You have a federal grant under 2 CFR Part 200 Subpart F that requires a Uniform Guidance Audit (UGA). Now what? In this article, we walk you through every step of the UGA, so you know what to expect and how to avoid trouble.
2 CFR Part 200 Subpart F Requires You To Hire an External Auditor
A UGA must be performed by a certified public accountant (CPA) who specializes in government grant accounting, the Federal Acquisition Regulation (FAR) and your funding agency’s supplemental regulations. You are responsible for finding a CPA and paying for the audit. The audit must comply with strict Government Auditing Standards (Yellow Book), and your auditor’s work papers are subject to inspection by the government to make sure that the audit was performed correctly. If the audit is determined to be inadequate, the government may reject it, requiring the audit to be redone.
The Uniform Guidance Audit: It Starts With a Plan
Your auditor will develop a risk-based plan for what he or she will test during the audit. In this planning phase, you’ll be asked several questions.
The auditor will want to know about your accounting system:
- What accounting system do you have in place
- How your accounting system works
- How you account for costs from your grant
The auditor will want to know about your company’s control environment:
- How your company works from day-to-day
- Whether you have any written accounting policies and procedures
- Whether the company’s internal controls and processes have sufficient documentation to create an audit trail
- If you have an employee manual
- Who is responsible for the accounting transactions
These questions help the auditor obtain an understanding of internal controls relevant to the audit to design audit procedures that are appropriate in the circumstances, and ultimately, how much they will test.
Your auditor will also ask you a number of fraud-related questions. This is a requirement for any audit, and your answers determine whether there is potential for fraud.
How an Auditor Performs a Uniform Guidance Audit
Your auditor needs to conduct procedures in order to determine whether you have complied, in all material respects, with the compliance requirements of your program(s). Additionally, they will want to make sure you have sufficient internal control over compliance of such requirements.
First, they will check what you’ve spent. Assume that they will ask, and that you will have to demonstrate the following:
- You are tracking the costs you spend by project
- Your accounting records clearly allocate costs by award
- You can produce a profit and loss (P&L) statement by job, showing totals for each project by category
From an auditor’s perspective, the scope of a UGA is driven by the Compliance Requirements in the OMB Compliance Supplement. Auditors identify which requirements are direct and material to your award(s) — meaning they are required to be tested because noncompliance could reasonably result in questioned costs or other significant findings.
- A/B – Activities Allowed or Unallowed/Allowable Costs (Cost Principles): Costs must be allowable, properly supported, allocated and consistent with the award terms and your policies.
- C – Cash Management: Drawdowns and payments should align with immediate cash needs and be supported by reconciliation to accounting records.
- I – Period of Performance: Costs must be incurred within the approved project period (i.e., cutoff must be appropriate to the award dates) and align to the approved budget and award documentation.
- M – Subrecipient Monitoring: If you pass funds to subrecipients, you must document subaward terms, assess risk, monitor performance and verify required audits (as applicable).
Your auditor will select a sample of grant expenditures. In practice, audit sampling is often stratified between payroll (i.e., direct labor) and non-payroll transactions (i.e., all other direct cost categories). Your direct cost categories will be very much like the following:
- Direct materials
- Direct labor
- Direct consultants
- Direct subcontractors
- Direct travel
- Direct equipment
- Other direct costs
Your auditor will make several selections from each category and perform procedures to test allowability and period of performance in conjunction with the required compliance attributes. In practice, auditors also commonly see Generally Accepted Accounting Principles (GAAP) cutoff issues. For example, expenses incurred near period end but recorded later due to delayed invoicing or expense reimbursements. Having a consistent accrual/close process and support for “incurred date” vs. “posted/paid date” is important.
Direct Materials
What they examine: For direct materials and other similar items, your auditor will examine invoices.
Why: They want to see how the cost relates to your award.
What they want to know:
- Who authorized the purchase(s)?
- Who authorized its payment(s)?
- How were direct costs coded in your accounting records?
- Do you have cancelled checks to verify that the costs were paid in a timely manner and with proper approvals?
Direct Labor
What they examine: Your auditor will look at your labor distributions or how you allocated the amounts you paid the employees to your award.
Why: They want to make sure these are truly direct expenses and that you charged the government correctly.
What they want to see: They will look at your time sheet and examine your personnel files to ensure the hours charged to the project agree with approved time sheets and appropriate wage rates.
Direct Consultants
What they examine: The auditor wants to see a signed consulting agreement.
Why: They want to make sure there is a detailed agreement and how it relates to the award.
What they want to see:
- A signed consulting agreement that includes project details, scope of work, hourly rate to be charged and how this work relates to the award.
- Invoices that reflect dates worked, details about the work performed and the number of hours worked at the consulting rate in the contract.
What they do not want to see: A generic entry with no detail, such as “consulting retainer: $5K.”
Direct Subcontractors
What they examine: The auditor wants to see a signed subcontractor agreement.
What they want to see:
- A subcontractor agreement that includes amount to be paid, term of engagement, payment terms and reference to the actual grant number.
- Important: Make sure the agreement reflects the correct relationship. If the party is a vendor/subcontractor, document the scope, deliverables and payment terms, and include any required contract clauses or award terms that apply. If the party is a subrecipient (i.e., carrying out part of the federal program), treat it as a subaward: include required subaward information, flow down applicable federal requirements and perform subrecipient monitoring — including verifying whether a Single Audit/UGA is required and obtaining the appropriate audit reporting, as applicable.
- Invoices from the direct subcontractor that agree with the overall agreement.
Direct Travel
What they examine: Your auditor will expect to see all supporting invoices for a direct travel expense.
Why: They want to make sure that your trip directly relates to your grant and that all your expenses are allowable.
What they want to see: Supporting and dated invoices for hotel, restaurants and conference costs.
- Note: They will compare the timing of the direct travel costs with that of direct labor to make sure time frames agree. They will compare the costs to published per diem rates and look for unallowable items, such as alcohol or seating upgrades.
Direct Equipment
What they examine: Invoices for the equipment, a picture of the item or the item itself.
Why: Direct equipment, such as a special microscope, that is purchased with government funds, belongs to the government and could be asked to be returned. They need to accurately assess value, condition and reusability.
What they want to see: An inventory tag and a place on an inventory list.
Other Direct Costs
What they examine: “Other direct expenses” is a broad category; it could be cloud costs, publication costs, etc. Your auditor will want to know exactly what this expense is and why you’ve incurred it.
Why: Your auditor will want to confirm that this expense directly relates to your award and is in agreement with your original award proposals.
What they want to see: This is very situational. It could be invoices, procurement schedules, contracts, etc.
How Cherry Bekaert Can Help
A Uniform Guidance Audit is a critical compliance milestone for organizations receiving federal grant funding. The process assesses financial systems, internal controls and cost accountability to validate responsible stewardship of public funds. Proactive oversight and disciplined financial practices are essential to minimizing risk and supporting future funding opportunities. To strengthen your readiness and compliance approach, connect with Cherry Bekaert’s government contracting advisors.
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