Automated Directives System (ADS) 591.3.2, Audits of Foreign Organizations and Host Government Entities, provides guidance on audits of foreign organizations. Specifically, ADS 5126.96.36.199, Foreign Organizations, states that a mission must assess risk at least annually to determine whether financial audits of foreign for-profit organizations are warranted.
Furthermore, ADS 5188.8.131.52 requires a Federal cognizant agency or independent auditor to audit the direct and indirect costs incurred under an award to determine allowable direct costs and to recommend indirect cost rates.
The USAID guidance states that the prime recipient must impose the Guidelines for Financial Audits Contracted by Foreign Recipients on foreign subrecipients. These guidelines state that USAID agreements with foreign recipients require recipients to contract independent auditors acceptable to USAID’s Office of Inspector General (OIG) to perform financial audits of the funds provided under the agreements.
In addition, ADS 591.3.6, USAID Audit Rights, clearly states that USAID retains the right to require audits or otherwise ensure adequate accountability of recipient organizations regardless of the audit requirement.
 According to the Federal Acquisition Regulation, a direct cost is any cost that can be identified with a particular final cost objective, and an indirect cost is any cost that is not directly identified with a single, final cost objective but can be identified with two or more final cost objectives, such as rent, utilities, and supplies.
 Such audits are in accordance with the Inspector General Act of 1978, as amended. The OIG reserves the right to conduct audits using its own staff, notwithstanding acceptable audits performed by other auditors, in cases where special accountability needs are identified.
- Develop and implement procedures to require the prime contractor to periodically conduct independent financial reviews of for-profit local subcontractors’ incurred costs to determine if audits are warranted.
- Conduct incurred costs audits as required by the Guidelines for Financial Audits Contracted by Foreign Recipients.
Source:AUDIT REPORT NO. 6-278-10-004-P March 31, 2010
The recommendations are derived from audit reports of the Office of the Inspector General. The source refers to the audit report, which is available on this site as part of the Audit Database Project: an educational tool for compliance with USAID regulations. Please see the disclaimer of this site before using recommendations.
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