PCIE STANDARDS SUBCOMMITTEE

POSITION STATEMENT NO.3

JULY 19, 1988

ISSUE

The issue concerns internal control coverage of nonmajor programs

in a single audit. For nonmajor programs that would normally be
required to be covered by a preliminary review of internal
controls, would it be acceptable under certain circumstances to
perform the preliminary review on a cyclical basis over a period of
years, rather than perform the reviews for each program every year?

BACKGROUND AND DISCUSSION

The AICPA Audit and Accounting Guide, Audits of State and Local
Governmental Units (ASLGU), specifies that all nonmajor programs
not required to be covered by a "full" study and evaluation of
internal controls in accordance with the 50% rule should be covered
by a preliminary review of internal controls. The OMB document,
Questions and Answers on the Single Audit Provisions of OMB
Circular A-128 "Audits of State and Local Governments", refers
readers to ASLGU for guidance on internal control coverage. PCIE
Position Statement No. 2 states that, generally, cognizant agency
audit organizations should not accept audits when the 50% rule is
not followed but also recognizes that, like all audit guide
requirements, departures may be justified. Statement No. 2 goes on
to say that the cognizant agency audit organization should require
the auditor to justify any departures from the 50% rule.

The above issue was raised with an indication that for some
entities it is impractical to perform a preliminary review of
internal controls annually for all nonmajor programs. It has been
suggested that it would be more cost beneficial to perform the
preliminary review of nonmajor programs on a cyclical approach over
a number of years.

POSITION

We believe that under certain circumstances, performing the

required preliminary reviews on a cyclical basis over a number of
years would be a justifiable departure from the guide.
Specifically, if there are a large number of nonmajor programs
requiring preliminary review coverage that are administered by a
number of operating components of the entity, we believe a cyclical
approach could be acceptable. Cognizant agency audit organizations
should evaluate the justification and adequacy of the specific
approach taken on an individual basis. At a minimum, we believe
that in order for a cyclical approach to be acceptable, each
affected program should be covered at least once every three years
in the case of an annual audit. If biennial audits are performed,
all programs should be covered by every second audit.

Any program that has not previously received preliminary review

coverage should be subject to a preliminary review in the first
year of the review cycle. We also believe that new nonmajor
programs should be so reviewed the first year they are received.

If a cyclical approach to conducting preliminary reviews of

internal controls is used in lieu of providing the coverage
specified by ASLGU, the ASLGU Example 20 internal control report
should be modified to clearly and accurately describe the coverage
provided for nonmajor programs.