It may have taken the Office of Management and Budget (OMB) until this month to finally release the 2016 2 C.F.R. Part 200 Appendix XI Compliance Supplement, but at least it addressed a timely issue that couldn’t wait any longer. This issue is discussed in the first section of Appendix VII of the supplement.

I’ll try to explain the issue briefly, although we will provide more details in a future article and in updated sections of the Single Audit Information Service. The uniform guidance revised step two of the major program determination process by amending several of the criteria listed in prior Circular A-133 that auditors consider when determining whether a Type A program is low risk (§200.518(c)). OMB expects the changes in the determination process under the uniform guidance to significantly increase the number of Type A programs that auditors identify as low risk each year.

Some stakeholders were concerned that this change could dramatically increase audit costs for the third year after implementing the uniform guidance (i.e., for audits of entities’ fiscal year periods ending in 2018) as auditors review an increased number of major programs. Low-risk Type A programs that were last audited as major programs under OMB Circular A-133 will have to be audited as major programs in the third year under the uniform guidance (i.e., audits of FYs ending in 2018), because, as low-risk Type A programs, they would not have been audited as major programs in at least one of the two most recent audit periods; this is known as the two-year look-back provision.

However, to avoid increases in the demand for audit services every third year after implementation of the uniform guidance, OMB is allowing auditors, when conducting audits over the next two years, to audit some low-risk Type A programs as additional major programs. However, a low-risk Type A program would not be permitted to be audited more than once during this three-year timeframe. This is known among the audit community as the “smoothing option.” According to the 2016 Compliance Supplement, “smoothing the audit of low-risk Type A programs during the first three years of implementation would not result in additional costs overall and, therefore, the costs associated with auditing these low-risk Type A programs in advance would be allowable.”

OMB and the Council on Financial Assistance Reform plan to address this as a question in the upcoming revision to the Frequently Asked Questions document related to implementation of the uniform guidance, which may be released in September. However, stakeholders encouraged OMB to address this issue now within the supplement since auditors are currently in the process of selecting major programs for 2016 single audits. We applaud OMB for including this information, but still think it would’ve been more advantageous for auditors if the entire supplement had been released weeks ago. We also are still waiting for OMB to release the document as it has in past years, with each part broken out in a PDF or Word document for easier viewing, rather than posting the entire 1,600-page plus document as a single PDF.

Auditors should be aware of this “smoothing option” now that OMB has made it an acceptable practice. We will continue to report on other changes and further details in the supplement in the future.

Let us know your thoughts on the “smoothing option” and how it will in performing audits going forward.