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Auditing the GMS System
Introduction
These materials have been prepared to assist you with preparing for audit and to serve as a reference for your auditor when auditing your agency.
This section covers these topics:
Auditing the GMS System -Schedules You Should Have Ready for Your Auditor
Certainly a major contribution you can make for a smooth and efficient audit is to assemble and have available a number of reference schedules. Many are products of your year end closing activities, others are reports easily printed from the system and certain materials need to be pulled from your files.
Here is a listing of these schedules and, if applicable, where and how to obtain them from the GMS System.
Should be for all checking accounts for last month of fiscal year. These should tie to final General Ledger and Balance Sheet cash accounts.
This schedule should list voucher#, check#, policy coverage, policy number, insurance company, period covered and prepaid amount. It should tie to your Prepaid Insurances Account on your General Ledger and Balance Sheet.
This schedule should list voucher#, check#, payee, period covered and prepaid amount. It should tie to appropriate Prepaid Accounts on your General Ledger and Balance Sheet.
These schedules should list voucher#, check#, payee and amounts. They should tie to appropriate accounts shown on your General Ledger and Balance Sheet.
Fixed asset schedules should include serial #, description, status, purchase date, purchase price, contract#, general ledger code, location, type, funding source (if applicable), depreciation method and amount (year and to-date at a minimum), number of months depreciated, and any relevant disposition information. The schedule should total out amounts applicable by funding sources.
This schedule should tie to appropriate Fixed Asset Accounts on the General Ledger and Balance sheet and to any depreciation reported as current year expense.
The Accounts Payable Analysis should reconcile with the General Ledger and Balance Sheet.
This should reconcile to the Accrued Leave Liability amounts reported on the General Ledger and Balance Sheet. Use the itemized listing by employee that printed at Month End on the Leave Rate Computation and Analysis.
This will illustrate (a) all allocations, (b) demonstrate that they have been performed consistently, and (c) show how all rate calculations have been obtained. Use the final Year-to-date Cost Allocation Summary and supporting Leave Rate Computation and Analysis, Fringe Benefit Rate Computation and Analysis, and Indirect Cost Rate Computation and Analysis.
This will reconcile to these asset accounts shown on the General Ledger and Balance Sheet. Use the schedule prepared for the final closing run - Exhibit 2 Grant and Contract Receivable.
This should reconcile to any other General Ledger and Balance Sheet Accounts Receivable amounts. This can be obtained by using the YTD General Ledger and printing transaction histories for these accounts.
For all savings and investments this should reconcile to Accrued Interest Asset Accounts appearing on the General Ledger and Balance Sheet.
For notes and accounts payable this should reconcile to the applicable liability accounts.
This will reconcile to the General Ledger and Balance Sheet Deferred Revenue (Refundable Advance) Account. Use the schedule prepared for the final closing run - Exhibit 3 Deferred Revenue.
This will reconcile to applicable General Ledger and Balance Sheet accounts. Use the schedule prepared for the final closing run - Exhibit 4 Due To Grantor Agencies.
Use the Agencywide Line Item Revenue and Expenditure report printed at Month End. By selecting dates for the entire fiscal year, a Transaction Code Listing details all transactions for the year in support of each line item reported.
Use the Project Revenue and Expenditure reports printed at Month End. By selecting dates for the entire fiscal year, a Project Element Charge Listing details all transactions for the year in support of each direct expense line item and all revenues. YTD Timesheet Charges by Activity printed at month end details all direct salary charges. YTD Cost Allocation Summary printed at month end details allocations for salaries, leave, fringe and indirect costs.
Auditing the GMS System - An Auditor's Overview
The GMS system classifies revenues and expenditures in two ways – either they are directly charged to the appropriate program activity or they are charged to pool account(s) where they are allocated to programs. Pooled allocations are reported throughout the year but are only formally closed in the General Ledger at year end. This section outlines how this works in the GMS system and identifies supporting financial reports to assist the auditor in understanding the system.
All charges originate through one of the following books of entry.
Registers for each of the above books are available to document initial data entry into the accounting system. Batch numbers are assigned for data entry and each transaction receives a transaction number and is coded for accounting treatment.
Coding for expenses is a series of five numbers.
Charges entered into the system, if directly coded to a program element, asset or liability account are posted directly to the designated account in the general ledger. These charges may be reviewed on the General Ledger with Current Detail, Transaction Code Listing, and Project/Element Charge Listing. They will also be presented on the Balance Sheet and Project, Element, and Agencywide Revenue and Expenditure Reports.
The typical GMS system uses an allocation methodology to charge 4 costs to program elements - direct salaries, leave costs, fringe benefits, and indirect costs. Each of these costs is charged to an allocated account, analyzed each month on a year-to-date basis, and posted to the financial reports. They are formally closed in the general ledger at year end by crediting the allocation account and debiting the program activity based upon final year end allocations. The final closing results in no change to financial reports since the allocation amounts were reported throughout the year. Thus, the final closing of these accounts is simply posting the final allocations to the project equity accounts in the general ledger.
• Direct Salaries
All salary charges are documented on employee timesheets which show program elements and hours worked. Timesheets are entered each pay period to (1) produce payroll, (2) maintain employee leave balances, and (3) produce labor distribution.
Gross wages are coded to 997000-50000 which is a payroll control account accumulating all paid salaries for the year. In addition to payroll records which reconcile to this account, several supporting labor distribution reports are also available. These are Monthly Timesheet Charges by Activity, Monthly Timesheet Charges by Employee, YTD Timesheet Charges by Employee, and YTD Timesheet Charges by Activity. Direct salary charges also appear on the YTD Cost Allocation Summary where they are added to allocated leave to form the total salaries amount posted to financial reports.
• Adjustments to Paid Salaries
Depending upon the particular organization, several adjustments may be made to paid salaries.
If the organization uses a compensatory time policy, they may charge compensatory time to programs when it is earned. In this event, these amounts will appear on all of the above labor distribution reports under the "comp time" column. When comp time is taken, a designated element and pay code is used and it is not an expense to a program. The formal adjustment to both the salaries and accrued compensatory time accounts is made at year end during closing. The amount of this adjustment may be viewed at any time on the Leave Rate Computation and Analysis.
If the organization incurs a liability for annual leave when it is earned, then the system allows this cost to be charged to programs at the time it is earned offset by the corresponding accrued annual leave liability account which is charged when annual leave is taken. This calculation is automatically handled in the system and may be viewed on the Leave Rate Computation and Analysis. A schedule supporting the current leave liability is printed each month - the last section of the Leave Rate Computation and Analysis. Again, these costs are automatically reported to programs throughout the year and the formal adjustments to both the salaries and accrued leave account is handled at year end. Any adjustments to the paid salary account is identified on the Balance Sheet under reconciling items throughout the year.
If the organization incurs a liability for sick leave, it is handled in the same way as annual leave.
• Leave Allocation
Most GMS systems use a cost allocation methodology to handle the allocation of leave costs. In this event, the actual cost of leave is computed (considering all leaves taken and the adjustments discussed above) and year-to-date distribution rates are calculated by employee class. This rate represents the ratio of leave costs to regular time salaries. Leave is then distributed to all programs. Total salary costs appearing on the financial reports includes directly charged salaries documented on timesheets and allocated leave costs distributed in this manner in most GMS systems.
The entire leave allocation methodology may be reviewed by using the Leave Rate Cost Computation and Analysis. The application of leave rates will appear on the YTD Cost Allocation Summary. The final distribution of salary costs will appear on revenue and expenditure reports, normally within the salary line item.
• Fringe Benefits
Organizations using a cost allocation methodology to handle fringe benefits may view the calculation and handling in this way. Fringe benefit charges (coded to 998000) will accumulate on the Fringe Benefit Rate Computation and Analysis. This report shows line item amounts which comprise the fringe benefit pool and calculates the year-to-date rates for distribution of fringe benefits to all programs. Distributions appear on the YTD Cost Allocation Summary and are reported throughout the year on revenue and expenditure reports under account 50500 Fringe Benefits.
• Indirect Costs
Organizations using a cost allocation methodology to handle indirect costs may view the calculation and handling in this way. Indirect cost charges (coded to elements 999000- 999900) will accumulate on the Indirect Cost Rate Computation and Analysis. This report shows line item amounts for each indirect cost pool used. The indirect cost rate is computed consistent with the organization's plan. Distributions appear on the YTD Cost Allocation Summary and are reported throughout the year on the revenue and expenditure reports under account 59700 Indirect Costs.
• Relationship of General Ledger to Cost Allocation
Throughout the year, cost allocation amounts are retained in the General Ledger with Current Detail in the 50000-99999 series of accounts. This is in contrast to direct program charges which accumulate within the appropriate 30000 series project account.
Each month, cost allocation amounts are analyzed and distributed to programs using the methodologies described above. These allocations are easily viewed on the YTD Cost Allocation Summary. From this summary, they appear on the revenue and expenditure reports. In addition, the Balance Sheet produced by the system reports cost allocation amounts within the 30000 series of projects - just as they would appear in the General Ledger with Current Detail at year end when closed. Any differences resulting from the allocation process are identified as reconciling items on the Balance Sheet.
Auditing the GMS System -> Cost Allocation Disclosure In the Audit Report
Cost Allocation Disclosure in the Audit Report OMB Circular A-133, Audits of States, Local Governments, and Nonprofit Organizations places emphasis on compliance with federal cost principles by nonprofit organizations that administer federal assistance. The auditor is now required to assess cost allocation procedures as to their compliance with OMB Circular A-122, Cost Principles for Nonprofit Organizations. This general requirement is contained in 13.C.(5) of Circular A-133.
Section 13.6(2)(C) also strengthens the internal control review of direct and indirect costs. Whether the organization uses direct charge allocations or indirect cost rates to share common or joint costs, internal procedures must demonstrate compliance with fair and objective cost-sharing among all programs - regardless of the willingness to pay.
To assist GMS clients and their auditors with fulfilling this requirement, we have prepared a Sample Disclosure Format for Allocated Costs to be consistent with the allocation procedures found in most GMS Systems.
Recommendation
Obviously, the format itself will differ with each organization. However, we do recommend that some version be contained in the audit report to fulfill this requirement.
Nonprofit and Public Agency Sample Disclosure Format for Allocated Costs
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Accounting Policies Cost Allocation
The following is a summary of significant cost allocation policies and results used in the preparation of the audited financial statements.
Cost Allocation operates in accordance with an Indirect Cost Proposal developed annually. The Proposal identifies shared costs and the financial bases for cost-sharing. It also identifies various non-financial bases for allocating certain joint or common costs as Direct Costs. The concepts in the Proposal were used by the accounting system and produced the following actual results for the fiscal year.
a. Leave Benefits consist of accrued annual leave and other types of leave granted, i.e., sick, holiday, and administrative leave. Leave costs are accumulated in an organizational leave pool and distributed to activities based on year-to-date in-service salary costs. This results in all activities bearing an equitable share of leave costs and diminishes the circumstantial effects of timing associated with leave usage. Actual leave costs for the year ended June 30, 20XX are shown below:
Annual Leave Earned
$92,140
Sick Leave Granted
$48,705
Holiday Leave Granted
$70,012
Personal Leave Granted
$ 3,050
Administrative Leave
Granted $ 2,863
Jury Service Leave Granted
$ 1,795
Educational Leave Granted
$ 2,280
Total Leave Costs
$220,845
Leave Benefit Costs $220,845 = 14.5%
In Service Salaries $1,522,000
Actual leave rates by employee classification (which reflects leave eligibility) are developed and applied to the year-to-date base of in-service salaries in each project to determine its share of leave costs. In the aggregate, $220,845 was charged among all programs operated during the fiscal year. (NOTE: Separate classes may be necessary if leave benefit eligibility differs among employees.)
FICA and Medicare Contributions
Full Time (12 Months) Y
Full Time (10 Months) Y
Part Time
Y
Pension Contributions
Y
Y
N
Health Insurance
Y
Y
N
Deferred Compensation
Y
N
N
State Unemployment
Y
Y
Y
Disability and Workers Comp
Y
Y
N
Full Time (12 Months)
Full Time (10 Months)
Part Time
Total
FICA and Medicare
Contributions 74,290
56,802
2,185
133,277
Pension Contributions
43,700
14,850
---
58,550
Health Insurance
44,675
38,612
---
83,287
Deferred Compensation
11,220
---
---
11,220
State Unemployment
12,625
11,880
1,715
26,220
Disability and Workers
Comp 13,595 8,910 --- 22,505
Total Fringe Benefits
$200,105
$131,054
$3,900
$335,059
Total Salaries
$971,660
$742,858
$28,600
Fringe Benefits Rates
(Final) 20.6% 17.6% 13.6%
These final rates were applied to the year-to-date salaries base by class in each Project to determine its share of fringe benefit costs. In the aggregate, $335,059 was charged among all programs operated during the fiscal year. The use of the pool and year-to-date financial activity results in an equitable distribution among all activities regardless of individual contract periods or monthly expenditure levels.
Management and Administrative Salaries:
Position Indirect Indirect Cost Description
Executive Director
$46,500
Administrative Asst.
19,250
Program Coordinator
28,600
Fiscal Officer
37,250
Sr. Bookkeeper
23,700
Bookkeeper
18,200
Personnel Director
27,400
Receptionist/Telephone
15,200
Total
$216,100
Central Support Functions
Fringe Benefits (20.6%)
44,515
Central Functions
Association Dues
2,800
Organizational Dues
Auditing
21,600
All Programs
Auto Expense
2,825
Central Functions
Accounting Software
Maint 2,450 Central Functions
Delivery Expense
1,470
Central Functions
Depreciation
2,400
Central Functions
Financial Management
2,725
Central Functions
Legal Services
3,230
All Programs
Liability Insurance
8,850
All Programs
Office Supplies
6,120
All Programs
Postage
2,230
Central Functions
Rent
68,000
All Programs
Reproduction
9,800
All Programs
Telephone System
19,640
All Programs
Long Distance Telephone
1,335
Central Functions
Travel
3,660
Central Functions
Total Indirect Costs
$419,750
ALLOCATION BASE:
Direct Salaries
$1,526,745
Direct Fringe
290,544
In-Kind Salaries
22,600
Total Base
$1,839,889
Indirect Costs were accumulated in an organizational pool and distributed to activities/programs based on year-to-date direct salaries, fringe, and In-kind salaries in conformance with the organization's Indirect Cost Proposal. Actual Indirect Costs and the final rate for the year ended June 30 are as follows:
Indirect Cost Rate (Final): Indirect Cost $ 419,750 = 22.8% Base $1,839,889
The final rate was applied to the year-to-date base in each project to determine its share of indirect costs. In the aggregate, actual costs of $419,750 were charged among all programs operated during the fiscal year. The use of year-to-date financial information arrayed costs equitably regardless of individual contract periods or monthly expenditure levels.
Category Base
Auto
Expense Mileage
Interim reports may show higher or lower allocated costs which reflect changing rates after project termination. Final costs for completed projects can only be determined at the end of the organization's fiscal year.
These materials have been prepared to assist you with preparing for audit and to serve as a reference for your auditor when auditing your agency.
This section covers these topics:
- Schedules you should have available for your auditor which will assist them with the audit. Appropriate GMS reports are identified to assist the auditor with fieldwork.
- GMS System Overview
- GMS recommended Cost Allocation Disclosure for the audit report.
Auditing the GMS System -Schedules You Should Have Ready for Your Auditor
Certainly a major contribution you can make for a smooth and efficient audit is to assemble and have available a number of reference schedules. Many are products of your year end closing activities, others are reports easily printed from the system and certain materials need to be pulled from your files.
Here is a listing of these schedules and, if applicable, where and how to obtain them from the GMS System.
- Chart of Accounts
- Print master file listing for both General Ledger Transaction Codes and Program Elements (by project).
- Current Year Indirect Cost Plan & Rate Agreement. (This should be in your files.)
- Bank Reconciliations
Should be for all checking accounts for last month of fiscal year. These should tie to final General Ledger and Balance Sheet cash accounts.
- Schedule of Prepaid Insurances
This schedule should list voucher#, check#, policy coverage, policy number, insurance company, period covered and prepaid amount. It should tie to your Prepaid Insurances Account on your General Ledger and Balance Sheet.
- Schedule of Other Prepaid Expenses
This schedule should list voucher#, check#, payee, period covered and prepaid amount. It should tie to appropriate Prepaid Accounts on your General Ledger and Balance Sheet.
- Schedule of Advances/Schedule of Deposits
These schedules should list voucher#, check#, payee and amounts. They should tie to appropriate accounts shown on your General Ledger and Balance Sheet.
- Schedule of Fixed Assets
Fixed asset schedules should include serial #, description, status, purchase date, purchase price, contract#, general ledger code, location, type, funding source (if applicable), depreciation method and amount (year and to-date at a minimum), number of months depreciated, and any relevant disposition information. The schedule should total out amounts applicable by funding sources.
This schedule should tie to appropriate Fixed Asset Accounts on the General Ledger and Balance sheet and to any depreciation reported as current year expense.
- Accounts Payable Analysis
The Accounts Payable Analysis should reconcile with the General Ledger and Balance Sheet.
- Schedule of Accrued Leave By Employee
This should reconcile to the Accrued Leave Liability amounts reported on the General Ledger and Balance Sheet. Use the itemized listing by employee that printed at Month End on the Leave Rate Computation and Analysis.
- Schedule of Cost Allocation and Supporting Rate Calculations
This will illustrate (a) all allocations, (b) demonstrate that they have been performed consistently, and (c) show how all rate calculations have been obtained. Use the final Year-to-date Cost Allocation Summary and supporting Leave Rate Computation and Analysis, Fringe Benefit Rate Computation and Analysis, and Indirect Cost Rate Computation and Analysis.
- Schedule of Federal and State Accounts Receivable
This will reconcile to these asset accounts shown on the General Ledger and Balance Sheet. Use the schedule prepared for the final closing run - Exhibit 2 Grant and Contract Receivable.
- Schedule of Other Accounts Receivable
This should reconcile to any other General Ledger and Balance Sheet Accounts Receivable amounts. This can be obtained by using the YTD General Ledger and printing transaction histories for these accounts.
- Schedule of Accrued Interest Income Calculation
For all savings and investments this should reconcile to Accrued Interest Asset Accounts appearing on the General Ledger and Balance Sheet.
- Schedule of Accrued Interest Expense Calculation
For notes and accounts payable this should reconcile to the applicable liability accounts.
- Schedule of Deferred Revenue (Refundable Advance)
This will reconcile to the General Ledger and Balance Sheet Deferred Revenue (Refundable Advance) Account. Use the schedule prepared for the final closing run - Exhibit 3 Deferred Revenue.
- Schedule of Grant and Contract Cash To be Returned To Grantors
This will reconcile to applicable General Ledger and Balance Sheet accounts. Use the schedule prepared for the final closing run - Exhibit 4 Due To Grantor Agencies.
- Summary of Agency Revenue and Expenses
Use the Agencywide Line Item Revenue and Expenditure report printed at Month End. By selecting dates for the entire fiscal year, a Transaction Code Listing details all transactions for the year in support of each line item reported.
- Summary of Revenue and Expenditures by Project
Use the Project Revenue and Expenditure reports printed at Month End. By selecting dates for the entire fiscal year, a Project Element Charge Listing details all transactions for the year in support of each direct expense line item and all revenues. YTD Timesheet Charges by Activity printed at month end details all direct salary charges. YTD Cost Allocation Summary printed at month end details allocations for salaries, leave, fringe and indirect costs.
Auditing the GMS System - An Auditor's Overview
The GMS system classifies revenues and expenditures in two ways – either they are directly charged to the appropriate program activity or they are charged to pool account(s) where they are allocated to programs. Pooled allocations are reported throughout the year but are only formally closed in the General Ledger at year end. This section outlines how this works in the GMS system and identifies supporting financial reports to assist the auditor in understanding the system.
All charges originate through one of the following books of entry.
- Vouchers
- Cash Receipts
- General Journal
- Cash Disbursements
- Timesheets
- Accounts Receivable (optional supplement)
Registers for each of the above books are available to document initial data entry into the accounting system. Batch numbers are assigned for data entry and each transaction receives a transaction number and is coded for accounting treatment.
Coding for expenses is a series of five numbers.
- A 5 digit GL code is used with 10000's representing asset accounts, 20000's representing liability accounts, 40000's representing revenues, and 50000-99999 representing expense codes.
- All charges are assigned a 6 digit program element. Certain elements have special purposes. 997000 is used to identify any transaction that is non-project and non-pool related. Normally this would be a charge to an asset or liability account. 998000 identifies all charges to the fringe benefit pool. 999000-999900 identifies charges to the indirect cost pool(s). 995100- 996900 identifies charges to various leave taken accounts. All other program elements assign charges to a particular program activity.
- A 5 digit project code is used to group program elements within contracts. All program related elements are assigned a 30000 series project number.
Charges entered into the system, if directly coded to a program element, asset or liability account are posted directly to the designated account in the general ledger. These charges may be reviewed on the General Ledger with Current Detail, Transaction Code Listing, and Project/Element Charge Listing. They will also be presented on the Balance Sheet and Project, Element, and Agencywide Revenue and Expenditure Reports.
The typical GMS system uses an allocation methodology to charge 4 costs to program elements - direct salaries, leave costs, fringe benefits, and indirect costs. Each of these costs is charged to an allocated account, analyzed each month on a year-to-date basis, and posted to the financial reports. They are formally closed in the general ledger at year end by crediting the allocation account and debiting the program activity based upon final year end allocations. The final closing results in no change to financial reports since the allocation amounts were reported throughout the year. Thus, the final closing of these accounts is simply posting the final allocations to the project equity accounts in the general ledger.
• Direct Salaries
All salary charges are documented on employee timesheets which show program elements and hours worked. Timesheets are entered each pay period to (1) produce payroll, (2) maintain employee leave balances, and (3) produce labor distribution.
Gross wages are coded to 997000-50000 which is a payroll control account accumulating all paid salaries for the year. In addition to payroll records which reconcile to this account, several supporting labor distribution reports are also available. These are Monthly Timesheet Charges by Activity, Monthly Timesheet Charges by Employee, YTD Timesheet Charges by Employee, and YTD Timesheet Charges by Activity. Direct salary charges also appear on the YTD Cost Allocation Summary where they are added to allocated leave to form the total salaries amount posted to financial reports.
• Adjustments to Paid Salaries
Depending upon the particular organization, several adjustments may be made to paid salaries.
If the organization uses a compensatory time policy, they may charge compensatory time to programs when it is earned. In this event, these amounts will appear on all of the above labor distribution reports under the "comp time" column. When comp time is taken, a designated element and pay code is used and it is not an expense to a program. The formal adjustment to both the salaries and accrued compensatory time accounts is made at year end during closing. The amount of this adjustment may be viewed at any time on the Leave Rate Computation and Analysis.
If the organization incurs a liability for annual leave when it is earned, then the system allows this cost to be charged to programs at the time it is earned offset by the corresponding accrued annual leave liability account which is charged when annual leave is taken. This calculation is automatically handled in the system and may be viewed on the Leave Rate Computation and Analysis. A schedule supporting the current leave liability is printed each month - the last section of the Leave Rate Computation and Analysis. Again, these costs are automatically reported to programs throughout the year and the formal adjustments to both the salaries and accrued leave account is handled at year end. Any adjustments to the paid salary account is identified on the Balance Sheet under reconciling items throughout the year.
If the organization incurs a liability for sick leave, it is handled in the same way as annual leave.
• Leave Allocation
Most GMS systems use a cost allocation methodology to handle the allocation of leave costs. In this event, the actual cost of leave is computed (considering all leaves taken and the adjustments discussed above) and year-to-date distribution rates are calculated by employee class. This rate represents the ratio of leave costs to regular time salaries. Leave is then distributed to all programs. Total salary costs appearing on the financial reports includes directly charged salaries documented on timesheets and allocated leave costs distributed in this manner in most GMS systems.
The entire leave allocation methodology may be reviewed by using the Leave Rate Cost Computation and Analysis. The application of leave rates will appear on the YTD Cost Allocation Summary. The final distribution of salary costs will appear on revenue and expenditure reports, normally within the salary line item.
• Fringe Benefits
Organizations using a cost allocation methodology to handle fringe benefits may view the calculation and handling in this way. Fringe benefit charges (coded to 998000) will accumulate on the Fringe Benefit Rate Computation and Analysis. This report shows line item amounts which comprise the fringe benefit pool and calculates the year-to-date rates for distribution of fringe benefits to all programs. Distributions appear on the YTD Cost Allocation Summary and are reported throughout the year on revenue and expenditure reports under account 50500 Fringe Benefits.
• Indirect Costs
Organizations using a cost allocation methodology to handle indirect costs may view the calculation and handling in this way. Indirect cost charges (coded to elements 999000- 999900) will accumulate on the Indirect Cost Rate Computation and Analysis. This report shows line item amounts for each indirect cost pool used. The indirect cost rate is computed consistent with the organization's plan. Distributions appear on the YTD Cost Allocation Summary and are reported throughout the year on the revenue and expenditure reports under account 59700 Indirect Costs.
• Relationship of General Ledger to Cost Allocation
Throughout the year, cost allocation amounts are retained in the General Ledger with Current Detail in the 50000-99999 series of accounts. This is in contrast to direct program charges which accumulate within the appropriate 30000 series project account.
Each month, cost allocation amounts are analyzed and distributed to programs using the methodologies described above. These allocations are easily viewed on the YTD Cost Allocation Summary. From this summary, they appear on the revenue and expenditure reports. In addition, the Balance Sheet produced by the system reports cost allocation amounts within the 30000 series of projects - just as they would appear in the General Ledger with Current Detail at year end when closed. Any differences resulting from the allocation process are identified as reconciling items on the Balance Sheet.
Auditing the GMS System -> Cost Allocation Disclosure In the Audit Report
Cost Allocation Disclosure in the Audit Report OMB Circular A-133, Audits of States, Local Governments, and Nonprofit Organizations places emphasis on compliance with federal cost principles by nonprofit organizations that administer federal assistance. The auditor is now required to assess cost allocation procedures as to their compliance with OMB Circular A-122, Cost Principles for Nonprofit Organizations. This general requirement is contained in 13.C.(5) of Circular A-133.
Section 13.6(2)(C) also strengthens the internal control review of direct and indirect costs. Whether the organization uses direct charge allocations or indirect cost rates to share common or joint costs, internal procedures must demonstrate compliance with fair and objective cost-sharing among all programs - regardless of the willingness to pay.
To assist GMS clients and their auditors with fulfilling this requirement, we have prepared a Sample Disclosure Format for Allocated Costs to be consistent with the allocation procedures found in most GMS Systems.
Recommendation
Obviously, the format itself will differ with each organization. However, we do recommend that some version be contained in the audit report to fulfill this requirement.
Nonprofit and Public Agency Sample Disclosure Format for Allocated Costs
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Accounting Policies Cost Allocation
The following is a summary of significant cost allocation policies and results used in the preparation of the audited financial statements.
Cost Allocation operates in accordance with an Indirect Cost Proposal developed annually. The Proposal identifies shared costs and the financial bases for cost-sharing. It also identifies various non-financial bases for allocating certain joint or common costs as Direct Costs. The concepts in the Proposal were used by the accounting system and produced the following actual results for the fiscal year.
a. Leave Benefits consist of accrued annual leave and other types of leave granted, i.e., sick, holiday, and administrative leave. Leave costs are accumulated in an organizational leave pool and distributed to activities based on year-to-date in-service salary costs. This results in all activities bearing an equitable share of leave costs and diminishes the circumstantial effects of timing associated with leave usage. Actual leave costs for the year ended June 30, 20XX are shown below:
Annual Leave Earned
$92,140
Sick Leave Granted
$48,705
Holiday Leave Granted
$70,012
Personal Leave Granted
$ 3,050
Administrative Leave
Granted $ 2,863
Jury Service Leave Granted
$ 1,795
Educational Leave Granted
$ 2,280
Total Leave Costs
$220,845
Leave Benefit Costs $220,845 = 14.5%
In Service Salaries $1,522,000
Actual leave rates by employee classification (which reflects leave eligibility) are developed and applied to the year-to-date base of in-service salaries in each project to determine its share of leave costs. In the aggregate, $220,845 was charged among all programs operated during the fiscal year. (NOTE: Separate classes may be necessary if leave benefit eligibility differs among employees.)
- Employees are defined by class based upon fringe benefit eligibility. Employee fringe benefits are accumulated in an organizational pool as they are incurred. Fringe costs are prorated by employee class (i.e., eligibility) based on its year-to-date proportionate share of salaries to total year-to-date organizational salaries. The classification of costs conforms to the organization's Indirect Cost Proposal for the year in which provisional rates of 21.0%, 17.4%, and 13.5% for classes 1-2-3 were negotiated respectively. The fringe eligibility matrix and actual fringe benefit costs and final rates for the year ended June 30, xxxx, are as follows:
FICA and Medicare Contributions
Full Time (12 Months) Y
Full Time (10 Months) Y
Part Time
Y
Pension Contributions
Y
Y
N
Health Insurance
Y
Y
N
Deferred Compensation
Y
N
N
State Unemployment
Y
Y
Y
Disability and Workers Comp
Y
Y
N
Full Time (12 Months)
Full Time (10 Months)
Part Time
Total
FICA and Medicare
Contributions 74,290
56,802
2,185
133,277
Pension Contributions
43,700
14,850
---
58,550
Health Insurance
44,675
38,612
---
83,287
Deferred Compensation
11,220
---
---
11,220
State Unemployment
12,625
11,880
1,715
26,220
Disability and Workers
Comp 13,595 8,910 --- 22,505
Total Fringe Benefits
$200,105
$131,054
$3,900
$335,059
Total Salaries
$971,660
$742,858
$28,600
Fringe Benefits Rates
(Final) 20.6% 17.6% 13.6%
These final rates were applied to the year-to-date salaries base by class in each Project to determine its share of fringe benefit costs. In the aggregate, $335,059 was charged among all programs operated during the fiscal year. The use of the pool and year-to-date financial activity results in an equitable distribution among all activities regardless of individual contract periods or monthly expenditure levels.
- Indirect costs consist of salaries and fringe benefits of central organization personnel who perform management and administrative functions necessary and beneficial to all activities. Also included are joint or common costs supporting all programs, or the central administrative portions of these costs. The classification of costs conforms to the organization's Indirect Cost Proposal for the year in which a 22.9% Provisional Indirect Cost Rate was negotiated for budgeting purposes.
Management and Administrative Salaries:
Position Indirect Indirect Cost Description
Executive Director
$46,500
Administrative Asst.
19,250
Program Coordinator
28,600
Fiscal Officer
37,250
Sr. Bookkeeper
23,700
Bookkeeper
18,200
Personnel Director
27,400
Receptionist/Telephone
15,200
Total
$216,100
Central Support Functions
Fringe Benefits (20.6%)
44,515
Central Functions
Association Dues
2,800
Organizational Dues
Auditing
21,600
All Programs
Auto Expense
2,825
Central Functions
Accounting Software
Maint 2,450 Central Functions
Delivery Expense
1,470
Central Functions
Depreciation
2,400
Central Functions
Financial Management
2,725
Central Functions
Legal Services
3,230
All Programs
Liability Insurance
8,850
All Programs
Office Supplies
6,120
All Programs
Postage
2,230
Central Functions
Rent
68,000
All Programs
Reproduction
9,800
All Programs
Telephone System
19,640
All Programs
Long Distance Telephone
1,335
Central Functions
Travel
3,660
Central Functions
Total Indirect Costs
$419,750
ALLOCATION BASE:
Direct Salaries
$1,526,745
Direct Fringe
290,544
In-Kind Salaries
22,600
Total Base
$1,839,889
Indirect Costs were accumulated in an organizational pool and distributed to activities/programs based on year-to-date direct salaries, fringe, and In-kind salaries in conformance with the organization's Indirect Cost Proposal. Actual Indirect Costs and the final rate for the year ended June 30 are as follows:
Indirect Cost Rate (Final): Indirect Cost $ 419,750 = 22.8% Base $1,839,889
The final rate was applied to the year-to-date base in each project to determine its share of indirect costs. In the aggregate, actual costs of $419,750 were charged among all programs operated during the fiscal year. The use of year-to-date financial information arrayed costs equitably regardless of individual contract periods or monthly expenditure levels.
- Certain direct costs are allocated among activities and programs through individual bases, as follows:
Category Base
Auto
Expense Mileage
- Financial Reporting - Projects completed during the fiscal year may have reported interim costs to grantor agencies, pending the determination of final costs at June 30, the end of the organization's fiscal period.
Interim reports may show higher or lower allocated costs which reflect changing rates after project termination. Final costs for completed projects can only be determined at the end of the organization's fiscal year.
