACCA), Anjie has gained extensive experience working as an Accountant, Finance Manager, Programme Funding Analyst, as well as delivering numerous inception workshops on financial management with DFID and EC contracts. Some of the organizations that she has worked for include: (Development Alternatives Incorporated) DAI, Actionaid UK & Tearfund, to name a few.