Great news!  You just found out your organization is going to get a grant from the Federal government.  Now you need to spend some time making sure you understand what the requirements of this grant are.  Oh, by the way, does this mean you’re now receiving at least $500,000 from the government?  If so, you also better call your auditors and let them know.

The government has a set of rules that governs the conduct of audits of organizations spending at least that much in Federal funds.  These rules, commonly known as A-133 (named for the government circular that contains these rules), provide that your auditors need to select some of your Federal programs, test them, and report on the results of those tests to the Government.

Depending on how long you’re been receiving this level of government funding, and the results of tests in prior years, the auditors will need to test programs covering either 25% or 50% of your total Federal expenditures.  Their testing will be focused on what they consider to be the major programs.  The determination of whether a program is major is primarily based on its’ size.  Generally speaking, for all but very large organizations, a program will be considered a Type A program and likely a major program if its expenditures are at least $300,000.

How many of the major programs need to be tested, in turn, depends on what the results of prior year tests were.  If there were no findings in the past two years, the auditors will be able to do less testing than if there were findings.   Depending on how much coverage the major programs provide, they may have to test some non-major programs as well.

The results of these tests are reported to the government in a series of separate reports that the auditors need to issue in addition to their basic report on your financial statements.  These reports, which must be submitted by the earlier of nine months after your fiscal year end or 30 days after you receive the reports from the auditors, have to be submitted to the government through their electronic reporting system.  The government then has the right to review your auditors’ work to make sure it complies with their rules.

Needless to say, if you are subject to these rules, it will increase the cost of your audit.  However, the amount of the grant will typically be more than sufficient to make the extra costs worthwhile.

If you believe you will be subject to these rules, particularly for the first time, you should discuss it with your auditors as soon as possible.  Working with them can make the process of the additional testing smoother, and keep the extra costs to a minimum.

If you’re eligible for Federal grants, the government can be a great source of funding for your programs.  But the funding does come with additional reporting responsibility, both on your part and that of your auditors.  Planning for this additional reporting in advance will help you make sure you stay in compliance with the government’s rules, and make the process as smooth as possible.