V. Annual Financial Report and Audit Instructions
The Audit Manual sets forth, for Tennessee local governmental units, nongovernmental entities receiving subrecipient funds from or through the state, and other organizations:
1. The standards and requirements for audits.
2. The accounting and internal control framework that should be followed; and
3. General compliance matters.
By statutory authority, the Comptroller of the Treasury prescribes the standards and requirements for the audit of local governments, grantee agencies and other organizations. Auditors on the comptroller’s staff, internal auditors, and certified public accountants must comply with the comptroller’s standards and requirements when conducting applicable audits.
The Comptroller of the Treasury also prescribes, by statutory authority and contractual provisions, the accounting and internal control framework that should be followed.
Other reporting and compliance requirements addressed in the Audit Manual are derived from federal and state laws and regulations as well as contractual provisions.
Sections 4-3-301 to 304, Tennessee Code Annotated, establishes the department of audit and requires the Comptroller of the Treasury, as administrative head of the department of audit, to:
1. Post-Audit Requirements:
a. Currently perform a post-audit of all accounts and other financial records of the state government, and of any department, institution, office or agency thereof in accordance with generally accepted auditing standards and in accordance with such procedures as may be established by the comptroller of the treasury.
b. Make annually, and at such other times as the general assembly shall require, a complete report on the post audit, such report to be in the form provided by §§ 8-4-109 [through] 8-4-111 and by any subsequent legislation.
2. Certify to the fund balance sheets, operating and other statements, covering the condition of the state’s finances, as prepared by the department of finance and administration, or by the state treasurer, before publication of such statements.
3. Serve as a staff agency to the general assembly, or to any of its committees, in making investigations of any phase of the state’s finances.
4. Make annually an audit of all the records of the several counties of the state, including the offices of county trustees, circuit court clerks, criminal court clerks, county clerks, and clerks and masters of chancery courts, and all county mayors and judges of the courts of general sessions, specifically including the accounts of all “trust funds” in the hands of clerks and masters, or county clerks, or both, and any other county official, whether elected or appointed.
a. In lieu of the audit required under the provisions of this subdivision (4), the department may accept an audit made by an independent certified public accountant, employed at the expense of the county, if the audit made by such independent certified public accountant . . . meets the minimum standards for county auditing established by the comptroller of the treasury, and approved by the governor.
b. The audit shall be made annually and copies of the audit furnished to the comptroller of the treasury.
c. Any county having an audit made by an independent certified public accountant . . . under the conditions prescribed in this subdivision (4) shall be relieved of paying to the state the fee required by § 9-3-210.
d. Beginning July 1, 1974, the department shall prepare the audit required under the provisions of this subdivision (4) in each county of this state at least once in every five-year period, and shall not accept an audit prepared by a certified public accountant . . . in lieu of a state audit for more than four (4) years in every five-year period beginning July 1, 1974, or may, in such manner as the comptroller of the treasury may determine, participate with or monitor the audit with the independent certified public accountant.
5. Devise a modern, effective and uniform system of bookkeeping and accounting, subject to the approval of the governor, comprehending:
a. An efficient system of checks and balances between the officers at the seat of government entrusted with the collections and receipts, custody and disbursement of the revenues of the state; and
b. A system of bookkeeping and accounting, for the use of all county officials and agencies handling the revenues of the state or of any political subdivision thereof; provided, that the comptroller of the treasury and the governor may approve any existing system.
6. Perform economy and efficiency audits, program results audits and program. Any or all of the elements of an audit may be performed, including financial and compliance, economy and efficiency program results and program evaluation.
7. Require that audits to be performed by the internal audit staffs of grantees or the internal audit staffs of state departments, boards, commissions, institutions, agencies, authorities or other entities of the state shall be coordinated with the office of the comptroller of the treasury, and any such audit reports as may be issued shall be prepared in accordance with standards established by the comptroller of the treasury. No department, agency, institution, board, commission or authority shall cause internal auditing to be performed by persons who do not meet the job specifications for internal auditors established by the commissioner of personnel and approved by the commissioner of finance and administration and the comptroller.
8. Require that all persons, corporations or other entities receiving grants from or through this state shall cause a timely audit to be performed, in accordance with auditing standards prescribed by the comptroller of the treasury; and
9. Establish minimum standards for the performance of audits by the internal audit staffs of local governments, special taxing districts, utility districts, political subdivisions, state departments, boards, commissions, institutions, agencies, authorities or other entities of the state. These standards, which shall be established by the comptroller of the treasury, shall include “Standards for the Professional Practice of Internal Auditing” published by the Institute of Internal Auditors, Inc., or such other standards as may be approved by the comptroller of the treasury. All audit reports issued by such internal audit staffs shall include a statement that the audit was conducted pursuant to these standards.
Section 6-56-105, Tennessee Code Annotated, directs the comptroller of the treasury, as administrative head of the department of audit, to ensure that annual audits are made of the accounts and records of each municipality in the State of Tennessee.
Any nongovernmental entity that expends less than the amount required for an audit under a state contract, regardless of whether federal or state funds are involved, during that entity’s fiscal year, is required to submit an annual report of the entity’s financial activities (not required to be audited) due no later than 9 months after the close of the entity’s fiscal year.
1. The submission of annual and audit reports shall be as follows:
a. State and Local Governments
The audit reports for these entities are posted to the Tennessee Comptroller of the Treasury website and OCJP will obtain these reports when posted. The audit report is considered the annual report for these agencies.
b. Nongovernmental (nonprofit or private organizations)
i. Notice of Single Audit : Agencies should submit completed Notice of Single Audit document to OCJP ninety (90) days after the Grantee’s fiscal year end. This is an annual requirement. OCJP requests that the Notice of Single Audit form to be submitted as stated below:
1. Submit the OCJP Notice of Single Audit as a PDF document and email it to OCJP.Fiscal@tn.gov 90 days AFTER the Grantee's fiscal year end.
2. This form should inform OCJP if:
a. YES you are REQUIRED to have a SINGLE audit because you expended at least $750,000 in State and/or Federal funding OR
b. NO you are NOT REQUIRED to have a SINGLE audit. This form does not apply to OCJP monitoring.
ii. Required Annual Reports: Agencies are also required to submit the following reports annually within nine (9) months of the agency's fiscal year end:
1. Single Audit (if required)
2. Form 990
The Single Audit (if required) and Form 990 are to be submitted to all of the following:
a. OCJP: OCJP.Fiscal@tn.gov
b. Commissioner of Finance and Administration: email@example.com
c. (ONLY SINGLE AUDIT) The Tennessee Comptroller of the Treasury by logging onto https://apps.cot.tn.gov/CARS/
The process will vary for governmental and nonprofit agencies. If issues are noted in audit reports that appear to affect OCJP funding, the Fiscal Unit will send a memo requesting a Corrective Action Plan (CAP). Additionally, compliance and implementation of the CAP will be reviewed during the next fiscal monitoring of the agency.
2. Audits and Reports - Nonprofit Organizations
Nonprofit organizations (other than those that meet the definition of a special purpose government) that receive funds from the various departments of the State of Tennessee through contractual agreements that establish a subrecipient relationship are subject to various auditing and reporting requirements. In addition, some departments may include an audit requirement in contracts that establish a vendor relationship. Principally, if a nonprofit organization expends $750,000 or more of subrecipient funding (or of other funding subject to an audit per a state contract) received from the various departments of the State of Tennessee, the nonprofit will be required to have an audit conducted in accordance with the provisions of Government Auditing Standards. This provision applies regardless of the amount of federal funds received from all sources (i.e., directly from the federal government, flow-through (pass-through) funds from the State of Tennessee, Tennessee counties, municipalities, special purpose governments, other nonprofit organizations, etc.).
Contracts between nonprofit organizations and the State of Tennessee may involve only state money. However, the contracts often involve federal money received by the State of Tennessee and subsequently used to provide funding to nonprofit organizations. State contracts that include these federal flow-through funds must be combined with other federal funding sources for the purpose of evaluating the applicability of current federal audit requirements. Nonprofit organizations that are required to submit audited financial statements to the Tennessee Comptroller’s Office and that meet the audit threshold for a Single Audit must submit the Single Audit to the Tennessee Comptroller’s Office.
Nonprofits are required to execute a three-way online audit contract (CPA firm, Entity and the Comptroller's Office) through the Comptroller website at https://apps.cot.tn.gov/CARS/.
After a CPA firm and an entity e-sign the online contract, the Comptroller's office approves it. To create an online audit contract, the CPA firm and entity should have an account in the CARS system. This must be completed prior to commencing the audit engagement.
Audit Considerations – State of Tennessee Subrecipient Contracts
In auditing subrecipient funds received from the State of Tennessee that are subject to audit, the auditor should become familiar with the program and the related requirements of the state department funding the program. The following list represents points of interest the auditor should consider in preparing the audit program for state subrecipient funds.
a. Program funds (subrecipient contracts, loans, commodities, etc.) received from the state may include both state and federal dollars. The federal portion does not lose its identity simply because it flows through the state; therefore, federal funds should be audited in accordance with the applicable OMB requirements.
b. A portion of state dollars disbursed may represent matching funds. These funds are governed by the same requirements as the related federal program.
c. In-kind contributions may or may not be allowable as the entity’s matching share for a program.
d. Calculations for determining matching shares may vary between contracts, and different rates for different cost categories may be applicable for a single contract.
e. Indirect cost allocation plans must be approved by the cognizant agency.
f. Most subrecipient agreements require the entity’s accounting system to provide for separate and identifiable account balances for each contract with subsidiary ledgers for each project within a contract. Grantor reports should agree with these accounts.
g. One entity may apply for subrecipient funds, but another entity may ultimately use the funds (pass-through funds). The entity that applies for the funds is responsible for ensuring the funds are used in compliance with grantor guidelines. The entity should report these funds in accordance with applicable accounting guidelines.
h. The following compliance attributes should be considered for each subrecipient expenditure item in the audit sample and for each subrecipient contract in the sample of subrecipient contracts selected for specific compliance testing.
i. Are expenditures necessary and reasonable for the proper administration of the contract?
ii. Do expenditures conform to limitations or exclusions in the contract?
iii. Was consistent accounting treatment applied for expenditures of all the recipient’s activities?
iv. Were expenditures net of applicable credits?
v. Were costs correctly allocated to a particular award?
vi. Were expenditures correctly recorded and supported by source documentation?
vii. Were expenditures approved in advance, if subject to prior approval?
viii. Were expenditures in accordance with competitive purchasing procedures, if applicable?
ix. Were expenditures allocated equitably to contracts and other activities in accordance with the relative benefits received?