auditing the head start program as part of your single audit: avoid common pitfalls
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Auditing the Head Start Program as Part of Your Single Audit: Avoid
Common Pitfalls
A Governmental Audit Quality Center Web EventOctober 11, 2012
Governmental Audit Quality Center
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Governmental Audit Quality Center
Administrative Notes
We encourage you to submit your technical questions – please limit your questions to the content of today’s program.You can submit your questions at any time during this Web event by clicking on the “Q &A” tab on the bottom of your screen.You can also download slides in PDF or PowerPoint by clicking on “Handouts” tab.This event is being recorded and will be posted in an archived format to the GAQC Web site.
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Governmental Audit Quality Center
Continuing Professional Education
To document your participation and obtain CPE, you must click “OK” on 75% of pop-up markers.There will be a total of 8 participation pop-up markers during the event (i.e., about 1 every 15 minutes).To track your progress on the pop-up markers, click on the Participation tab on lower portion of screen.At the end of today’s presentation we will provide steps for obtaining your CPE certificate.Contact the Service Center for help with obtaining CPE at 888.777.7077 or service@aicpa.org.If you are not receiving CPE for this event, ignore the pop-up markers if they appear.
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Governmental Audit Quality Center
Presenters Ann Linehan, Deputy Director• Office of Head Start
Terry Ramsey, CPA• U.S. Department of Health & Human Services
Belinda Rinker, JD• Senior Advisor to the Office of Head Start
Jim Belanger, CPA• Director, Fiscal Operations, Program Monitoring
Eric Formberg, CPA, CGFM• Plante & Moran PLLC
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Governmental Audit Quality Center
What We Will Cover
Overview of the Head Start ProgramCompliance RequirementsCommon Program FindingsAudit Quality IssuesTips for Avoiding Pitfalls
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Governmental Audit Quality Center
Overview of the Head Start Program
Ann Linehan, Deputy DirectorOffice of Head Start
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Governmental Audit Quality Center
Purpose of Head StartHead Start is a Federal program that promotes the school readiness of children ages birth to five from low-income families by enhancing their cognitive, social, and emotional development.
• Early Head Start provides services to pregnant women and families with children up to age three.
• Head Start serves children age three to five and their families.
Together the two programs are commonly referred to as Head Start.
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Governmental Audit Quality Center
Head Start ServicesEach year, Head Start / Early Head Start programs provide comprehensive services to over a million eligible children and families.Comprehensive services include early childhood development and education, health, family engagement, and community partnerships.Community Assessment determines program model/s: center-based, home-based, or family child care.
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Governmental Audit Quality Center
Head Start Grants and Eligible Entities
Head Start grants are provided directly to local agencies by the Administration for Children and Families, Office of Head Start, with no intermediary state funding agency.Eligible agencies include local public or private nonprofit agency, including community-based and faith-based organizations, or for-profit agency, within a community. See Head Start Act Sec. 641(a)(1) [42 U.S.C. 9836].Recipients may designate delegate agencies to operate all or part of the Head Start program.
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Governmental Audit Quality Center
ACF Office of Head Start Geographic RegionsNote: Region 11 (American Indian/Alaska Native) and
Region 12 (Migrant and Seasonal Head Start) have nationaladministrative offices in Washington, DC.
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Regional Contact Information: http://www.acf.hhs.gov/programs#region
Governmental Audit Quality Center
Head Start Grants
The current federal funding is nearly $8 billion.
The smallest grant is $190,664 and the largest is $210 million.
With over 1600 grantees, the average funded enrollment per grantee is 595, ranging from 15 to 22,348 children.
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Governmental Audit Quality Center 13
Governmental Audit Quality Center
Early Childhood Learning and Knowledge Center (ECLKC)
http://eclkc.ohs.acf.hhs.gov/hslc
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Head Start Performance StandardsHead Start ActMonitoring ProtocolTraining and Technical Assistance Centers
Program InstructionsInformation MemorandumsHead Start Announcements…and more!
Governmental Audit Quality Center
Governance Structure
Head Start agencies must establish and maintain a formal structure for program governance, including a governing body and a policy council. See Head Start Act Sec. 642.
The governing body has fiscal and legal responsibility for the Head Start agency.
The policy council is responsible for supporting program direction. A majority of policy council members must be parents of children who are currently enrolled in the agency’s Head Start program.
Delegate agencies must establish a policy committee.
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Governmental Audit Quality Center
Monitoring Reviews
Head Start agencies must be monitored to determine compliance with all applicable requirements. See Head Start Act Sec. 641A. Review Types: Triennial, First Year, Other
Monitoring teams include fiscal reviewers.
Agency receives a written report identifying any areas of deficiency or noncompliance and is given a timeframe to correct all findings
The protocol used to conduct reviews can be found on the ECLKC website under the Monitoring & Reports tab.
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Governmental Audit Quality Center
Regulatory Developments
Limitation of grant period to five (5) years. See Head Start Act Sec. 638. [42 U.S.C. 9833].
Designation Renewal System at 45 CFR Part 1307 identifies seven conditions which, if met, requires a Head Start program to re-compete for a five-year grant.
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Governmental Audit Quality Center
Regulatory Developments, cont.
Three of the seven DRS conditions relate to fiscal operations. §1307.3(e): an agency has been suspended from the Head Start/Early Head Start program by ACF during the relevant time period covered under §1307.7.§1307.3(f): an agency has been debarred from receiving Federal or State funds or has been disqualified from the Child and Adult Food program (CACFP) during the relevant time period covered under §1307.7.§1307.3(g): An agency has been determined within the twelve months preceding the responsible HHS official's review under § 1307.7 to be at risk of failing to continue functioning as a going concern.
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Governmental Audit Quality Center
Compliance RequirementsCommon Head Start Program Findings
Audit Tips
Presented by:Terry RamseyBelinda RinkerJim Belanger
Eric Formberg
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Governmental Audit Quality Center
Session Goals
Explain Head Start requirements most likely to be misunderstood by auditors.
Identify common Head Start risk factors and provide audit tips.
Help auditors perform an effective and efficient audit of the Head Start program.
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Governmental Audit Quality Center
Materials Highlight RequirementsUnique to Head Start
Basic single audit knowledge is assumed.Audit Standards (GAAS & GAGAS)OMB Circular A-133, Audits of States,
Governments, and Non-Profit OrganizationsA-133 Compliance SupplementOMB Administrative and Cost Principle CircularsFederal Audit Clearinghouse reportingAbility to write proper audit findings
Register for AICPA Web Event titled, Writing Up Government Audit Findings, October 19, 2012, click here.
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Governmental Audit Quality Center
Information Provided is not a Substitute for Compliance Supplement or OMB A-133
Session covers only areas identified as common risks for Head Start programs.An individual entity’s risk may be different
Auditor must still comply with OMB A-133 and consider all requirements identified in the Compliance Supplement.
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Governmental Audit Quality Center
Overall Program & Entity RisksHead Start not designed to make money.Only covers costs that are reasonable, allowable
and allocable (RAA) for the accomplishment of program objectives
At best, entity relying on Head Start funding breaks even. Grantee must insure that costs are allowable or
cover unallowable costs from other revenue sources
Entity primarily funded by Federal grants at higher risk for unallowable costs, particularly match. Limited options to cover unallowable costs
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Governmental Audit Quality Center
Overall Audit Tips
Combine similar areas if practical.Ensure samples target risk areas.Be alert to:Improperly allocated costs
Both direct and costs claimed as matchCost shifting
Particularly around beginning and end of period
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Governmental Audit Quality Center
Activities AllowedProgram Services
Funds must be spent for program services consistent with the Head Start Performance Standards.See list of allowable activities in Compliance
SupplementIf unsure whether a cost is allowable: Check the program regulations (45 CFR 1301 – 1311) at the Policy & Regulation tab on the ECLKC website (provided earlier).
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Governmental Audit Quality Center
Activities Allowed Capital Expenditures
Must have ACF prior approval.Necessary for purchase or sale of items of
equipment that meet or exceed the Federal acquisition cost level of $5,000.
Required for all facilities activities funded in whole or in part with Head Start funds as described in 45 CFR Part 1309 including: Construction Initial Purchase or Down Payment Major Renovation Mortgage Principal and/or interest
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Governmental Audit Quality Center
Activities AllowedTransportation Costs
Transportation costs to and from Head Start center-based programs and other program activities are only allowable if provided in accordance with Head Start Transportation Regulations (45 CFR 1310). Transportation of center- based children must be in
a compliant vehicle with an age and weight appropriate child restraint system.
Related risk area: time and cost of parent supplied transportation in a non-compliant vehicle is not allowable as match.
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Governmental Audit Quality Center
Activities UnallowedNutritional Services
The Head Start Performance Standards at 45 CFR 1304.23 require grantee agencies to use funds from the US Department of Agriculture (USDA), Food and Nutrition Service (FNS), Child Nutrition Programs as the primary source of payment for meal services.The most common USDA program utilized by Head Start programs is the Child and Adult Care Food Program (CACFP).Head Start funds may only be used to cover those allowable costs not reimbursable by USDA. Parents may not be charged for Head Start nutrition program participation.
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Governmental Audit Quality Center
Activities UnallowedNutritional Services Audit Tips
Food costs charged to Head Start present a risk of questioned costs.Ask why costs not charged to USDAValidate that costs are allowableValidate that USDA would not reimburse costsDetermine if grantee has been suspended or
debarred from USDA participation
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Governmental Audit Quality Center
Cost AllocationDirect Allocation Method
Many smaller grantees do not have approved negotiated indirect cost rate.Shared costs are allocated as direct costs based on benefit to each program. Occupancy costs of shared facilitiesPersonnel working for multiple programs
Teacher for both Head Start and child care Executive Director for multiple program agency
Busses shared with Head Start and public schoolsCommunication systems and other equipment
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Governmental Audit Quality Center
Cost AllocationDirect Allocation Method
Entity should have a written cost allocation plan describing the basis and method for allocating shared costs.ACF does not review or approve direct cost
allocation plansCost allocation plans may be informal, such as
annotated spreadsheetsMethod must provide for an equitable allocation of costs to each program based on benefit received.
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Governmental Audit Quality Center
Cost Allocation Risks
Actual allocation of costs not in accordance with cost allocation plan.All costs allocated based on single basis such as level of funding rather than benefit to program.Over-allocating costs to Head Start to cover deficiencies in other funding sources.Failure to include all shared costs in the cost allocation plan.Double charging for same costs by inclusion in a negotiated indirect cost rate agreement and direct charging through allocation.
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Governmental Audit Quality Center
Cost Allocation Audit TipsDetermine whether cost allocation plan: Fairly allocates costs based on relative benefits received Uses reasonable allocation bases Is consistently applied to all programs Allocation methods supported by the accounting system
Indirect costs are charged per negotiated indirect cost rate agreement both in terms of rate and base.Test documentation supporting allocations to insure that they are reasonable, allowable and allocable.Be alert to identified cost allocation risks.Listen to an archived “open to the public” GAQC Web event on Understanding Indirect Cost Rates: A Primer for Auditors Performing Single Audits. 33
Governmental Audit Quality Center
Activities Allowed & Cost Principles Risks
Inadequate source documentation.More common for match and shared costs
Lack of written fiscal procedures.Engaging in procurement activities without free and open competition.Inadequate documentation for shared personnel compensation expenses.Payroll recordsDaily time records for non-exempt employeesPersonnel activity reports
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Governmental Audit Quality Center
Activities Allowed & Cost Principles Risks Journal Entries
Journal entries indicate costs moved from other programs to Head Start.Costs entered before or after award period to shift costs between award periods.Multiple adjusting entries needed at end of award period.Audit tips:Test supporting documentation for journal entriesCheck for approval or purchases and sales of
facilities and equipment Be alert to unusual journal entry activity,
particularly at year end
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Governmental Audit Quality Center
Activities Allowed & Cost Principles Risks Internal Controls
Basis for allocation of costs is not supported or source documentation is lacking.Small programs may not have sufficient staff to effectively segregate fiscal responsibilities.Credit card use and petty cash access may not be adequately limited.Bank account reconciliation shows unissued checks as outstanding.
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Governmental Audit Quality Center
Other Activities Allowed Risks
Extensive use of Head Start funds for professional medical and dental services.Head Start must be payer of last resortDental services often area of highest risk
Compensation to individual employee paid in excess of Executive Level II ($179,700). Not in 2012 Compliance Supplement, will be added to 2013 Compliance Supplement. If paid in excess, Head Start may not pay any part of the
compensation (42 U.S.C. 9498, Sec. 653) May not allocate pro rata part below $179,700 to Head Start May not be included in negotiated indirect cost rate agreement
or allocated direct costs
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Governmental Audit Quality Center
Activities Allowed & PropertyReal property, facilities, equipment and related assets purchased in whole or in part with Head Start funds must be used for program purposes.Grantees must adequately protect Head Start assets.Head Start funds more facilities activities than any other ACF program, including 3,632 current facilities.Facilities activities allowed under 45 CFR Part 1309 include: Purchase (initial or through payment of mortgage principal
and/or interest) Construction (applies only to new facilities) Major renovation as defined in 45 CFR 1309.3
Use of Head Start funds for facilities activities results in a Federal interest which must be protected by filing a notice in the public record or posting for modular units.
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Governmental Audit Quality Center
Activities Allowed & Property Risks
Equipment inventory is not updated and reconciled to source documents as required every two years.Equipment or facilities are not properly insured for property damage and liability.Grantee uses Head Start funds for a facilities activity without prior ACF approval.Notice of Federal interest is not filed in the public record or posted on a modular unit.Property subject to a Federal interest is pledged as collateral without ACF approval.
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Governmental Audit Quality Center
Activities Allowed & Property Risks
Required ACF rights of notice, cure and substitution are not included in leases, mortgages or subordination agreement.Facilities are sold or transferred without ACF disposition instructions and compensation of Federal share.Rent is charged at full fair market value instead of depreciation or use allowance under capital (material equity) leases and related party leases.Depreciation uses a basis other than acquisition cost or uses accelerated depreciation rather than straight line for facilities.
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Governmental Audit Quality Center
Activities Allowed & Property Audit Tips
Identify capital expenditures and determine if ACF consent to purchase was received.Examine leases to identify any that are capital leases or involve related parties. If so, determine if ACF permission was received for
pledge of propertyReview lines of credit to determine if property purchased in whole or in part with Head Start funds was pledged as collateral. If so, determine if ACF permission was received for
pledge of propertyIf Head Start funds were used for facilities activities insure notice of Federal interest was filed or posted.
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Governmental Audit Quality Center
Eligibility & EarmarkingChildren must be age-eligible for the Head Start program. Not in 2012 Compliance Supplement, will be added to 2013 Compliance Supplement. At least three years old by the date used to determine eligibility for
public school in the community. Early Head Start serves pregnant women and families with
children under age 3.
Required percentage of income eligible families. 90% of children from low income families below the poverty line,
including homeless families and those eligible for public assistance
May have up to 10% of children from non-low income families Under certain circumstances may have an additional 35% of
children from families up to 130% of the poverty line Indian tribal programs have unique eligibility requirements
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Governmental Audit Quality Center
Eligibility & EarmarkingGrantee must examine documents for proof of eligibility, but not required to retain copies. Acceptable documents include tax forms, W-2’s, pay stubs,
statements from employers and proof of receipt of public assistance
Head Start provides a recommended form entitled Head Start Eligibility Verification (OMB 0907-0374).The employee who reviews documents and determines eligibility must provide a signed statement to be retained in the child’s records: Identifying what documents were reviewed Stating the child is eligible to participate
Grantees are strongly encouraged to retain copies of the documentation reviewed.
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Governmental Audit Quality Center
Eligibility & EarmarkingHead Start grantee must enroll 100% of funded enrollment.Actual enrollment must be reported monthly, including
reason for any shortfall below funded enrollmentNot less than 10% of enrolled children must be children with disabilities.Funded enrollment less than 10% requires waiver
Risk of failure to enroll sufficient income eligible children.Enrollment of children who are not age eligible.Failure to identify documents relied on to determine eligibility or sign verification.
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Governmental Audit Quality Center
Eligibility and Earmarking Audit Tips
Encourage grantees to follow Head Start guidance and use forms provided for eligibility verification.Test regularly at points throughout the program year (end of months).Compare various sources of enrollment and attendance to determine consistency, such as monthly enrollment reports and CACFP meal counts.Highest risks include children enrolled whose families are not income eligible and failure to meet overall required percentages for low income families and children with disabilities.
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Governmental Audit Quality Center
Program IncomeNo Participation Fees
Programs may not collect fees for Head Start services or participation, including meals.However, if a parent volunteers to pay all or part
of the child’s costs, it may be accepted Recorded as program income Must be used for allowable program costs
Program may collect co-payment for non-Head Start child care services as part of an extended day (commonly referred to as wrap-around services).Program income may also be received from rental of property purchased with Head Start funds.
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Governmental Audit Quality Center
Program Income Audit Tips
Determine if the program is collecting any fees from Head Start parents.If so, examine fees for allowability (not for Head
Start services)Then determine whether allowable fees are used
for program costsBe alert to income from equipment sales such as vehicles purchased with Federal funds but no longer needed for program purposes.Watch for applicable credits mischaracterized as program income.
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Governmental Audit Quality Center
Cash Management & Period of AvailabilityRed Flags for Year End Float Risk
Risk conditions at year end:Head Start has funding not drawn down from HHS
Payment Management System (PMS)Other programs have bills without available cash to payEntity is short on cash
Red Flag actions at year end:Pull down all available funding from HHS PMSBooks next year’s expenses in current year
Journal entries with no support Allocating other program costs to Head Start Writing checks with no supporting invoices
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Governmental Audit Quality Center
Cash Management & Period of AvailabilityAudit Tips for Year End Float Risk
Understand each program’s cash flow. Possible delays in receipt of state child care funds
Be alert to unusual year end transactions. Understand business reasons
Test supporting documentation for journal entries. Especially charges under agreements for shared services
Review year end direct cost allocations and indirect cost charges. Consider possibility of over-allocating to Head Start Inquire why year end checks do not clear promptly.
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Governmental Audit Quality Center
Cash Management Risks & Audit TipsStandard cash management requirements apply to Head Start programs.Risk results from ability of Head Start programs to draw down cash from HHS PMS in advance of expenditures. Availability of cash may lead to: Drawing down excess cash not needed for
disbursementLoaning Head Start funds to another agency program to
cover delayed receipt of fundsEarly drawdown not minimizing time elapsed between drawdown and payment.Drawdown based on accrued expenses not disbursed until later date (or next fiscal period).
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Governmental Audit Quality Center
Matching (Non-Federal Share)
The Federal share of the total cost of a Head Start program may not exceed 80% of the total budget.A written waiver from ACF may be provided if grantee
requests waiver and meets specified criteriaWaivers apply for one year, but grantee may reapply
for subsequent yearsGrantees are required to contribute at least 20% of the total costs of the program through cash or in-kind.Grantee notice of award (NOA) reflects amount and proposed sources of grantee match.
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Governmental Audit Quality Center
Matching (Non-Federal Share) RisksEconomic conditions have reduced cash donations and historic sources of large in-kind donations, such as free space. Increased risk entity cannot meet required matchMost matching is in-kind, often multiple small amounts
Property and services claimed as matching not meeting cost principles.Valuation is overstatedDonated items are not used for program servicesVolunteer services not benefiting the Head Start programCash claimed when donated, not when used Inadequate documentation of volunteer servicesClaiming Federal source funds as match
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Governmental Audit Quality Center
Matching (Non-Federal Share) Audit TipsConsider existence of identified risks.Determine whether documentation supporting amounts claimed as match indicate:Reasonable, allowable, and properly allocatedFairly valued, especially volunteer timeReceived or spent in correct grant periodActually occurredBenefited the Head Start program
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Governmental Audit Quality Center
Administrative Cost EarmarkCosts of developing and administering Head Start may not exceed 15% of total program costs, including the required non-Federal match.A written waiver from ACF may be provided for a
period of time not to exceed twelve months if grantee requests waiver and meets specified criteria
Administrative costs include:Salaries and fringe benefits of executive personnelOrganization-wide planning costsAccounting and auditingPurchasing and personnel functionsMaintenance and operation of administrative space
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Governmental Audit Quality Center
Administrative Cost Earmark RisksAdministrative costs may be misclassified as programs costs.Dual benefit costs fully allocated to Head Start program.Employees with both administrative and Head Start
responsibilities charged all to Head StartCosts of administrative facility maintenance and
utilities charged completely to Head StartCharging administrative costs through direct allocation which are already include in the approved indirect cost rate.Indirect costs which are categorized as programs costs should be explained.
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Governmental Audit Quality Center
Administrative Cost Earmark Audit Tips
Determine whether accounting system properly identifies and classifies costs between program and administrative costs.Ensure all program costs are identified including those provided through matching.Determine cost reasonableness by reviewing annual budget.Test costs for proper allocation between program and administrative cost classifications.Calculate whether administrative costs exceed the 15% limit.
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Governmental Audit Quality Center
GAQC Resources
GAQC Web site (www.aicpa.org/GAQC)
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Just Released!
Auditee Resource Center – Open to the Public• Why quality audit important?• Auditee resources – some existing resources for auditors and
some new (single audit, Yellow Book, other compliance audits, and financial statements audits)o Archived Web eventso Practice aidso Articleso Access to GAQC Alerts
• Links to Publications• Link to Conferences and other training available• Access the Auditee Resource Center
Governmental Audit Quality Center
GAQC Resources – Tools & Aids
New! Yellow Book Independence Practice AidSingle Audit Practice Aids • SEFA Practice Aids (both for the auditor and auditee)• Internal Control Practice Aids• Illustrative Auditor’s Reports
Peer Review ChecklistsArchived GAQC Alerts and GAQC Web eventsAICPA Audit Guide, Government Auditing Standards and Circular A-133 Audits
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GAQC Resources – Web EventsChallenges with Fair Value Measurements for NPOs*Understanding Indirect Cost Rates: A Primer for Auditors Performing Single Audits*New 2011 Yellow Book*Understanding the New AICPA Yellow Book Independence Practice Aid*Updated Schedule of Expenditures of Federal Awards (SEFA) Practice Aids (for SAS 119)Subrecipient Monitoring: An Auditee and Auditor Perspective*2012 Compliance Supplement and Related Best PracticesFun and Games with Not-for-Profit Functional ExpensesPreparing for Your Single Audit: An Auditee Perspective *Single Audit Fundamentals On-Demand Series* Open to the Public
Governmental Audit Quality Center
Questions ?????
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Closing Remarks
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Auditors play a vital role in assuring that Head Start agencies manage grant funds effectively to support
excellence in services to children and families.
Governmental Audit Quality Center
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link (a new window or tab will open).5. On the AICPA Learning Center, click on “My Transcript” in
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If you need assistance with locating your certificate, please contact the AICPA Service Center at 888.777.7077 or service@aicpa.org.
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