ACCOUNTING GUIDE
FOR
CONSTRUCTION GRANT PROJECTS
I532-)
October 1977
U S Environmental Protection Agency
Region 5, Library (PL-12J)
77 Wr<*. Jackson Boulevard, 12tn
Chicago, IL 60S04-3590
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Foreword
This guide offers suggestions for financial management of a
construction grant project. As a recipient of a federal grant,
you are responsible for the fiscal integrity of the project.
This responsibility cannot be delegated to a contractor or
consulting engineer. Your accounting must separately identify
all federal and matching funds applied to this project. It
must also identify the disposition of those funds for completed
work.
The guide is presented in two parts. The first part describes
accounting procedures suggested for the effective management of
a construction project. The second part is g, check list developed
by the Association of Government Accountants. This list may
assist you in evaluating your current financial management system.
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Part One
INTRODUCTION
Applicants for wastewater treatment construction grants are required to
have an adequate financial management system and audit procedure which
provides efficient and effective accountability and control of all
property, funds, and assets related to the grant project. The grantee
financial system is subject to EPA or EPA designated audit to assure
fiscal integrity of Federal funds. The purpose of this guide is to
suggest those accounting standards that EPA would consider basic to an
adequate financial management system.
Proper accounting for construction grants can provide management with an
effective tool for protecting the public interest. In addition to the
accounting records and controls utilized by the grantee in managing its
normal operations, the acceptance of an EPA construction grant necessitates
the establishment of accounting records and controls for management of the
construction project. Occasionally, however, grantees have not taken
appropriate steps to establish such accounting records and controls. As
a result, these grantees have not been able to adequately account for pro-
ject funds or expenditures or to identify those costs considered unneces-
sary, unreasonable, or unallowable for Federal participation. In some
cases these weaknesses have been so significant that EPA has had to with-
hold payments from grantees pending their correction. By verifying that
their existing accounting controls and records meet the suggested stand-
ards, grantee management can avoid such difficulties and better manage
their construction project.
BACKGROUND
All governmental bodies are responsible to the public for their actions.
In writing the Standards for Audit of Governmental Organizations, Programs,
Activities, and Functions the Comptroller General of the United States
stated:
A fundamental tenet of a democratic society holds that
governments and agencies entrusted with public resources
and the authority for applying them have a responsibility
to render a full accounting of their activities. This
accountability is inherent in the governmental process
and is not always specifically identified by legislative
provision. This governmental accountability should identify
not only the objects for which the public resources have
been devoted but also the manner and effect of their
application.
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EPA regulations clearly place the accountability requirement for construc-
tion grants in the hands of the grantee. Part 30.210 of the EPA general
grant regulations explains the role of the grantee as follows:
An award of a grant shall be deemed to constitute a public
trust. It is the responsibility of the grantee to ...
effectively manage grant funds within the grant budget,
complete the undertaking in a diligent and professional
manner, and monitor and report performance. This responsi-
bility may neither be delegated nor transferred by the
grantee.
To obtain a grant from EPA, a grantee must qualify as responsible. Part
30.340-2 of EPA's general grant regulations explains responsibility as
follows:
To qualify as responsible, an applicant must meet and main-
tain for the life of the proposed grant the following stand-
ards as they relate to a particular project...(d) Have an
adequate financial management system and audit procedure
which provides efficient and effective accountability and
control of all property, funds and assets...
During the last two years, EPA audits of construction grants have often
shown that grantees accounting and financial management systems were not
adequate. Instances were found where the grantee could not account for
the funds spent on the construction project. In other cases, claims for
Federal participation have been substantially over - or under - stated.
Most of these problems could have been eliminated had the grantees esta-
blished the necessary controls and procedures in their accounting and
financial management systems. In discussing these problems with grantees,
it became apparent that existing regulations did not provide sufficient
guidance all in one place for the grantee to knowwhat EPA expected in
the way of minimum accounting controls and records. This guide brings
together and further develops some of the most important accounting stand-
ards enumerated in various Federal publications.
ACCOUNTING SYSTEM
Each grantee is expected to have an adequate accounting system. Part
30.800 of the EPA general grant regulations states:
The grantee is responsible for maintaining a financial
management system which will adequately provide for:
(a) Accurate, current, and complete disclosure of the
financial results of each grant program... Accounting
for project funds will be in accordance with generally
accepted accounting principles and practices, consis-
tently applied, regardless of the source of funds.
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In order to have an acceptable accounting system, there must be books
and records showing all financial transactions related to the construc-
tion project. The system must document all receipt and disbursement
transactions. It must also group them by type of account (e.g., asset,
revenue, expense, etc.) and by individual expense account (e.g., personnel
salaries and wages, sub-contract costs, etc.).
In accepting an EPA grant, the grantee has the responsibility for account-
ing for the costs incurred under that individual grant project. Part
30.805 of the EPA general grant regulation requires that:
...(a) The grantee shall maintain books, records,
documents, and other evidence and accounting procedures
and practices, sufficient to reflect properly (1) the
amount, receipt, and disposition by the grantee for all
assistance received for the project, including both
Federal assistance and any matching share..., and (2)
the total costs of the project, including all direct
and indirect costs of whatever nature incurred for the
performance of the project for which the EPA grant
was awarded...
To accomplish this the grantees must establish a construction cost center
for each grant project. In instances where a grantee has many construction
projects and does not wish to include a separate cost center for each pro-
ject in its general ledger, the grantee may account for project costs through
the use of subsidiary accounts. In these instances a control account must
be included in the grantee's general ledger. Appropriate reconciliations
must be made between the control account and its subsidiary accounts to
assure the validity of amounts recorded. All direct costs of the grant pro-
ject should be recorded on a timely basis to these cost accounts. Where
reporting is required in the grant agreement at program element or cost
objective level, subsidiary accounts should be organized to provide this
data.
Where the grantee acquires Federal participation in indirect costs through
a negotiated agreement, the accounting system should accumulate costs on
a functional basis. In this way the grantee can identify the cost of
major activities such as construction, administration, operation, or
maintenance of its treatment facilities.
Some of the minimum standards for an adequate accounting system are:
1. The accounting system should be on a double entry basis with a
general ledger in which all transactions are recorded in detail or in
summary from subordinate accounts.
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2. Recording of transactions pertaining to the construction project
should be all inclusive, timely, verifiable, and supported by documenta-
ti on.
3. The system must disclose the receipt and use of all Federal funds
received in support of the project as well as identification of matching
funds.
4. Responsibility for project funds, whether Federal or matching
must be placed with a project manager and documented.
5. Responsibility for accounting and control must be segregated from
project operations. The accounting system and related procedures should
be documented for consistent application.
6. The accrual basis of accounting is strongly recommended for
construction projects as it provides a more effective measure of costs
and expenditures.
7. Inventories of property and equipment should be maintained in
subordinate records controlled by the general ledger and should be •
verified by physical inventory at least bi-annually.
8. The accounting system must identify all EPA grant project costs
and differentiate between eligible and ineligible, allowable and unallow-
able, and direct and indirect costs.
9. Accounts should be set up in such a way as to identify each
organizational unit, function or task providing services to the construc-
tion project. This feature will provide basic data for developing and
monitoring indirect cost proposals.
10. An important project management objective of the system is the
deviation of information regarding actual vs. budgeted costs by project
task and performing organization.
11. Financial reports should be prepared monthly to provide project
managers a timely, accurate status of the construction project and costs
incurred. Such reports should be reconciliable to the basic accounting
records and form the basis for required Federal reports.
SUPPORTING DOCUMENTATION
According to Part 30.800 of the EPA general grant regulations, the
grantee's financial management system shall provide for:
...(g) Accounting records which are supported by source
documentation...
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Every entry in the grantee's accounting records should be supported by
appropriate documentation. This could be documentation generated from
outside the grantee's office, such as invoices or it could be internally
generated documentation, such as payroll registers and time distribution
records. In many cases, several documents will support a single trans-
action. For instance, a purchase of material should be supported by a
purchase request, purchase order, and receiving report in addition to an
invoice. It might also be supported by requests for proposal, contracts,
progress reports, and progress payments. Thus, the files of supporting
documents should contain all information necessary to explain every
transaction completely. The files of supporting documentation should be
cross-referenced in such a way that transactions can be traced from any
document dealing with the transaction back to the initiation of that
transaction and forward to the entry or entries in the accounting system.
The ability to properly trace a transaction consists of two elements.
The first is mechanical in nature. All entries should be traceable to
supporting documents. This requires a good filing system based on refer-
ence codes for each entry and related document. The coding system used
should allow one to trace any transaction recorded on the grantee's books
directly to the supporting documentation and vice versa.
The second element is related to the logic behind the transaction. One
should be able to determine not only what was done, but why it was done.
It is here that written procedures and internal controls become essential.
A grantee should have complete procedures for handling all of its signifi-
cant financial transactions.
Special care must be taken in maintaining adequate supporting documentation
for costs incurred or revenue utilized under an EPA construction grant.
Such documentation will be utilized by the EPA auditor in making his review
of the acceptability of costs for Federal participation. The lack of
adequate documentation will necessitate the auditor questioning those costs
not adequately supported. For example, if the grantee has claimed personnel
costs for employees spending a portion of their time on the sponsored pro-
ject, but time records were not maintained showing the total time worked
by those employees and identifying the specific portion of that time spent
working on the project, those personnel costs will have to be questioned.
INTERNAL CONTROLS
The acceptance of a Federal grant necessitates compliance with established
grant conditions and regulations. For example, Part 30.800 of EPA's general
grant regulations provides that the grantee will maintain an adequate
financial management system to provide for:
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...(c) Effective control over and accountability for all
project funds, property, and other assets. Grantees shall
adequately safeguard all such assets and shall assure that
they are used solely for authorized projects.
Failure to comply with grant conditions or regulations can result in
significant penalties (See Part 30.430 of EPA's general grant regulations).
Internal control is the means by which the grantee's accounting, procure-
ment, and other management systems are regulated. It serves to assure
management that proper procedures are being followed with respect to all
project operations, as well as the receipt and disbursement of public
funds. Some of the more important elements of internal control are:
1. A plan of financial organization to provide appropriate segregation
of responsibilities.
2. No one person should have complete control over all phases of a
transaction involving expenditures of funds.
3. Record keeping should be separated from operations in the handling
and custody of assets.
4. Written procedures concerning how things are done and who has the
responsibility for doing and approving them.
5. Written approvals at each major step of the process.
6. An internal review to verify that the established procedures were
fol1 owed.
7. Periodic audits should be made at the grantee's initiative at
least every two years.
8. A systematic method should be established to assure timely and
appropriate resolution of audit findings and recommendations.
9. Cost/price analysis of contractor proposals should be carried out
in accordance with EPA grant regulations.
As an example of internal control, a grantee's accounting office might
require that an invoice for construction services be accompanied by a
monthly progress report from the engineering firm certifying that the work
for which payment was requested, was properly completed in accordance with
approved plans and specifications. Grantee official^ responsible for over-
seeing the construction project would then review the billing and engineering
firm's certification and authorize payment based on their knowledge of
progress being made on the project.
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Internal control systems will be implemented differently for each grantee.
Each system should, however, have procedures which act to check the
internal controls automatically and which insure that all major trans-
actions have appropriate controls or checks and balances on the individuals
involved.
The grantee's internal control system should be the prime mechanism utilized
in assuring that Federal and/or State grant conditions and regulations are
met. Upon receiving a Federal or State grant, the grantee should carefully
review the grant terms and conditions and applicable regulations to identify
those requirements with which he must comply. Those of most concern for
recipients of EPA construction grants are:
40 CFR 30 - EPA General Grant Regulations
30 CFR 35, Subparts C, D, & E - EPA Regulations Governing
Construction Grants
Federal Management Circular 74-4 - Cost principles applicable
to grants and contracts with State and local governments, and
Federal Management Circular 74-7 - Uniform administrative require-
ments for grants-in-aid to State and local governments.
The grantee should then review his internal control system to determine
whether its procedures will assure compliance with all the grant requirements.
In addition to internal control, the system should assure that all contrac-
tors, consultants, or engineers working on the project properly fulfill
their responsibilities. This requires careful monitoring of the quality
and timeliness of their work as well as scrutiny of their adherence to
contract terms and conditions. In some instances, the internal control
system should provide for review of their technical and financial books and
records as they relate to the sponsored project.
If a grantee's internal management control system is not adequate to assure
competent management of all aspects of the project and compliance with all
grant terms, conditions, and regulations, appropriate modifications in the
system must be made. The grantee should at the very least review and approve
all contractor invoices before payment.
BOOKS AND RECORDS
The following is a brief description of the books of account and records
considered to be the minimum required to record transactions. However,
the grantee may establish any additional accounting records considered
necessary to provide adequate financial control of its assets and liabilities
and to account for program costs.
1. A Cash Receipts Register should be maintained for the recording of
funds received (all funds applied to the project). A combined Cash Receipts
and Disbursements Register may be used in lieu of separated registers.
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2. A Check Disbursements Register should be maintained to record
checks issued for the withdrawal of funds from the grantee's bank account.
3. A General Ledger should be maintained to record all accounting
transactions.
4. A Cost Control Ledger may be maintained containing separate sub-
sidiary accounts with the General Ledger containing a control account.
5. A Journal Voucher should be used to document and record transactions
in the General Ledger and/or Cost Control Ledger which are not recorded
from the Cash Receipts or Check Disbursements register. An example would
be to correct the erroneous classification of the purchase of a supply item
which had originally been classified as equipment.
6. Payroll Records should be maintained to accumulate the payroll data
required by Federal, State or local law with respect to each employee. In
addition, time and effort reports should be maintained indicating the jobs
worked and time worked by each employee.
7. Property Records should be maintained for each item of non-expendable
property acquired. As a minimum these records should include a description
of the property, serial and model numbers, date of purchase, original cost,
and location.
DETERMINATION OF PROJECT COSTS
As mentioned in the section on accounting systems, one of the primary func-
tions of the system and related records is to identify and support cost
items charged to the grant project. The grantee accounting system should
segregate project costs into various sub-accounts for each category of
costs included in the grant budget and/or for cost items required for the
financial report, Outlay Report and Request for Reimbursement for Construc-
tion Projects. By recording costs in this manner, the grantee may readily
make comparisons between actual and budgeted expenses, review the source
and application of funds, review for allowability of costs, and prepare
required EPA financial reports. Throughout this process, appropriate dis-
tinction must be made between direct and indirect costs, allowable and un-
allowable costs, and eligible and ineligible costs.
Part 30.700 of EPA's general grant regulations state:
(a) All Federal assistance received under an EPA grant shall be
expended by the grantee solely for the reasonable and eligible costs of
the approved project in accordance with the terms of the grant agreement
and this sub-chapter. All project expenditures by the grantee shall be
deemed to include the Federal share.
(b) The grantee may not delegate nor transfer his responsibility for
the use of grant funds.
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(c) No profit or other increment above cost in the nature of profit
is allowed.
The grantee must analyze each cost item before it is charged to the grant
project to determine that it is eligible, allowable, and whether direct
or indirect.
ELIGIBLE COSTS
In reviewing and approving construction grants, EPA analyzes in detail all
significant documentation related to the project. This includes grant
applications, plans and specifications, change orders, etc. One purpose
for this review is the determination of those portions of the project which
are eligible or ineligible for Federal participation. For example, under
grants awarded under Public Law 84-660, EPA could not participate in the
costs of sanitary sewers. Similarly, under Public Law 92-500, EPA may not
participate in the cost of sewer collection systems for new communities,
new subdivision, or newly developed urban areas.
When EPA identifies a portion of a project as ineligible for Federal partici-
pation, the grantee must take action to assure that all costs related to
the ineligible portion are appropriately segregated. If the ineligible
portion of work relates to construction, bid documents should clearly
distinguish between the eligible and ineligible portions of the contract.
Similarly contractors should be required, in preparing their bills or
invoices, to distinguish between the charges for the eligible portion of
work and the charges for the ineligible portion. Similarly, where a portion
of the engineering, legal, or any other part of the work under the grant
is deemed ineligible, invoices and/or other supporting documentation must
clearly distinguish between the costs of the eligible and of the ineligible
work. Costs applicable to an ineligible portion of a project can not be
claimed for Federal reimbursement.
ALLOWABLE COSTS
The EPA general grant regulations provide general guidance on allowability
of project costs. Section 30.705 states that allowability of project costs
shall be determined by the following:
1. The costs must be reasonable and within the scope of the project;
2. The cost is allocable to the extent of benefit properly attribu-
table to the project;
3. Such cost must be accorded consistent treatment through application
of generally accepted accounting principles;
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4. The cost must not be allocable to or included as a cost of any
other Federally assisted program in any accounting period (either current
or prior); and
5. The cost must be in conformity with any limitations, conditions,
or exclusions set forth in the grant agreement or this sub-chapter,
including appropriate Federal cost principles.
In addition to the general grant regulations, there are three basic guide-
lines governing the allowability of costs for municipalities or other
local governmental entities receiving construction grants. The first is
a general guideline for all grants to local governments: Federal Management
Circular 74-4. The other two guidelines are EPA originated and provide
further guidance as to which costs are allowable or unallowable: 40 CFR
35.940 of EPA's Construction Grants Regulations and Program Gudiance
Memorandum PG-64.
Through the exercise of its internal control system and/or through the
review of individual transactions, the grantee must identify those costs
unallowable for Federal participation (40 CFR 30.800(f)). Such costs should
be segregated into separate sub-accounts under the construction project's
cost center. Care must be taken to assure that these unallowable costs
are not included in the grantee's claim for Federal participation.
DIRECT AND INDIRECT COSTS
Direct costs are those which can be directly identified to the grant pro-
ject. For an EPA construction grant, this would include costs of con-
struction, engineering, rate studies, salaries and wages of grantee per-
sonnel working directly on the project, etc. Sub-accounts should normally
be established to account for each major category of direct costs.
Indirect costs are those which can not readily be identified to a particular
project, but are nevertheless incurred by the grantee for the joint benefit
of not only the grant project but also for all other -of the grantee activi-
ties. For example, accounting or procurement support, office space and
utilities are normally indirect costs in that they are incurred as part of
the grantee's normal operation and it would be difficult to determine just
what portion of these costs would be attributable to any individual cost
center or grant project.
One key factor in accounting for direct and indirect costs is consistency
of treatment. Part 30.715(b) of EPA's general grant regulations requires
that grantees must consistently handle an item of costs as either a direct
or as an indirect cost. Thus, items of cost which are charged directly to
a construction grant cost center must also be similarly handled for other
grantee cost centers. Items of indirect cost should be accumulated and
then allocated or charged out on an equitable overall basis to all of the
grantee's cost centers.
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To obtain Federal participation in indirect costs, a grantee must obtain
an approved indirect cost rate or negotiated lump sum for overhead from
EPA. An indirect cost rate is merely a means by which the grantee de-
termines the relative proportion of indirect expenses which each cost
center including the construction project should bear. In order to develop
an indirect cost rate, the grantee must identify the total of all its
indirect costs, exclusive of ineligible or unallowable costs, and an
appropriate indirect cost base. Once this is done, the grantee should
prepare an indirect cost proposal showing the composition of indirect
costs and the method in which the indirect cost rate was computed. The
indirect cost proposal should then be submitted to the cognizant agency
for review. The process for obtaining an approved indirect cost rate is
discussed in more detail:
- Part 30.715 of EPA's General Grant Regulations
- Federal Management Circular 73-6 - Indirect Cost for Educational
Institutions
- Federal Management Circular 74-4 - Cost principles applicable
to grants and contracts with State and local governments, and
- OASC-8, a Department of Health, Education and Welfare publication
entitled, "A Guide for Local Governmental Agencies".
Once an indirect cost rate has been reviewed and approved for use on the
EPA construction grant, indirect costs may be claimed for reimbursement
under the grant.
All the grantee claims for costs incurred on the construction grant project
and the supporting documentation are subject to audit by the EPA. All
costs charged to the Federal share of the project must be carefully analyzed
by the grantee to assure both eligibility and allowability. Grantees with
established patterns of erroneous claims will draw greater EPA interest from
the standpoint of supporting document requirements and more frequent audit
coverage.
PROPERTY ACCOUNTABILITY
EPA General Grant Regulations, 40 CFR 30.810 prescribe policies and pro-
cedures governing management and ownership of real property and tangible
personal property whose acquisition cost is borne in whole or in part by
EPA as a direct cost under a grant. However, recipients of grants for
construction of waste treatment works are not required to submit property
reports for tangible personal property purchased with grant funds (see
Section 30.635-5 of the EPA grant regulations and procedures). Generally,
grantees are authorized to use their own property management standards and
procedures as long as they meet the minimum standards prescribed in Part
30.810 and FMC 74-7, Attachment N.
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FINANCIAL REPORTS
During and subsequent to the completion of the grant project, the grantee
is required to submit financial reports. For construction grants the report
required is an "Outlay Report and Request for Reimbursement for Construction
Programs". Traditionally, many grantees have relied upon EPA or their
consulting engineer to prepare or assist in the preparation of their finan-
cial report or claim. It should be noted, however, Part 30.635.3 of the
EPA General Grant Regulations provides that the grantee is responsible
for this task, and rightfully so. The grantee will be held financially
liable if claims are made and paid for costs which are not acceptable under
the EPA grant program. Similarly, it is the grantee who suffers if signifi-
cant acceptable costs are overlooked and not included in the reimbursement
form. In such instances, the grantee would not received Federal funds to
which he was rightfully entitled.
In instances where a grantee has maintained an adequate accounting system
as described herein, the preparation and submission of the financial report
should be routine. Balances from the appropriate sub-accounts could be
posted to the financial report. Where there are differences between the
amounts recorded in the sub-accounts and the amounts to be reported, the
grantee must maintain reconciliations or other documentation explaining
such differences.
The Outlay Report and Request for Reimbursement for Construction Programs
provides space for the grantee to provide an estimate of project completion.
Grantees should use report progress from their engineering firms to develop
this estimate. The estimated percentage of completion should represent
the accomplished portion of the project or task described in the grant
agreement for which the reimbursement report is submitted. All financial
reports, should be submitted on a timely basis to the appropriate EPA
region finance office.
CONCLUSION
It is extremely important that the grantee assures its financial management
methods and accounting systems support the requirements of a Federal grant
program. The grantee should measure its current accounting system against
the standards in this guide and other Federal regulations referenced. If
assistance is needed in evaluation or upgrading the grantee accounting
system, the services of a certified public accountant or registered munici-
pal accountant should be acquired.
More detailed exhibits of accounting systems methodology is available from
a number of reference books, such as Governmental Accounting, Auditing,
and Financial Reporting, published by the Municipal Finance Offices Associa-
tion.
Guidance in developing an industrial cost recovery system is provided
in EPA publication, MCD-45, Industrial Cost Recovery System.
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Part Two
Section 1
Planning and Budgeting
A. Activity Plans
1. Are (organizational) goals and objectives planned?
2. Does the planning include documentation showing:
(a) manpower projections?
(b) projections of facility requirements?
(c) projections of major equipment requirements?
(d) the establishment of priorities?
(e) target dates for interim and final objectives?
(f) all requirements of individual Federal grants/contracts?
B. Operating Budgets
1. Does the organization prepare and use an annual financial plan or
operating budget to allocate its resources by type of work or
activity?
(a) Are responsibilities for budget preparation defined for all
organizational levels?
(b) Do budget processes involve the active participation of
intermediate and lower level managers?
(c) Do budget processes allow time for full review, adjustment,
approval, and dissemination prior to the commencement of a
new budget period?
(d) Do budgeting procedures provide for a grantee's share of
both cash and non-cash (in-kind and contributed resources)
contributions?
C. Cash Flow Budgets
1. Are cash flow projections prepared and approved (by the senior
manager or governing groups), and do the projections show whether
funds will be available to meet all scheduled needs on time?
2. Are cash flow projections based on
(a) financial reports which include all assets and liabilities
(including contingencies)?
(b) cash expenditures forecasts derived from planned activity
and prior period costs, appropriately adjusted for changing
conditions?
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(c) cash receipt or borrowing forecasts which are reasonably
certain to be realized?
(d) the maintenance of generally accepted financial ratios, i.e.,
(1) working capital ratio of 2:1?
(2) quick asset (acid test) ratio of 1:1?
3. Are Federal cash requirements based on reliable forecasts of
expenditures in order to limit the time between the receipt and
the disbursement of such funds?
D. Budget Reviews/Revisions
1. Are periodic reports comparing incurred costs to budgets prepared
and;
(a) submitted to management?
(b) used to identify required adjustments in time to make
necessary changes and to obtain approvals before limitations
are exceeded?
2. Does the system identify budget category revisions which require
grantor agencies' approvals?
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Section 2
Accounting
A. Basic System Features
1. Does the financial accounting system provide data which is compatible
(including account classifications) with the planning budgeting
and program management system data?
2. Are the financial accounting system policies and procedures docu-
mented to ensure uniform accounting practices?
3. Does the accounting system provide accrual accounting data for
financial reports?
4. Does the accounting system provide all the data needed to prepare
financial reports on the:
(a) financial status of the:
overall organization?
each Federally assisted program (or project)?
(b) sources of funds for
(1) the overall organization?
(2) each Federally assisted program?
(c) costs of activities and operations of the
(1) the overall organization?
(2) each Federally assisted program?
5. Is the accounting for Federal programs integrated into the
general accounting system?
6. Does the system provide a direct means or audit trail for verify-
ing reported data, through each accounting process, with the
original documents?
7. Are original documents:
(1) supported by sufficient data to confirm the propriety of
the accounting entry?
(2) retained fo^ audit?
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B. Basic Controls
1. Are organizational functions and duties structured to segregate
responsibilities for:
(a) authorizing and approving financial transactions?
(b) entering transactions?
(c) keeping summary (control) records?
(d) maintaining custody of funds and property?
2. Does the response to question 1 above apply to:
(a) cash receipts
(b) cash disbursements
(c) procurements
(d) personnel and payroll management
(e) property (and supply) management
3. Does the system specify the controls required over the timeliness,
reliability, and accuracy of the entries, the processing and
the reports?
4. Does the system provide for all revenues/costs to be recorded
prior to the preparation of end of period reports?
5. Are costs in the program or project accounts (sub-accounts or
project records) reconciled with amounts in the general ledger
accounts?
6. Are program (or project) funds, property, and other resources
afforded appropriate physical and security safeguards?
7. Are periodic internal reviews (audits, inspections, etc.) required
to validate qualifications of personnel for:
(a) operating the accounting system?
(b) managing the program or project?
8. Are financial records and reports, including those for Federally
assisted programs or projects regularly audited by independent
accountants?
C. Program (Project) Funds
1. Does the system require all grant payments/advances to be identified
in a separate account or on the project accounting record?
2. Does the system provide adequate data that can be used to prepare
Requests for Advances or Reimbursements?
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3. Does the system require that all persons who have access to
Federal funds be bonded?
4. Are Federal fund advances deposited in a bank with FDIC
insurance coverage?
5. Does the system provide procedures for monitoring siibgrantees
(or secondary recipients) needs for funds to assure that program
funds are not acquired and/or paid out until necessary?
6. Does the system provide specific records to identify and support
in-kind contributions applicable to the program?
D. Fiscal Controls
1. Does the system include accounting for obligations (legally
binding commitments)? (If answer is no, explain how orders
requiring the expenditure of funds are controlled.)
2. Does the system limit obligations to the amounts approved for
each respective budget category?
3. Does the system outline the criteria for an obligation?
4. Are obligations entered on accounting records in the month in
which the legal commitment is made e.g., approval and issuance
of a subgrant or contract)?
5. When proposed expenditures are recorded before becoming legally
binding obligations, are they segregated from binding obligations
for reporting purposes?
6. Are obligations reclassified as expenditures in the month the
goods are received or constructive receipt occurs?
E. Cost Accounting
1. Basic Features
(a) Does the system require that all costs for Federally aided
projects be supported by documentary evidence of:
(1) personnel management studies which show that compensa-
tion (for both employees and consultants) is comparable
with skill levels and/or geographical area rates?
(2) appropriate procurement methods? (See Section 3)
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(3) actual receipt and application of materials and
services (including prorated amounts) to the program
(or project)?
(4) justification for travel?
(b) Does the system identify substantial non-cash costs, if
charged to the direct or indirect costs of the Federally
aided projects, which are provided to:
(1) employees? (e.g., house, private use of an automobile,
boat or airplane, recreation facilities, etc)
(2) officials, officers, consultants of the grantee?
(3) contractors or contractors employees?
(c) Does the system documentation provide criteria and procedures
to ensure the consistent identification of:
(1) direct costs?
(2) indirect costs (if applicable)?
(3) unallowable costs (ineligible for Federal assistance)?
(d) Are direct costs charged to a Federally assisted program or
project (or indirect cost identified for distribution)
reviewed for propriety, reasonableness and allowability
before the costs are recorded as eligible for Federal aid?
(e) Are all costs that are charged to a Federally assisted program
or project summarized in one distinct group of accounts (or
sub-accounts) or on a project record?
(f) Do the sub-accounts (or project records) provide cost data
for each:
(1) identified segment of the program or project?
(2) program element (budget category or cost objective)
within the segment?
(g) Does the criteria for direct costs exclude labor, material,
and other costs normally allocated to various activites by
overhead/indirect rates?
2. Direct Costs
(a) Personnel Costs
(1) Does the system require compensation costs charged to
Federally aided projects to be:
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(a) based on written authorization?
(b) limited to items/amounts approved for Federal
participation?
(c) supported by time and attendence reports?
(d) supported by time distribution records showing
the ratio of time spent on the Federal program to
other work?
(2) Does the system provide controls over overtime that would:
(a) limit overtime charges to a program for approved and
necessary needs?
(b) distribute overtime charges in accordance with
approved and consistently followed methods?
(3) Does the system provide that responsibilities for the
following functions will not be assigned to the same
persons:
(a) timekeeping?
(b) payroll computation?
(c) payroll verification?
(d) payroll approval?
(e) payroll/paycheck distribution?
(b) Consulting Costs
Does the system require consulting services costs to be
supported by:
(1) formal agreements initiated under approve procurement
practices?
(2) evidence that the service was received and applied to
the Federal aid program?
(c) Travel Costs
Does the system provide for travel costs charged to a Federal
program to be based on
(1) written travel policies which establish approval and
allowance provision not in excess of Federal allowances?
(2) documentation showing the time, purpose, mode and points
of travel, and the net expense reimbursements?
(d) Contract Costs
Are contractual costs for Federal aid programs based on the
total incurred costs as determined and documented by
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(1) a program manager and/or engineer?
(2) a contract administrator? (See Section 3)
(e) Property and Facility Costs
(1) Does the system limit charges for property (including
facilities, equipment and supplies) for Federal cost
participation to:
(a) items approved for inclusion in the program or
project costs?
(b) the lower of the competitive rental costs or acquisi-
tion costs if the option for the most economic
determination was delegated by the Federal agency?
(c) the actual acquisition costs, adjusted by discounts,
rebates, allowances, etc?
(d) the usual net costs of items normally acquired
by quantity purchases?
(e) the lower of the net competitive market costs or
the net acquisition costs if such property is avail-
able and normally acquired from other departments?
(2) Are property improvement costs capitalized if:
(a) the original acquisition cost of the property was
capitalized? or
(b) the improvement will provide useful benefits afte^
the end of federal support?
(3) Does the system provide criteria and procedures for
properly classifying and recording improvements and
maintenance/repair costs?
(4) Are costs for property and facility maintenance, heating,
etc., charged to Federal aid programs based on (a)
actual cost measurements or (b) engineering estimates?
(5) Are property use and depreciation charges for Federally
aided programs:
(a) limited to capitalized property which is essential
and not otherwise charged to project?
(b) based on a uniform policy which provides for:
(1) actual cost allocations which are started at the
time the property is placed in use and based on
the most realistic practical method for matching
costs with use?
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(2) the cessation of charges when the property
is no longer in use or when all acquisition
costs (has net residual value) have been dis-
tributed as operating costs?
(3) the exclusion of charges for property provided
at no charge by the Federal Government?
(6) Does the system require that costs for lease and rental
payments which create a material equity in the property
be distributed as both capital and operating costs if:
(a) the asset has or will be used for any purpose other
than the Federal program?
(b) the asset will probably be used after federal aid
has disclosed its intention to accept such equity
payments as current operating costs?
3. Indirect Costs
(a) Does the system provide for the accumulation of indirect
costs, applicable and allowable for Federal programs, to
support rate computation?
(b) Are reviews made to determine (or confirm annually) the
propriety of the base used for rate applications?
(c) Does the system require the documentation and justification
of all rate computations?
F. Automation
1. Is the accounting system automated? (If "No", omit questions
2 through 9)
2. Are the ADP aspects of the grantees' financial accounting system
fully documented?
3. Are audit trails provided that permit the tracing of any trans-
action back to the original source document and forward to a
final total?
4. Are source documents fully controlled from the point of origin
to the point of conversion to machine-readable media?
5. Is the access to and movement of machine readable data fully
controlled?
6. Are rejected and erroneous data controlled to the extent that
management can be assured that corrections are made?
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7. Are positive processing controls built into the system?
8. Are provisions made for (a) safeguarding computer programs and
program documentation (b) back-up or emergency operation and
(c) reconstruction of data files in case of catastrophe?
9. Does the system provide complete controls over output products?
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Section 3
Procurement
A. Management
1. Do written policies (as well as organizational placement) provide
the procurement unit with independent and final authority over:
(a) the award of all major (over $100) purchase contracts?
(b) the administration of purchase contracts?
2. Do organizational policies require that procurement personnel
be qualified by training in:
(a) the organizations procurement practices?
(b) evaluation specifications?
(c) source identification and bid solicitation methods?
(d) negotiating techniques?
(e) price cost analyses?
(f) type of contracts and contract clauses?
(g) code of conduct or conflict of interest situations?
3. Do procurement policies require that all major procurements will be
supported by:
(a) properly approved requisitions?
(b) quotations and approved bidders tabulation lists, or approved
records of negotiations?
(c) price/cost analyses?
(d) record of basis of contract used?
(e) signed copy of contract?
(f) records of contract performance and disputes?
4. Do procurement policies require an assessment of subcontractors
procurement practices for compliance with Federal requirements?
5. Do organizational policies require periodic audit/management reviews
to determine whether sound procurement practices are used?
B. Requirements
1. Do procurement policies
(a) specify who has authority to initiate purchase requests?
(b) provide the procurement unit with authority to question
requirements which may restrict competition or increase
prices?
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2. Do procurement or material management policies require requisi-
tioners to:
(a) affirm that the items/services are needed and not otherwise
available?
(b) assure that the minimum requirements (specifications, quality,
quantity, etc.) do not extend needs?
C. Source Selection
1. Do procurement policies outline sources selection criteria?
2. Do the policies require the maintenance and use of:
(a) source lists and catalogues (e.g., Thomas Register, Buyers
Guides, McCraes and Sweets catalogues, business and trade
magazines, etc.)?
(b) Vendor files which cover:
(1) technical, managerial, and financial capabilities?
(2) bid/cost reliability experience?
(3) quality and delivery experience?
(4) compliance with administrative requirements (civil
rights, wage rates, environmental, etc.)?
3. Does the selection process assure adequate and effective compe-
tition and the use of sole source buys only under controlled
conditions.
D. Pricing
1. Do the procurement policies require an appropriate price/cost
analysis by qualified individuals as a prerequisite to all major
buys, (major purchases and contracts)
2. Is the procurement staff adequately supported by technical, cost,
legal and audit experts to assist in deliberations and negotiations?
3. Are purchase order changes and contract extensions subjected to
price/cost analysis comparable to that afforded the initial buy?
E. Contract Performance/Delivering
1. Do procurement policies require contractors to post bid and perfor-
mance bonds?
2. Do procurement policies require requisitioners to notify the pro-
curement offices of the receipt of goods and services in the
quantity and quality ordered?
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3. Is the procurement office responsible for remedial actions in
those instances in which goods and services are not delivered
in accordance with the terms of the procurement instrument?
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Section 4
Property and Facilities Management
A. Property Management
1. Does the system provide property records for all non-expendable
items which show:
(a) the date acquired,
(b) title rights,
(c) source,
(d) description,
(e) location,
(f) condition,
(g) quantity,
(h) and cost or value?
2. Are inventories performed of:
(a) all program property annually and on competion or termination
of Federal aid?
(b) program property in custody of subgrantees or contractors
annually and on completion or termination of the agreement?
3. Are differences between physical and book inventories properly
reviewed, reconciled and approved?
4. Is the property stored in a secure area which would prevent
deterioration?
5. Does the system require the identification and labeling of all
program property, including those acquired by subgrantees and
contractors?
6. Does the system limit provide for obtaining the grantors approval
prior to the personal property?
7. Are periodic reports required of property no longer needed for
the project?
B. Facilities Management
Space Utilization
1. Does the organization have a written policy for the assignment and
utilization of building space?
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2. Does the criteria/authority for space administration ensure that
needs are determined impartially and that allocations are justified
for the accomplishment of program objectives?
3. Are inventory records of owned and leased real property maintained
which describe:
(a) functional purpose and size?
(b) condition?
(c) cost?
(d) use categories?
4. Do the inventory records provide support for the preparation of:
(a) operating budgets?
(b) capital budgets?
(c) maintenance and housekeeping requirements and cost allocations?
(d) depreciation schedules and space rental cost allocation
schedules?
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Section 5
Management Information
A. Financial Reports
1. Has responsibility been assigned or a system established to
assure that all financial reports required for grants by law
or regulation are:
(a) prepared and submitted?
(b) complete and accurate?
(c) timely?
(d) prepared on a consistent basis?
2. Do independent public accountants regularly render opinions on:
(a) financial reports for grants?
(b) other financial reports?
3. Are guidelines established to provide for the retention of grant
financial records for a grantors audit?
4. Are financial reports based on sources other than the accounting
system? (If so, explain)
B. Program Management Reports
1. Do management reports on Federal programs contain information on:
(a) percentage of completion?
(b) major milestones met?
(c) major milestones to be met?
(d) foreseen problems in meeting grant objectives or terms?
'e) milestones requiring government approval before proceeding?
f) decisions of governing bodies (board of directors, county
or city supervisors, etc.) on major points of the grant?
2. Are all program management reports available to the grantor?
(If no, explain)
3. Does the system assure that financial information on program
management reports agree with that shown on financial reports
for grants? (If no, explain)
4. Are there any "action" reports prepared as a result of findings
in audit reports from:
(a) internal auditors?
(b) external auditors?
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(c) State or local government auditors?
(d) Federal government auditors?
5. Do program management reports compare budgeted costs with actual
costs?
6. Are there any action reports as the result of budgeted costs
exceeding actual costs?
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