Removing the mystery: How auditors select federal programs for audit

Governments that spend $750,000 or more in federal awards during their fiscal year must receive a Single Audit to determine their compliance with certain federal requirements. If your government has received a Single Audit—either annually or at some point in the past—you might have wondered how your auditor selected federal programs for audit.

Auditors exercise professional judgment and follow a structured, step-by-step process to select federal programs for audit. Auditors are required to audit a certain percentage of federal awards that a government spent during the year, so they must select enough programs to meet coverage requirements. Auditors typically start with evaluating your largest federal programs first and, in some cases, they might also evaluate and select some of your smaller programs.

To clear up the mystery of the Single Audit selection procedure, here is a primer to help you understand the auditor's process and even anticipate which programs will be up for audit.

How do auditors determine audit coverage?

Your auditor must select enough federal programs so that they are auditing at least 40 percent of the federal awards your government expended during the year. Depending on your accounting method and audit history, it's possible your government might be considered a low-risk auditee. In which case, the audit coverage needed drops to 20 percent.

Think of a low-risk designation like a discount you might get for a clean driving record. If you prepare financial statements using generally accepted accounting principles (GAAP)—and you have had regular, clean audits and have filed your paperwork on time with the federal clearinghouse—then you have a good track record and probably qualify for the designation. To know for sure, see the detailed requirements in Section 200.520 of the Uniform Guidance.

If your government reports using cash basis, you cannot qualify for low-risk status. This is because local governments in Washington State are allowed to choose their basis of accounting, and you cannot be considered low risk if you chose a non-GAAP accounting method. School districts, on the other hand, cannot choose their accounting method and are required to report using a non-GAAP basis of accounting. As such, school districts can qualify for low-risk designation under federal regulations.

What is the difference between large and small programs?

Your federal programs over $750,000 are usually your large programs and referred to as “Type A.” Everything less than $750,000 is a smaller “Type B” program. The Type A threshold increases if you spend over $25 million in federal awards. For details on how much the threshold increases, see Section 200.518 of the Uniform Guidance.

Keep in mind, some federal programs are grouped together and considered one program for audit purposes. These are called “clusters” and are identified in part five of the annual compliance supplement (find the 2021 compliance supplement here). For example, the National School Lunch Program is included with several other programs like the School Breakfast Program because they have similar compliance requirements. Your Schedule of Expenditures of Federal Awards (SEFA) should already identify the clusters as part of its presentation.

How do auditors select large programs?

Your Type A programs must be audited once every three years or more frequently if they are considered high risk. Your program might be high risk if your auditor or grantor has had a significant issue with the program in the past. Other factors like changes in personnel or systems or a lack of follow up on prior audit issues can also affect the program's risk status. To read more, see Section 200.518(c) of the Uniform Guidance.

*It's worth noting that the 2021 compliance supplement designates several COVID-19 relief effort programs as high risk, including the Education Stabilization Fund, the Coronavirus Relief Fund and the Provider Relief Fund. This designation will likely affect the programs your auditor selects.

When do auditors select smaller programs?

In some situations, your auditor can express professional judgment to select one or more Type B programs in order to get enough audit coverage. However, as part of this selection process, there are circumstances where your auditor will need to do a risk assessment on your larger Type B programs. If a Type B program is assessed as high risk, then your auditor will select it for audit. To read more, see Section 200.518(d) of the Uniform Guidance.

So much of the analysis on determining federal awards expended is based on how much your government spent on federal awards during the year. This information comes from the SEFA. It's critical that you file accurate information so that your auditor can make good decisions when selecting programs for audit. Remember, the Budgeting, Accounting and Reporting System (BARS) Manuals have important information about how to prepare the SEFA! If you represent a school district, your information can be found in the Administrative Budgeting and Financial Reporting (ABFR) Handbook.

Additional reading and resources

If you want to learn more about the federal Single Audit requirements, refer to sections 200.514-520 of the Uniform Guidance.

Remember, we're here to help. While your grantor is the best source for information about a federal program, you can also submit technical questions about federal awards to our HelpDesk in the client portal.

If you have other questions, comments or suggestions, feel free to email us at Center@sao.wa.gov.