2019 Compliance Supplement and How it Affects Your Audit

CPAs & Advisors

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The long-awaited 2019 Compliance Supplement was released by the Office of Management and Budget (OMB) on July 1, 2019. It is effective for audits of fiscal years beginning after June 30, 2018. The new supplement includes many key changes after last year’s “skinny” version was released in May 2018. The most talked-about change was the inclusion of a mandate that each agency limit the number of requirements identified as being subject to the compliance audit to six. The only exception is the Research and Development cluster which was permitted to identify seven requirements. Part 2 of the supplement, Matrix of Compliance Requirements, identifies the requirements relevant to each major program this year, and the requirements are likely to be different from those in prior years.

What does this change for the audit? Not as much as you might imagine. While the respective agencies limited the number of requirements, due to the late release, the Michigan Department of Education (MDE) issued their 2018-2019 Michigan School Auditing Manual before the final version of the Compliance Supplement was available. As a result, some of the compliance requirements shown as being “not subject to audit” in the Compliance Supplement, i.e., Equipment/Real Property Management in the Child Nutrition Cluster, are still deemed relevant by MDE, thus still required to be tested by the school district’s auditor as part of the Single Audit.

Additional Changes

Increased Procurement Threshold

The 2017 and 2018 National Defense Authorization Acts (NDAA) increased the micro-purchase threshold to $10,000 for procurement under grants, first for institutions of higher education, nonprofit entities, nonprofit research organizations, or independent research institutes and, later, for effectively all auditees for all federal grants. However, these changes have not yet been formally codified in the Federal Acquisition Regulations at 48 CFR Subpart 2.1 and early implementation is not permissible. While OMB issued a memorandum (M-18-18) on June 20, 2018, that clarified the implementation date, it was recognized that there was confusion as to when it was truly applicable. As a result, OMB stated that auditors are not expected to develop audit findings for school districts that have implemented the increased purchase threshold, as long as the school district updated their federal procurement policy. If the policy contains a blanket statement that the district will follow federal requirements, it is expected that they are still complying with the $3,500 micro-purchase threshold.

Internal Controls

Part 6 of the Compliance Supplement received a major overhaul with increased requirements for internal controls, why they are important, and specific examples. These examples include both entity-wide controls and items specific to each type of compliance requirement. The updates were implemented to more closely align the audit requirements with the five components of internal controls as identified by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework: control environment, risk assessment, control activities, information and communication, and monitoring. School district auditors will have an increased focus on risk assessment this year and auditees should expect more questions relating to internal control than in the past.

The changes above are those that will be the most relevant to school districts as the 2019 fiscal year audits are underway. We recommend that district management review their policies and procedures that are currently in place to be as prepared as possible for their auditors. Districts should carefully go over their request or “prepared by client” (PBC) list, as there may be new or more extensive items requested. Internal control narratives should be updated with the most relevant and timely information. Communication is always key, but especially important during a year of change. Yeo & Yeo’s Education Services Group is here to help with any questions or concerns that you may have.

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