Behind the Scenes – An Overview of the Single Audit Process
by Shauna R. Brewster, CPA, MBA, Senior Associate
Posted on November 20, 2019
If your organization has ever undergone a single audit before, then you know that the process is extensive. A single audit adds additional time and cost to an organization’s existing financial audit. However, organizations who understand the single audit process have the tools to help facilitate a smooth audit.
Single Audit Defined
A single audit is an organization-wide audit over an entity’s federal awards. Any nonfederal entity that expends more than $750,000 of federal awards in the fiscal year is required to undergo a single audit. Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, or more commonly known as Uniform Guidance, establishes audit requirements and exists as the rule book for all aspects of managing federal awards.
Objectives of a Single Audit
Auditors have two main goals when performing a single audit:
- Ensure the financial statements and schedule of expenditures of federal awards (SEFA) present fairly, in all material respects, in accordance with generally accepted accounting principles (GAAP)
- Ensure compliance with each direct and material compliance requirement for each major federal program selected for review
Process of Performing a Single Audit
Auditors perform the following five major steps to complete an organization’s single audit.
- Review the SEFA in relation to underlying financial records to ensure accuracy and completeness
- Evaluate the organization as either a low or high risk auditee
- Determine the major programs that will be reviewed
- Evaluate the organization’s compliance with each direct and material compliance requirement for the major programs selected
- Communicate compliance deficiencies
Schedule of Expenditures of Federal Awards (SEFA)
Auditees are required to prepare the SEFA for the fiscal year. This schedule’s primary goal is to list out the total federal awards expended for each individual major program. The SEFA must be prepared accurately and include all required elements as it is used to determine the organizations major programs for the fiscal year. Many organizations choose to have the SEFA prepared by their auditor or the entity tasked with preparing their financial statements. To review the SEFA for accuracy and completeness, auditors will request documentation to support the information presented. (For more help on preparing your organization’s SEFA , see “Common SEFA Errors and How to Avoid These Hazards” by Michael Lauzon.)
Low-Risk Auditee Vs High-Risk Auditee
Depending on an organization’s single audit history, it may qualify as a low-risk auditee. To qualify as a low-risk auditee, the organization must meet the following conditions for the two preceding audit periods:
- Single audits were performed on an annual basis in accordance with the provisions of the Uniform Guidance
- Submissions to the Federal Audit Clearinghouse were timely
- The auditor’s opinion on the financial statements was unmodified
- The auditor’s opinion on the SEFA was unmodified
- No going concern was reported
- No material weaknesses in internal control over financial reporting under the requirements of Government Auditing Standards
- None of the Type A federal programs had audit findings due to any of the following:
- Internal control deficiencies that were identified as material weaknesses
- A modified opinion on a major program
- Known or likely questioned costs that exceeded 5% of the total federal awards expended for the program during the audit period
Auditors must select as many major programs as necessary to ensure that the major programs selected encompass 40 percent of the total federal awards expended for the fiscal year. However, if an auditee qualifies as a low-risk auditee, then the auditor may only select as many major programs as necessary to ensure that the major programs selected encompass only 20 percent of the total federal awards expended for the fiscal year.
Selecting Programs for Review
A major program is either a single federal program or a cluster of federal programs selected for detailed review as part of the organization’s single audit. Auditors select major programs in accordance with procedures outlined in Uniform Guidance. First, programs are categorized as either a Type A program or a Type B program. Type A programs are generally larger federal programs while Type B programs are generally smaller federal programs. Second, programs are evaluated on a variety of criteria to determine whether a program is considered low-risk or high risk. Finally, using all of their auditing superpowers and the procedures in Uniform Guidance, auditors analyze the information and select the programs that will be audited for the fiscal year.
Evaluating Major Programs for Compliance
When it is time to audit the major programs selected, auditors rely on the compliance supplement for guidance. The compliance supplement appends the Title 2 U.S. Code of Federal Regulations (CFR) Part 200 and is updated annually. This lengthy document instructs auditors on the specific compliance requirements that are direct and material to each program listed. To assess compliance with the compliance requirements, auditors will perform procedures to understand the organization’s internal control structure as it relates to each major program and test those controls to ensure they are operating effectively. Auditors are also required to follow up on prior audit findings. As a result, auditors may perform additional procedures to determine whether prior year deficiencies have been corrected.
Communicating Compliance Deficiencies and Audit Opinions
Once the major programs have been audited, auditors must evaluate and compile any compliance deficiencies. Findings can be reported in relation to the organization’s financial statements and its federal programs. Finding severity levels include material weakness, significant deficiency, and noncompliance. If findings are severe enough, auditors may need to modify their opinions over the organization’s financial statements, SEFA, major programs, and/or individual compliance requirements. All of this information gets communicated formally in a single audit report that is uploaded to the Federal Audit Clearinghouse website.
In conclusion, single audits have numerous aspects and require significant attention from both auditees and auditors. This detailed level of review ensures that funds are spent meeting the objectives of the Federal programs they were set aside for. However, when organizations gain an understanding of the single audit, they can enable a smoother process.