2021 Compliance Supplement – A Summary of Major Changes: What Auditees Need to Know

Each year, the Office of Management and Budget (OMB) issues a 2 CFR Part 200, Appendix XI Compliance Supplement (Compliance Supplement). The Compliance Supplement provides a road map that auditors must follow when performing a Single Audit (established under the Single Audit Act of 1984), and it can be used as a tool by auditees to better understand the audit process and what the auditors will be testing.

With the large number of new Federal COVID-19 programs being authorized, and the amount of new Single Audits being undertaken this year because of them, the Compliance Supplement is as important as ever.

Overview

Each year the Compliance Supplement is updated by both the OMB and the related Federal agencies that issue funds which fall under Single Audits. The 2021 Compliance Supplement was released in July 2021, but it will be followed up with what’s expected to be two Compliance Supplement Addendums covering the new American Rescue Plan (ARP) programs as detailed in Appendix VII of the Compliance Supplement. Single Audits that include programs identified as having future addendums would likely need to be delayed until the addendum is issued.

The 2020 Compliance Supplement included many updates related to COVID, including new programs and advisories to auditors. The 2021 Compliance Supplement carries forward most of those advisories with updates being made for new Federal programs (primarily ARP funded) and revisions to the Uniform Guidance that became effective this past Fall.

The 2021 Compliance Supplement is required to be used on Single Audits for years beginning after June 30, 2020. A summary listing of changes made to all Parts and Appendices of the 2021 OMB Compliance Supplement can be found in Appendix V to the Compliance Supplement. Appendix V and Appendix VII, described in more detail below, are always the first two sections we look to when a new Compliance Supplement is issued.

An overview of the Compliance Supplement and more details on the updates follows below:

Part One:

The Compliance Supplement comprises eight parts. Part One describes the background, purpose, and applicability of the Compliance Supplement and is worth the read if this is the first time you’re looking at the Compliance Supplement.

Part Two:

Part Two covers the matrix of compliance requirements for various programs designated by the program’s Assistance Listing (AL, formerly known as CFDA) number. Each year, federal agencies must submit a matrix detailing up to six of the 12 compliance requirements that will be Subject to Audit. What this means is that, even if a grant was required to follow the Allowable Cost principles, if Part 2 has “N” in the Allowable Cost column for that particular program, the Single Audit will not be testing Allowable Costs.

The 12 compliance requirements consist of:

• activities allowed or unallowed;
• allowable costs/cost principles;
• cash management;
• eligibility;
• equipment and real property management;
• matching, level of effort, earmarking;
• period of performance;
• procurement suspension and disbarment;
• program income;
• reporting;
• subrecipient monitoring; and
• special tests and provisions.

The Federal agencies submit this information for ALs that have a high level of Federal assistance issued from the agency, but it does not include all ALs that have been issued. Each year, ALs are added to this matrix, removed, and sometimes changed. Yellow highlights in the 2021 Compliance Supplement – Part Two represent changes from the 2020 Compliance Supplement.

Part Three:

Part Three of the Compliance Supplement covers the 12 previously mentioned compliance requirements, except for special tests and provisions. It details a summary overview of each compliance requirement, based on the 12 compliance requirements above; the audit objectives; and provides suggested audit procedures, such as sampling and reviewing policies. It also covers the requirement to obtain understanding and test the effectiveness of internal controls over the compliance requirement. As special tests and provisions are unique to the specific program, the Compliance Supplement does not give guidance on how to test them, only that testing must be covered. This Part only included minor updates.

Changes in Part Three of the 2021 Compliance Supplement were primarily related to revisions made to the Uniform Guidance and became effective this last year. This includes revisions in the Period of Performance section with introduction of the “Budget Period” concept, as well as optional changes to the Micro-Purchase Threshold (MPT) as covered in the I. Procurement section.

Additionally, this section includes OMB’s statement that audit findings should not be reported if an entity applies an increase to the MPT to Federal awards existing as of November 12, 2020. Of course, the MPT change would still need to be applied to procurements/purchases made on or after that date in order to comply.

Part Four:

Part Four covers the Federal agencies’ specific program requirements for ALs included in the Compliance Supplement. Federal agencies can include key guidance in this area for the auditors to be aware of when testing the related programs. This part is updated regularly in the Compliance Supplement with any changes in Federal programs.

In the 2020 Compliance Supplement, we saw additions to Part Four for new Federal COVID programs, including the Coronavirus Relief Fund and Education Stabilization Fund. Familiarity with Part Four, when available for your Federal program(s), is important to understanding what key requirements are being communicated to your auditor and what are the compliance requirements being Subject to Audit.

Part Five:

Part Five of the Compliance Supplement covers the same areas as Part Four, but instead of individual programs, it focuses on the clusters included in the Compliance Supplement, particularly the Research and Development and Student Financial Aid clusters. In addition, the last section of Part Five formally identifies program clusters, which is information needed to know when preparing the Schedule of Expenditures of Federal Awards and ensuring that, when applicable, Federal programs are reported and subtotaled by cluster.

Part Six:

Part Six of the Compliance Supplement covers internal controls. Organizations receiving Federal assistance must maintain a system of internal controls that provides reasonable assurance of compliance with Federal requirements. Under Single Audits, the auditor must gain an understanding of these controls and audit the controls.

Part Six covers an example control structure that organizations can adopt. It includes controls under the “Standards for Internal Control in the Federal Government” (Green Book) which is issued by the Government Accountability Office. It also includes the “Internal Control Integrated Framework” (COSO Framework), issued by the Committee of Sponsoring Organization of the Treadway Commission. Under 2 CFR Part 200, the Green Book and the COSO Framework are recommended internal controls structures, but not required. Part Six provides examples of controls using these structures. In previous Compliance Supplements, this part had been removed as OMB worked to incorporate changes in the Green Book and COSO Framework.

Though not required to implement the example control activities outlined in Part Six, the guidance in this section is very helpful if an entity is new to Federal awards and is working to establish internal controls or, like any good grant management system, researching for examples in which existing internal controls can be strengthened.

Part Seven:

Part Seven of the Compliance Supplement guides when an AL is not included in the Compliance Supplement and how the program should be audited. Out of the entire Compliance Supplement, Part Seven contains the most technical audit jargon and may not be as helpful for auditees compared to other Parts.

Part Eight:

Part Eight of the Compliance Supplement includes the appendices to the Compliance Supplements. The appendices include:

• Federal Programs Excluded from the A-102 Common Rule and Portions of 2 CFR Part 200 (Appendix I);
• Federal Agency Codification of Government-wide Requirements and Guidance for Grants and Cooperative Agreements (Appendix II);
• Federal Agency Single Audit, Key Management Liaison, and Program Contacts (Appendix III);
• Internal Reference Tables (Appendix IV);

Appendix IV identifies, among other information, those programs deemed to be “higher risk” by the OMB. This is used by the auditor primarily when determining which Federal awards should be considered major programs and, therefore, audited. The 2021 Compliance Supplement saw the “higher risk” program listing significantly expanded and now includes all new programs created by the American Rescue Plan, as well as the following:

*This program, established by the CRRSAA, will not be included in the 2021 Compliance Supplement. See Appendix VII for more information about the planned timing of subsequent follow-up Supplement issuance(s).

Being included on the listing does not necessarily mean that the Federal program will be selected for audit in the Single Audit, but it is an indication there’s a high likelihood that it will be.

Other appendices include:

• List of Changes for the 2021 Compliance Supplement (Appendix V);
• Program-Specific Audit Guides (Appendix VI);
• Other Audit Advisories (Appendix VII);

Don’t let “Other” in the title mislead you here. This Appendix covers key audit advisories and has included, for example, guidance on identifying COVID-19 Federal programs in the SEFA, disclosure of donated Personal Protective Equipment, and how auditors should utilize Agency Guidance that has specifically been issued for many of the Federal COVID-19 programs.

In addition, Appendix VII of the 2021 Compliance Supplement identifies that additional Compliance Supplement addendums are planned to be issued and posted on CFO.gov website for at least the following programs:

• Treasury
  • Capital Projects Fund – AL pending
  • Homeownership Assistance Fund – AL #21.026
  • Local Assistance and Tribal Consistency Fund – AL pending
  • State and Local Fiscal Recovery Fund – AL #21.026
• Education
  • Education Stabilization Fund – AL #84.425 [ARP funds]

Final appendices include:

• Examinations of EBT Service Organizations (Appendix VIII); and
• Compliance Supplement Core Team (Appendix IX).

The OMB Compliance Supplement can be a resource for auditees if you know where and what to look for. In an era of significant increases in Federal funding, it is important for auditees to be aware of resources available to them. Happy navigating!

If you require help when preparing for a Single Audit, contact a Clark Nuber professional.

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