[Code of Federal Regulations]
[Title 7, Volume 11]
[Revised as of January 1, 2006]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR1773]

[Page 1024-1040]
 
                          TITLE 7--AGRICULTURE
 
    CHAPTER XVII--RURAL UTILITIES SERVICE, DEPARTMENT OF AGRICULTURE
 
PART 1773_POLICY ON AUDITS OF RUS BORROWERS

                      Subpart A_General Provisions

Sec.
1773.1 General.
1773.2 Definitions.

                    Subpart B_RUS Audit Requirements

1773.3 Annual audit.
1773.4 Borrower responsibilities.
1773.5 Qualifications of CPA.
1773.6 Auditor communication.
1773.7 Audit standards.
1773.8 Audit date.
1773.9 Disclosure of fraud, illegal acts, and other noncompliance.
1773.10 Access to audit-related documents.
1773.11-1773.19 [Reserved]

    Subpart C_RUS Requirements for the Submission and Review of the 
  Auditor's Report, Report on Compliance and on Internal Control Over 
               Financial Reporting, and Management Letter

1773.20 CPA's submission of the auditor's report, report on compliance, 
          report on compliance and on internal controls over financial 
          reporting, and management letter.
1773.21 Borrower's review and submission of the auditor's report, report 
          on compliance and on internal control over financial 
          reporting, and management letter.
1773.22-1773.29 [Reserved]

                  Subpart D_RUS Reporting Requirements

1773.30 General.
1773.31 Auditor's report.
1773.32 Report on compliance and on internal control over financial 
          reporting.
1773.33 Management letter.
1773.34-1773.37 [Reserved]

        Subpart E_RUS Required Audit Procedures and Documentation

1773.38 Scope of engagement.
1773.39 Utility plant and accumulated depreciation.
1773.40 Regulatory assets.
1773.41 Extraordinary retirement losses.
1773.42 Clearing accounts.
1773.43 Capital and equity accounts.
1773.44 Long-term debt.
1773.45 Regulatory liabilities.
1773.46-1773.49 [Reserved]

    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

    Source: 56 FR 63360, Dec. 3, 1991, unless otherwise noted.

    Editorial Note: Nomenclature changes to part 1773 appear at 63 FR 
38722, July 17, 1998.

[[Page 1025]]

                      Subpart A_General Provisions

Sec. 1773.1  General.

    (a) This part implements those standard provisions of the security 
instrument utilized by the Rural Utilities Service (RUS) for both 
electric and telecommunications borrowers and by the Rural Telephone 
Bank (RTB) for its telecommunications borrowers. The provisions require 
borrowers to prepare and furnish to RUS, at least once during each 12-
month period, a full and complete report of its financial condition, 
operations, and cash flows, in form and substance satisfactory to RUS, 
audited and certified by an independent certified public accountant 
(CPA), satisfactory to RUS, and accompanied by a report of such audit, 
in form and substance satisfactory to RUS.
    (b) This part 1773 applies to both RUS and RTB borrowers. For the 
purposes of RTB borrowers, as used in this part 1773, RUS means RTB and 
Administrator means Governor unless the text indicates otherwise.
    (c) This complies with the 1994 revision of Government Auditing 
Standards, issued by the Comptroller General of the United States, 
United States General Accounting Office, including amendments dated May 
13, 1999, and July 30, 1999.
    (d) An auditor's report, report on compliance and on internal 
control over financial reporting, and management letter are required to 
meet the reporting provisions of the RUS security instrument.
    (1) The auditor's report must state that the audit was conducted in 
accordance with generally accepted government auditing standards 
(GAGAS).
    (2) The management letter must state that the audit was conducted in 
accordance with this part.
    (3) A report of the audit, in form and substance satisfactory to 
RUS, cannot be issued unless and until an audit has been performed in 
accordance with GAGAS and this part.
    (4) A borrower is in violation of provisions of its security 
instrument with RUS if the borrower fails to provide an audit performed 
in compliance with GAGAS and this part. RUS security instruments 
normally provide for notice and an opportunity to cure such violations 
before RUS can exercise certain remedies.
    (5) A report prepared in connection with a review or compilation of 
financial statements, as defined in Statement of Standards for 
Accounting and Review Services No. 1, Compilation and Review of 
Financial Statements, does not satisfy the requirements of the RUS 
security instrument.
    (6) A report, as described in Statement on Auditing Standards (SAS) 
No. 62, entitled ``Special Reports'', or in SAS No. 75, entitled 
``Engagements to Apply Agreed-upon Procedures to Specified Elements, 
Accounts, or Items of a Financial Statement'', does not satisfy the RUS 
loan security instrument requirements.
    (7) An annual report containing audited financial statements does 
not satisfy the RUS security instrument requirements.
    (e) This part further implements those provisions of the standard 
RUS security instrument by setting forth the criteria for CPAs to be 
deemed satisfactory to RUS and the audit procedures and documentation 
standards that must be performed before a report of the audit 
satisfactory to RUS can be prepared and issued.

[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 107, Jan. 3, 1996; 66 FR 
27835, May 21, 2001]

Sec. 1773.2  Definitions.

    As used in this part:
    AA-PARA means Assistant Administrator, Program Accounting and 
Regulatory Analysis.
    Administrator means the Administrator of RUS and, as provided in 
Sec. 1773.2 (b), Governor.
    AICPA means the American Institute of Certified Public Accountants.
    Audit means an examination of financial statements by an independent 
CPA for the purpose of expressing an opinion on the fairness with which 
those statements present financial position, results of operations, and 
changes in cash flows in conformity with generally accepted accounting 
principles (GAAP) and for determining whether the borrower has complied 
with applicable laws, regulations, and contracts for those transactions 
and events reflected in the financial statements.

[[Page 1026]]

    Borrower means an entity that has an outstanding RUS, RTB, or FFB 
loan or loan guarantee, or that has received a grant for electric, 
telecommunications, distance learning, or telemedicine purposes under 
the act.
    CPA means certified public accountant. The terms CPA and CPA firm 
are used interchangeably.
    FFB means the Federal Financing Bank, an instrumentality and wholly 
owned corporation of the United States.
    Fraud has the same meaning prescribed in SAS No. 82 entitled 
``Consideration of Fraud in Financial Statements''.
    GAAP means generally accepted accounting principles.
    GAGAS means generally accepted government auditing standards as set 
forth in Government Auditing Standards, Standards for Audit of 
Governmental Organizations, Programs, Activities, and Functions, issued 
by the Comptroller General of the United States.
    GAO means the General Accounting Office.
    Governor means the Governor of the RTB.
    Illegal act has the meaning prescribed in SAS No. 54, entitled 
``Illegal Acts by Clients''.
    OIG means the Office of Inspector General, United States Department 
of Agriculture.
    OMB means the Office of Management and Budget.
    Regulatory asset means an asset resulting from an action of a 
regulator as prescribed in Statement of Financial Accounting Standards 
(SFAS) No. 71, entitled ``Accounting for the Effects of Certain Types of 
Regulation''.
    Regulatory liability means a liability imposed on a regulated 
enterprise by an action of a regulator as prescribed in SFAS No. 71, 
entitled ``Accounting for the Effects of Certain Types of Regulation''.
    Related party has the meaning prescribed in SFAS No. 57, entitled 
``Related Party Disclosures''.
    Related party transaction has the meaning prescribed in SFAS No. 57, 
entitled ``Related Party Disclosures''.
    Reportable condition has the meaning prescribed in SAS No. 60, 
entitled ``Communication of Internal Control Structure Related Matters 
Noted in an Audit''.
    RTB means the Rural Telephone Bank.
    RUS means the Rural Utilities Service, an agency of the United 
States Department of Agriculture established pursuant to Section 232 of 
the Federal Crop Insurance Reform and Department of Agriculture 
Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178), successor 
to REA with respect to administering certain electric and 
telecommunications programs. See 7 CFR 1700.1.
    RUS Bulletin 1773-1, Policy on Audits of RUS Borrowers, is a 
publication prepared by RUS that contains the RUS regulation 7 CFR part 
1773 and exhibits of sample audit reports, financial statements, and a 
management letter used in preparing audit of RUS borrowers. This 
bulletin is available from USDA, Rural Utilities Service, Program 
Development and Regulatory Analysis, 1400 Independence Ave., SW., Stop 
1522, Washington, DC 20250, or available on the internet at http://
www.usda.gov/rus/.
    SAS means Statement on Auditing Standards as prescribed by the 
AICPA.
    SEC Practice Section means the Securities and Exchange Commission 
Practice Section of the AICPA.
    SFAS means Statements of Financial Accounting Standards as 
prescribed by the Financial Accounting Standards Board.
    State means any state or territory of the United States, or the 
District of Columbia.
    Uniform System of Accounts means, for telecommunications borrowers, 
the Uniform System of Accounts for Telecommunications Companies, 
prescribed by the Federal Communications Commission and published at 47 
CFR Part 32, as supplemented by RUS pursuant to 7 CFR Part 1770, 
Accounting Requirements for RUS Telephone Borrowers, subpart B, Uniform 
System of Accounts, and for electric borrowers,

[[Page 1027]]

as contained in 7 CFR Part 1767, Accounting Requirements for RUS 
Electric Borrowers, subpart B, Uniform System of Accounts.

[56 FR 63360, Dec. 3, 1991, as amended at 59 FR 66440, Dec. 27, 1994; 60 
FR 2874, Jan. 12, 1995; 63 FR 38722, July 17, 1998; 66 FR 27835, May 21, 
2001]

                    Subpart B_RUS Audit Requirements

Sec. 1773.3  Annual audit.

    (a) Each borrower must have its financial statements audited 
annually by a CPA selected by the borrower and approved by RUS as set 
forth in Sec. 1773.4.
    (b) Each borrower must establish an annual as of audit date within 
twelve months of the date of receipt of the first advance of funds from 
grants and insured and guaranteed loans approved by RUS and RTB and must 
prepare financial statements as of the date established.
    (c) Until all loans made or guaranteed by RUS have been repaid, the 
borrower must furnish three copies of the auditor's report, report on 
compliance and on internal control over financial reporting, and 
management letter to RUS within 120 days of the as of audit date.
    (d) A borrower that qualifies as a unit of state or local government 
or Indian tribe as such terms are defined in the Single Audit Act of 
1984 (31 U.S.C. 7501 et seq.), the Single Audit Act Amendments of 1996 
(31 U.S.C. 7505 et seq.) and OMB Circular A-133, Audits of States, Local 
Governments, and Non-Profit Organizations (copy available from the 
Executive Office of the President, Publication Services, 725 17th St., 
NW., Suite 2200, Washington, DC 20502; 202-395-7332), must comply with 
this part as follows:
    (1) A borrower that expends $300,000 or more in a year in Federal 
awards must have an audit performed and submit an auditor's report 
meeting the requirements of the Single Audit Act of 1984 and the Single 
Audit Act Amendments of 1996.
    (2) A borrower that expends less than $300,000 in Federal awards 
during the year must have an audit performed in accordance with the 
requirements of this part.
    (3) A borrower must notify RUS, in writing, within 30 days of the as 
of audit date, of the total Federal awards expended during the year and 
must state whether it will have an audit performed in accordance with 
the Single Audit Act of 1984 and the Single Audit Act Amendments of 
1996, or this part.
    (i) A borrower that elects to comply with this part must select a 
CPA that meets the qualifications set forth in Sec. 1773.5.
    (ii) If an audit is performed in accordance with the Single Audit 
Act of 1984 and the Single Audit Act Amendments of 1996, an auditor's 
report that meets the requirements of the Single Audit Act of 1984, and 
the Single Audit Act Amendments of 1996, will be sufficient to satisfy 
that borrower's obligations under this part.
    (e) OMB Circular A-133, Audits of States, Local Governments, and 
Non-Profit Organizations does not apply to audits of RUS electric and 
telecommunications cooperatives and commercial telecommunications 
borrowers.

[56 FR 63360, Dec. 3, 1991, as amended at 59 FR 659, Jan. 6, 1994; 63 FR 
38722, July 17, 1998; 66 FR 27835, May 21, 2001]

Sec. 1773.4  Borrower responsibilities.

    (a) Selection of a qualified CPA. The borrower's board of directors 
is responsible for the selection of a qualified CPA that meets the 
requirements set forth in Sec. 1773.5. When selecting a CPA, the 
borrower should consider, among other matters:
    (1) The qualifications of CPAs available to do the work;
    (2) The CPA's experience in performing audits of utilities; and
    (3) The CPA's ability to complete the audit and submit the reports 
and management letter within 90 days of the as of audit date.
    (b) Board approval of selection. The board's approval of a CPA must 
be recorded by a board resolution that states:
    (1) The CPA meets RUS's qualifications to perform an audit; and
    (2) The borrower and CPA will enter into an audit agreement in 
accordance with Sec. 1773.6.
    (c) Notification of selection. When the initial selection or 
subsequent change

[[Page 1028]]

of a CPA by a borrower has been made, the borrower must notify RUS, in 
writing, at least 90 days prior to the as of audit date.
    (1) RUS will notify the borrower, in writing, within 30 days of the 
date of receipt of such notice, if the selection or change in CPA is not 
satisfactory.
    (2) Notification to RUS that the same CPA has been selected for 
succeeding audits of the borrower's financial statements is not 
required; however, the procedures outlined in this part must be followed 
for each new CPA selected, even though such CPA may previously have been 
approved by RUS to audit records of other RUS borrowers. Changes in the 
name of a CPA firm are considered to be a change in the CPA.
    (d) Audit engagement letter.The borrower must enter into an audit 
engagement letter with the CPA that complies with Sec. 1773.6.
    (e) Debarment certification. The borrower is responsible for the 
receipt, from the selected CPA, of a lower tier covered transaction 
certification, as required under the provisions of Executive Orders 
12549 and 12689, Debarment and Suspension, and any rules or regulations 
issued thereunder.
    (f) Submission of auditor's report. The borrower must submit to RUS 
the required auditor's report, report on compliance and on internal 
control over financial reporting, and management letter as set forth in 
Sec. 1773.21.
    (1) An annual auditor's report, report on compliance and on internal 
control over financial reporting, and management letter that fail to 
meet the requirements detailed in this part will be returned to the 
borrower with a written explanation of noncompliance.
    (2) The borrower must, within 60 days of the date of the letter 
detailing the noncompliance, submit corrected reports to RUS.
    (3) If corrected reports are not received within 60 days of the date 
of the letter detailing the noncompliance, RUS may notify the borrower 
that a default has occurred under its security instrument or take other 
appropriate action. The default notice will set forth the period of time 
during which the default will be remedied.
    (g) Submission of plan of corrective action. The borrower must 
submit written comments to RUS on the findings and recommendations in 
the auditor's report, report on compliance and on internal control over 
financial reporting, and management letter. The borrower must also 
submit to RUS:
    (1) A written plan for corrective action taken or planned; and
    (2) Comments on the status of corrective action taken on previously 
reported findings and recommendations.
    If corrective action is not necessary, a written statement 
describing the reason it is not should accompany the auditor's report.

[56 FR 63360, Dec. 3, 1991, as amended at 66 FR 27835, May 21, 2001]

Sec. 1773.5  Qualifications of CPA.

    For purposes of the RUS standard security instrument, any CPA that 
meets the qualifications criteria of this section and enters into an 
audit agreement with the borrower that complies with Sec. 1773.6, will 
be considered satisfactory to RUS.
    (a) Certification. The accountant that audits the financial 
statements of an RUS borrower must be a CPA in good standing of some 
state. The CPA does not have to be licensed by the state in which the 
borrower is located; however, the CPA must abide by the rules and 
regulations of professional conduct promulgated by the accountancy board 
of the state in which the borrower is located.
    (b) Independence. The CPA must be independent. A CPA will be 
considered independent if the CPA:
    (1) Meets the standards for independence contained in the AICPA Code 
of Professional Conduct in effect at the time the CPA's independence is 
under review;
    (2) Does not have and has not had any direct financial interest or 
any material indirect financial interest in the borrower during the 
period covered by the audit; and
    (3) Is not and was not, during the period under audit, connected 
with the borrower as a promoter, underwriter, trustee, director, 
officer, or employee.
    (c) Peer review requirement. The CPA must belong to and participate 
in a peer review program, and must have undergone a satisfactory peer 
review of

[[Page 1029]]

the accounting and audit practice conducted by an approved peer review 
program under paragraph (c)(4) of this section, unless a waiver is 
granted under paragraph (c)(7) of this section. The reviewing 
organization must not be affiliated with or have had its most recent 
peer review conducted by the organization currently being reviewed 
(reciprocal reviews). After the initial peer review has been performed, 
the CPA must undergo a peer review of the accounting and audit practice 
within 36 months of the issuance of the previous peer review or at such 
additional times as designated by the peer review executive committee.
    (1) A CPA that receives an unqualified peer review report will be 
satisfactory to RUS provided that the CPA meets the other criteria set 
forth in this section.
    (2) If a CPA receives a qualified or adverse peer review report, the 
CPA must undergo a second peer review within 18 months of the date of 
the qualified or adverse report. A CPA that receives an unqualified 
second peer review report will be satisfactory to RUS provided that the 
CPA meets the other criteria set forth in this section.
    (3) A CPA that receives a second qualified or adverse peer review 
report will not be satisfactory to RUS.
    (4) Approved peer review programs. The following peer review 
programs are approved by RUS:
    (i) The peer review programs conducted by the AICPA;
    (ii) The peer review program conducted by the regulated audit 
program group of the National Conference of CPA Practitioners; and
    (iii) An independent peer review program that, in RUS's 
determination, requires its members to:
    (A) Ensure that the CPA can legally engage in the practice of 
certified public accounting;
    (B) Adhere to the quality control standards established by the 
AICPA;
    (C) Submit to peer reviews of the CPA's accounting and audit 
practice every 36 months or at such additional times as designated by 
its own executive committee; and
    (D) Ensure that all professionals in the firm, including CPAs and 
nonCPAs, take part in the qualifying continuing professional education 
requirements of GAGAS, as set forth in paragraphs (c)(4)(iii)(D)(1) and 
(c)(4)(iii)(D)(2). A qualified continuing professional education course 
is one which meets the standards of the AICPA.
    (1) An auditor responsible for planning, directing, conducting, or 
reporting on government audits must complete, every two years, at least 
eighty hours of continuing education and training which contributes to 
the auditor's professional proficiency. At least twenty hours must be 
completed in any one year of the two-year period; and
    (2) An individual responsible for planning, directing, and 
conducting substantial portions of the field work, or reporting on the 
government audit must complete at least 24 of the 80 hours of continuing 
education and training in subjects directly related to the government 
environment and to government auditing. If the audited entity operates 
in a specific or unique environment, auditors must receive training that 
is related to that environment.
    (5) Submission of reports. The CPA must submit to the Assistant 
Administrator, Program Accounting and Regulatory Analysis, a copy of any 
peer review report and accompanying letter of comment, if any, within 60 
days of the date such report and letter of comment are released by the 
peer review group.
    (i) If the peer review report indicates that a follow-up review will 
be made, the CPA must submit subsequent reports to the Assistant 
Administrator, Program Accounting and Regulatory Analysis, within 60 
days of the date such reports are released by the peer review group.
    (ii) A peer review report must be submitted to the Assistant 
Administrator, Program Accounting and Regulatory Analysis, at least once 
every 36 months, or more frequently, if required by the peer review 
program.
    (iii) A copy of the peer review report, accompanying letter of 
comment, and the partners' inspections must be made available to OIG, 
upon request.
    (6) Waiver of the peer review requirement. (i) A CPA may request 
that the Administrator, RUS, waive the peer review requirement. To be 
eligible for a

[[Page 1030]]

waiver, the following criteria must be met:
    (A) The firm has been in existence for less than 1 year from the 
date of the request and has not been previously organized under a 
different name;
    (B) One of the partners organizing the firm has previously, within 
18 months preceding the request, worked for a firm that has been peer 
reviewed and the partner was partner-in-charge of audits of RUS 
borrowers in the previous firm;
    (C) The firm has enrolled in an approved peer review program; and
    (D) The firm agrees to have the peer review conducted within 18 
months of the date of the RUS waiver.
    (ii) Waiver requests must address each of the criteria in paragraph 
(c)(7)(i) of this section and should be submitted to the Assistant 
Administrator, Program Accounting and Regulatory Analysis'.

[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 107, Jan. 3, 1996; 63 FR 
38722, July 17, 1998; 66 FR 27835, May 21, 2001]

Sec. 1773.6  Auditor communication.

    (a) During the planning stages of a financial statement audit, GAGAS 
and AICPA standards require the auditor to communicate certain 
information regarding the nature and extent of testing and reporting on 
compliance with laws and regulations and internal control over financial 
reporting. The communication must include the nature of any additional 
testing of compliance and internal control required by laws and 
regulations or otherwise requested, and whether the auditors are 
planning to provide opinions on compliance with laws and regulations and 
internal control over financial reporting. This communication must take 
the form of an audit engagement letter prepared by the CPA and formally 
accepted by the board of directors or an audit committee representing 
the board of directors. The engagement letter must also encompass those 
items prescribed in SAS 83, entitled ``Establishing an Understanding 
with the Client''. It must also include the following:
    (1) The borrower and the CPA acknowledge that the audit is being 
performed and the auditor's report, report on compliance and on internal 
control over financial reporting, and management letter is being issued 
in order to enable the borrower to comply with the provisions of RUS's 
security instrument;
    (2) The borrower and CPA acknowledge that RUS will consider the 
borrower to be in violation of its security instrument with RUS if the 
borrower fails to have an audit performed and documented in compliance 
with GAGAS and this part;
    (3) The CPA represents that he/she meets the requirements under this 
part to be satisfactory to RUS;
    (4) The CPA will perform the audit and will prepare the auditor's 
report, report on compliance and on internal control over financial 
reporting, and management letter in accordance with the requirements of 
this part;
    (5) The CPA will document the audit work performed in accordance 
with GAGAS, the professional standards of the AICPA, and the 
requirements of this part;
    (6) The CPA will make all audit-related documents, including 
auditor's reports, workpapers, and management letters available to RUS 
or its representatives (OIG and GAO), upon request, and will permit the 
photocopying of all audit-related documents; and
    (7) The CPA will follow the requirements of reporting fraud and 
illegal acts as outlined in Sec. 1773.9.
    (b) The audit agreement may include such additional terms and 
conditions as the CPA and borrower deem appropriate, including, but not 
limited to:
    (1) The CPA will report all audit findings to the board of directors 
as required in Sec. 1773.20(b); and
    (2) The auditor's report, report on compliance, report on compliance 
and on internal controls over financial reporting, and management letter 
with copies for transmittal to RUS, and supplemental lenders, if 
applicable, will be submitted to the borrower's board of directors 
within 90 days of the as of audit date;
    (c) A copy of the audit agreement must be available at the 
borrower's office for inspection by RUS personnel.

[[Page 1031]]

One copy of the current audit agreement must be maintained in the CPA's 
workpapers or permanent file.

[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 108, Jan 3, 1996; 63 FR 
38722, July 17, 1998; 66 FR 27835, 27836, May 21, 2001]

Sec. 1773.7  Audit standards.

    (a) The audit must be performed in accordance with GAGAS and this 
part. The audit must be performed in accordance with GAGAS in effect at 
the audit date unless the borrower is directed otherwise, in writing, by 
RUS.
    (b) The audit must include such tests of the accounting records and 
such other auditing procedures that are sufficient to enable the CPA to 
express an opinion on the financial statements and to issue the required 
report on compliance and on internal control over financial reporting 
and the management letter.
    (c) Audit scope limitation. (1) The borrower will not limit the 
scope of the audit to the extent that the CPA is unable to meet RUS's 
audit requirements or to provide an unqualified opinion that the 
financial statements are presented fairly in conformity with GAAP.
    (2) The security instrument provision requiring the submission of a 
report of the audit is not satisfied if the CPA must qualify the opinion 
in the auditor's report due to limitations placed on the scope of the 
audit by the borrower.
    (3) If the CPA determines during the audit that an unqualified 
opinion cannot be issued due to a scope limitation imposed by the 
borrower, the CPA should use professional judgment to determine what 
levels of the borrower's management should be informed.
    (4) After informing the borrower's management, if the scope 
limitation is not adequately resolved, the CPA should immediately 
contact the AA-PARA, RUS, U.S. Department of Agriculture, Washington, DC 
20250-1523. The AA-PARA will endeavor to resolve the matter with the 
borrower.

[56 FR 63360, Dec. 3, 1991, as amended at 66 FR 27836, May 21, 2001]

Sec. 1773.8  Audit date.

    (a) The annual audit must be performed as of the end of the same 
calendar month each year unless prior approval to change the as of audit 
date is obtained, in writing, from RUS.
    (1) A borrower may request a change in the as of audit date by 
writing to the AA-PARA at least 60 days prior to the newly requested as 
of audit date.
    (2) The time period between the prior as of audit date and the newly 
requested as of audit date must be no longer than twenty-four months. 
For example, a borrower that wishes to change its as of audit date from 
December 31, 20X1, to June 30, must make the change effective no later 
than June 30, 20X3.
    (b) Comparative financial statements must be prepared and audited 
for the twelve months ending as of the new audit date and for the twelve 
months immediately preceding that period.
    (c) A borrower that changes its as of audit date from December 31, 
20X1, to June 30, 20X3, must have the CPA report on statements in the 
following manner:

------------------------------------------------------------------------
                                              Statements prepared as of
       Previously issued statements                new audit date
------------------------------------------------------------------------
12/31/20X1; 12/31/20X0 (Statement need not  6/30/20X3; 6/30/20X2.
 be reissued).
------------------------------------------------------------------------


[ 56 FR 63360, Dec. 3, 1991, as amended at 66 FR 27835, 27836, May 21, 
2001]

Sec. 1773.9  Disclosure of fraud, illegal acts, and other 
          noncompliance.

    (a) In accordance with GAGAS, the auditor must design the audit to 
provide reasonable assurance of detecting fraud that is material to the 
financial statements and material misstatements resulting from direct 
and material illegal acts, and noncompliance with the provisions of 
contracts or grant agreements that could have a direct and material 
effect on financial statements amounts.
    (b) If specific information comes to the auditor's attention that 
provides evidence concerning the existence of possible illegal acts that 
could have a material indirect effect on the financial statements or 
material noncompliance with the provisions of contracts

[[Page 1032]]

or grant agreements that could have a material indirect effect on the 
financial statements, auditors should apply audit procedures 
specifically directed to ascertaining whether an illegal act or 
noncompliance with provisions of contract or grant agreements has 
occurred.
    (c) Pursuant to the terms of its audit engagement letter with the 
borrower, the CPA must immediately report, in writing, all instances of 
fraud and all indications or instances of illegal acts, whether material 
or not, to:
    (1) The president of the borrower's board of directors;
    (2) The Assistant Administrator, Program Accounting and Regulatory 
Analysis; and
    (3) OIG, as follows:
    (i) For the States of Delaware, District of Columbia, Maryland, 
Pennsylvania, Virginia, West Virginia, Connecticut, Maine, 
Massachusetts, New Hampshire, New Jersey, New York, Puerto Rico, Rhode 
Island, Vermont and the Virgin Islands, report to USDA-OIG-Audit, 
Northeast Region, Regional Inspector General, 6505 Belcrest Road, room 
428-A, Hyattsville, Maryland 20782;
    (ii) For the States of Alabama, Florida, Georgia, Kentucky, 
Mississippi, North Carolina, South Carolina, and Tennessee, report to 
USDA-OIG-Audit, Southeast Region, Regional Inspector General, 401 W. 
Peachtree Street, NW., room 2328, Atlanta, Georgia 30365-3520;
    (iii) For the States of Illinois, Indiana, Michigan, Minnesota, 
Ohio, and Wisconsin, report to USDA-OIG-Audit, Midwest Region, Regional 
Inspector General, 111 N. Canal Street, Suite 1130, Chicago, Illinois 
60606;
    (iv) For the States of Arkansas, Louisiana, New Mexico, Oklahoma, 
and Texas, report to USDA-OIG-Audit, Southwest Region, Regional 
Inspector General, 101 South Main, room 324, Temple, Texas 76501;
    (v) For the States of Colorado, Iowa, Kansas, Missouri, Montana, 
Nebraska, North Dakota, South Dakota, Wyoming, and Utah, report to USDA-
OIG-Audit, Great Plains Region, Regional Inspector General, P.O. Box 
293, Kansas City, Missouri 64141; and
    (vi) For the States of Alaska, Arizona, California, Hawaii, Idaho, 
Nevada, Oregon, Territory of Guam, Trust Territories of Pacific, and 
Washington, report to USDA-OIG-Audit, Western Region, Regional Inspector 
General, 555 Battery Street, room 511, San Francisco, California 94111.

[56 FR 63360, Dec. 3, 1991, as amended at 61 FR 108, Jan. 3, 1996; 66 FR 
27836, May 21, 2001]

Sec. 1773.10  Access to audit-related documents.

    Pursuant to the terms of the audit agreement, the CPA must make all 
audit-related documents, including auditors' reports, workpapers, and 
management letters available to RUS, or its designated representative, 
upon request and must permit RUS, or its designated representative, to 
photocopy all audit-related documents.

Sec. Sec. 1773.11-1773.19  [Reserved]

    Subpart C_RUS Requirements for the Submission and Review of the 
  Auditor's Report, Report on Compliance and on Internal Control Over 
               Financial Reporting, and Management Letter

Sec. 1773.20  CPA's submission of the auditor's report, report on 
          compliance, report on compliance and on internal controls over 
          financial reporting, and management letter.

    (a) Time limit. As soon as possible after completion of the audit, 
but within 90 days of the as of audit date, the CPA should deliver the 
auditor's report, report on compliance and on internal control over 
financial reporting, and management letter to the president of the 
borrower's board of directors. As a minimum, copies should be provided 
for each member of the board of directors and the manager. Further, 
three copies must be provided to the borrower for transmittal to RUS.
    (b) Communication with the board of directors. In addition to 
providing sufficient copies of the auditor's report, report on 
compliance and on internal control over financial reporting, and 
management letter for each member of the borrower's board of directors, 
RUS requires that the CPA report all audit findings to the borrower's 
board of directors. RUS recommends that audit

[[Page 1033]]

findings be communicated orally; however, the communication may be oral 
or written, at the borrower's discretion. If the information is 
communicated orally, the CPA must document the communication by 
appropriate memoranda or notations in the workpapers. If the CPA 
communicates in writing, a copy of the written communication must be 
included in the CPA's audit workpapers or permanent file.
    (c) Matters to be communicated. Matters communicated to the board of 
directors must include, but are not limited to the matters to be 
communicated to the audit committee as prescribed in SAS No. 61, 
entitled ``Communication with Audit Committee'',:
    (1) The initial selection of and changes in significant accounting 
policies;
    (2) The methods used to account for significant or unusual 
transactions and the effects of significant accounting policies in 
controversial or emerging areas;
    (3) The process utilized by management to formulate significant 
accounting estimates and the basis for the CPA's conclusions regarding 
the reasonableness of these estimates;
    (4) Audit findings and recommendations, including audit adjustments 
that either individually or in the aggregate have a significant effect 
on the borrower's financial statements;
    (5) The CPA's responsibility for other information presented with 
the audited financial statements, any audit procedures performed, and 
the results thereof;
    (6) Any disagreements with management, whether or not satisfactorily 
resolved, concerning matters that individually or in the aggregate may 
be significant to the borrower's financial statements or the auditor's 
report, report on compliance and on internal control over financial 
reporting, or management letter;
    (7) Significant matters that were the subject of consultations with 
other accountants;
    (8) Significant issues discussed with management with regard to the 
initial or recurring retention of the CPA; and
    (9) Any serious difficulties encountered in dealing with management 
during the performance of the audit.

[56 FR 63360, Dec. 3, 1991, as amended at 59 FR 659, Jan. 6, 1994; 66 FR 
27835, May 21, 2001]

Sec. 1773.21  Borrower's review and submission of the auditor's report, 
          report on compliance and on internal control over financial 
          reporting, and management letter.

    (a) The borrower's board of directors should note and record receipt 
of the auditor's report, report on compliance and on internal control 
over financial reporting, and management letter and any action taken in 
response to the reports or management letter in the minutes of the board 
meeting at which such reports and management letter are presented.
    (b) The borrower must furnish RUS with three copies of the auditor's 
report, report on compliance and on internal control over financial 
reporting, and management letter within 120 days of the as of audit 
date. Any provision in RUS's security instrument that requires such 
documents to be furnished to RUS in a shorter period of time may be 
disregarded.
    (c) The borrower must furnish RUS with three copies of its plan for 
corrective action, if any, within 180 days of the as of audit date.
    (d) The borrower must furnish RUS, within 120 days of the as of 
audit date, with a copy of each special report, summary of 
recommendations or similar communications, if any, received from the CPA 
as a result of the audit.
    (e) All required submissions to RUS described in paragraphs (a) 
through (d) of this section should be sent to: Assistant Administrator, 
Program Accounting and Regulatory Analysis, Stop 1523, 1400 Independence 
Ave., SW, Washington, DC 20250-1523.

[56 FR 63360, Dec. 3, 1991, as amended at 59 FR 659, Jan. 6, 1994; 66 FR 
27835, 27836, May 21, 2001]

[[Page 1034]]

Sec. Sec. 1773.22-1773.29  [Reserved]

                  Subpart D_RUS Reporting Requirements

Sec. 1773.30  General.

    (a) The CPA must prepare the following (examples of which are set 
forth in RUS Bulletin 1773-1):
    (1) An auditor's report;
    (2) A report on compliance and on internal control over financial 
reporting; and
    (3) A management letter.
    (b) The CPA should deliver the auditor's report, report on 
compliance and on internal control over financial reporting, and 
management letter (with copies as required in Sec. 1773.20) to the 
borrower as soon as possible after completion of the audit but not more 
than 90 days after the as of audit date.

[56 FR 63360, Dec. 3, 1991, as amended at 63 FR 38723, July 17, 1998; 66 
FR 27835, 27836, May 21, 2001]

Sec. 1773.31  Auditor's report.

    The CPA must prepare a written report on comparative balance sheets, 
statements of revenue and patronage capital (or income and retained 
earnings, depending upon the structure of the borrower) and statements 
of cash flows. This report must be signed by the CPA, cover all 
statements presented, and refer to the separate report on compliance and 
on internal control over financial reporting issued in conjunction with 
the auditor's report. The auditor's report should also state that the 
report on compliance and on internal control over financial reporting is 
an integral part of a GAGAS audit, and in considering the results of the 
audit, this report should be read along with the auditor's report on the 
financial statements.

[66 FR 27836, May 21, 2001]

Sec. 1773.32  Report on compliance and on internal control over 
          financial reporting.

    As required by GAGAS, the CPA must prepare a written report 
describing the auditors testing of compliance with applicable laws, 
regulations, contracts, and grants, and on internal control over 
financial reporting and present the results of those tests. This report 
must be signed by the CPA and must include, as a minimum:
    (a) The scope of the CPA's testing of compliance with laws and 
regulations and internal control over financial reporting including 
whether or not the tests performed provided sufficient evidence to 
support an opinion on compliance or internal control over financial 
reporting and whether the CPA is providing such opinions;
    (b) If conditions believed to be material weaknesses considered to 
be reportable conditions are disclosed, the report should identify the 
material weaknesses that have come to the CPA's attention;
    (c) If no reportable instances of non-compliance and no reportable 
conditions were found, the CPA must issue a report as illustrated in RUS 
Bulletin 1773-1.
    (d) If material instances of non-compliance and reportable 
conditions are identified, the CPA must issue a report as illustrated in 
RUS Bulletin 1773-1.
    (e) Other nonmaterial instances of noncompliance should not be 
disclosed in the report on compliance and on internal control over 
financial reporting, but should be reported in a separate communication 
to the board of directors, preferably in writing. All such 
communications must be documented in the workpapers and submitted to RUS 
in compliance with Sec. 1773.21.
    (f) If the CPA has issued a separate letter detailing immaterial 
instances of noncompliance, the report on compliance and on internal 
control over financial reporting must be modified to include a statement 
such as:

    We noted certain immaterial instances of noncompliance, which we 
have reported to the management of (borrower's name) in a separate 
letter dated (month, day, year).

    (g) If the CPA has issued a separate letter to management to 
communicate other matters involving the design and operation of the 
internal control over financial reporting, the report on compliance and 
on internal control over financial reporting must be modified to include 
a statement such as:

    However, we noted other matters involving the internal control over 
financial reporting that we have reported to the management of

[[Page 1035]]

(borrower's name) in a separate letter dated (month, day, year).

    (h) The report must contain the status of known but uncorrected 
significant or material findings and recommendations from prior audits 
that affect the current audit objective.

[63 FR 38723, July 17, 1998, as amended at 66 FR 27836, May 21, 2001]

Sec. 1773.33  Management letter.

    The CPA must prepare a management letter that includes, at a 
minimum, comments on:
    (a) Audit procedures. State whether the audit has been performed in 
accordance with this part;
    (b) Special reports. State whether any special reports, summaries of 
recommendations, or similar communications were furnished to the 
borrower's management during the course of the audit or during interim 
audit work, and provide a description of the information furnished;
    (c) Accounting and records. Comment on the adequacy and 
effectiveness of the borrower's accounting procedures, discuss the 
general condition of the records, and outline any recommendations for 
improvement. Comment on the adequacy and fairness of the methods used in 
accumulating and recording labor, material, and overhead costs, and the 
distribution of these costs to construction, retirement, and maintenance 
or other expense accounts, and where appropriate, include:
    (1) Whether continuing property records (CPRs) have been 
established, are updated on a current basis, at least annually, and are 
reconciled with the controlling general ledger plant accounts;
    (2) Whether construction clearing accounts are cleared promptly of 
costs of completed construction to the proper classified plant accounts 
and whether depreciation was accrued on such completed construction from 
the date the plant was placed in service;
    (3) Whether retirements of plant are currently and systematically 
recorded and properly priced;
    (4) Whether all costs associated with retirements of plant are 
properly accounted for in the accumulated provision for depreciation 
accounts and comment on any unusual charges or credits to such accounts; 
and
    (5) Whether RUS approval was obtained for the sale, lease or 
transfer of capital assets secured under the mortgage when approval is 
required, and whether proceeds from the sale or lease of plant, material 
or scrap were handled in conformance with RUS requirements.
    (d) Materials control. Comment on the adequacy of the control over 
materials and supplies.
    (e) Compliance with RUS loan and security instrument provisions. 
State whether the following provisions of RUS' loan and security 
instruments have been complied with:
    (1) For electric borrowers, provisions related to:
    (i) The requirements for a borrower to obtain written approval of 
mortgagees to enter into any contract for the management, operation, or 
maintenance of the borrower's system if the contract covers all or 
substantially all (90 percent) of the electric system. For purposes of 
this part, the following contracts shall be deemed as requiring RUS 
approval:
    (A) Management contracts in which the borrower has contracted to 
have another borrower or other entity manage its affairs;
    (B) Management contracts in which the borrower has contracted to 
manage another borrower or other utility system;
    (C) Operations and maintenance contracts in which the borrower has 
contracted to have another borrower or other entity operate and/or 
maintain all or substantially all (90 percent) of the physical plant 
facilities of the borrower.
    (D) Operations and maintenance contracts in which the borrower has 
contracted to operate and maintain the physical plant facilities of 
another borrower or other utility system; and
    (ii) The requirement for a borrower to prepare and furnish 
mortgagees annual financial and statistical reports on the borrower's 
financial condition and operations. For borrowers with a December 31 
year end, the CPA must state whether the information represented by the 
borrower as having

[[Page 1036]]

been submitted to RUS in its most recent December 31 RUS Form 7 or Form 
12 is in agreement with the borrower's audited records. For borrowers 
with a year end other than December 31, the CPA must state whether the 
information appears reasonable based upon the audit procedures 
performed. If the borrower represents that an amended report has been 
filed as of December 31, the comments must relate to the amended report.
    (2) For telecommunications borrowers, provisions relating to the 
requirement for a borrower to obtain written approval of the mortgagees 
to enter into:
    (i) Any contract, agreement or lease between the borrower and an 
affiliate other than as allowed under 7 CFR part 1744, subpart E;
    (ii) The requirement for a borrower to prepare and furnish 
mortgagees annual financial and statistical reports on the borrower's 
financial condition and operations. For borrowers with a December 31 
year end, the CPA must state whether the information represented by the 
borrower as having been submitted to RUS in its most recent December 31 
RUS Form 479 is in agreement with the borrower's audited records. For 
borrowers with a year end other than December 31, the CPA must state 
whether the information appears reasonable based upon the audit 
procedures performed. If the borrower represents that an amended report 
has been filed as of December 31, the comments must relate to the 
amended report.
    (f) Related party transactions. State whether all material related 
party transactions have been disclosed in the notes to the financial 
statements in accordance with SFAS No. 57, entitled ``Related Party 
Disclosures''. If the audit did not disclose any related party 
transactions considered to be material, either individually or in the 
aggregate, so state;
    (g) Depreciation rates. For electric borrowers, comment when the 
depreciation rates used in computing monthly accruals are not in 
compliance with RUS requirements (See RUS Bulletin 183-1, Depreciation 
Rates and Procedures), which require the use of depreciation rates that 
are within the ranges established by RUS for each primary plant account, 
or with the requirements of the State regulatory body having 
jurisdiction over the borrower's depreciation rates; and
    (h) Deferred debits and deferred credits. For electric borrowers, 
provide a detailed analysis of the totals reported as deferred debits 
and deferred credits, including, but not limited to, margin 
stabilization plans, revenue deferral plans, and expense deferrals. The 
CPA must state whether RUS has approved, in writing, each regulatory 
asset and liability.
    (i) Investments. For electric and telecommunications borrowers, 
provide a detailed schedule of all investments in subsidiary and 
affiliated companies accounted for on either the cost or equity basis. 
This requirement includes investments in corporations, limited liability 
corporations and partnerships, joint ventures, etc. For all investments 
list the name of the entity, ownership percentage, and the principal 
business in which the entity is engaged. For investments recorded on the 
cost basis include the original investment, advances, dividends declared 
or paid in the current and prior years and the net investment. For 
investments recorded on the equity basis include the ownership 
percentage, original investment, advances, and current and prior years' 
earnings and losses, including accumulated losses in excess of the 
original investment.

[56 FR 63360, Dec. 3, 1991, as amended at 59 FR 659, Jan. 6, 1994; 61 FR 
108, Jan. 3, 1996. Redesignated and amended at 63 FR 38723, July 17, 
1998; 63 FR 40169, July 28, 1998; 66 FR 27830, May 21, 2001]

Sec. Sec. 1773.34-1773.37  [Reserved]

        Subpart E_RUS Required Audit Procedures and Documentation

Sec. 1773.38  Scope of engagement.

    (a) RUS requires that the audit procedures set forth in Sec. Sec. 
1773.39 through 1773.45 be performed annually by the CPA during the 
audit of the RUS borrowers' financial statements, which audit procedures 
may be in addition to the conduct of a GAGAS audit.

[[Page 1037]]

    (b) The CPA must exercise professional judgment in determining 
whether any auditing procedures in addition to those mandated by GAGAS 
or this part should be performed in order to afford a reasonable basis 
for rendering the auditor's report, report on compliance and on internal 
control over financial reporting, and management letter.

[56 FR 63360, Dec. 3, 1991, as amended at 66 FR 27835, May 21, 2001]

Sec. 1773.39  Utility plant and accumulated depreciation.

    (a) General. The audit of these accounts must include tests of 
additions, replacements, retirements, and changes. Based upon the CPA's 
determination of materiality, an appropriate sample of transactions must 
be selected for testing. The CPA's workpapers must document that he/she:
    (1) Examined direct labor and material transactions to determine 
whether the borrower's accounting records reflect a complete 
accumulation of costs;
    (2) Examined indirect costs and overhead charges to determine if 
they conform to the Uniform System of Accounts;
    (3) Reviewed the costs of completed construction and retirement 
projects to determine if they were cleared promptly from the work in 
progress accounts to the classified plant in service accounts and the 
related depreciation reserves;
    (4) Examined direct purchases of special equipment and general 
plant;
    (5) Determined the degree of accuracy and control of costing 
retirements, including tests of salvage and removal costs;
    (6) Reviewed the borrower's work order procedures; and
    (7) Reviewed depreciation rates for adequate support, compared them 
to RUS guidelines, and determined if they are in compliance.
    (b) Construction work in progress. (1) The workpapers must include a 
summary of open work orders reconciled to the general ledger. The CPA 
must note on the summary any unusual or nontypical projects.
    (2) Based upon the CPA's determination of materiality, an 
appropriate sample of work orders must be selected for testing. The 
CPA's workpapers must document that he/she:
    (i) Reviewed equipment purchases charged to work orders, including 
payments and receiving reports;
    (ii) Reviewed contracts showing the scope of the work, the nature of 
the contract, the contract amount, and scheduled payments and reviewed 
supporting documents to determine that all services contracted for were 
in fact rendered;
    (iii) Reviewed time cards and pay rates for several employees who 
allocate their time to work orders;
    (iv) Reviewed the nature of material and supplies issued to the 
project, traced amounts and quantities to supporting documents, and 
reviewed the reasonableness of clearing rates for assignment of stores 
expense to the work order;
    (v) Reviewed the accuracy of the computation of overheads applied to 
the work order; and
    (vi) Reviewed other costs charged to the work order for support and 
propriety.
    (3) Based upon the CPA's determination of materiality, an 
appropriate sample of completed contracts must be selected for testing. 
The CPA's workpapers must document that he/she:
    (i) Scheduled payments to contractors and traced to verify payments 
and supporting invoices;
    (ii) Traced contract costs to final closeout documents, to the 
general ledger, and to the continuing property records; and
    (iii) Verified the costs of owner furnished materials, if 
applicable.
    (4) The CPA must review the borrower's procedures for unitization 
and classification of work order and contract costs. Based upon the 
CPA's determination of materiality, an appropriate sample of 
transactions must be selected for testing. The CPA's workpapers must 
document that he/she:
    (i) Reviewed the tabulation of record units for construction from 
the work order staking sheets to the tabulation of record units, to the 
unitization sheets, and to the continuing property records;

[[Page 1038]]

    (ii) Reviewed the procedures for unitizing and distributing costs of 
completed construction to the plant accounts;
    (iii) Verified that standard costs were being used;
    (iv) Evaluated the basis for development of standard costs; and
    (v) Determined that costs of completed construction were cleared 
promptly from work in progress accounts.
    (c) Continuing property records. Based upon the CPA's determination 
of materiality, an appropriate sample of transactions must be selected 
for testing. The CPA's workpapers must document that he/she:
    (1) Determined whether the subsidiary plant records agree with the 
controlling general ledger plant accounts;
    (2) Noted differences in the workpapers; and
    (3) Commented, in the management letter, on any discrepancies.
    (d) Retirement work-in-progress. Based upon the CPA's determination 
of materiality, an appropriate sample of transactions must be selected 
for testing. The CPA's workpapers must document that he/she:
    (1) Determined that plant retirements are currently and 
systematically recorded and priced on the basis of the continuing 
property records, and determined that costs of removal have been 
properly accounted for;
    (2) Explained the method used in computing the cost of units of 
plant retired if continuing property records have not been established 
and determined whether costs appeared reasonable; and
    (3) Determined the manner in which net losses due to retirements 
were accounted for and traced clearing entries to the depreciation 
reserve, the plant accounts, and the continuing property records.
    (e) Provision for accumulated depreciation. The CPA's workpapers 
must include an analysis of transactions. Based upon the CPA's 
determination of materiality, an appropriate sample of transactions must 
be selected for testing. The CPA's workpapers must document that he/she:
    (1) Verified the depreciation accruals for the period, including the 
depreciation base;
    (2) Reviewed the basis of the depreciation rates, any change in 
rates and the reason therefor, and, if appropriate, determined whether 
the rates are in compliance with RUS requirements or with the 
requirements of the state regulatory body having jurisdiction over the 
borrower's depreciation rates;
    (3) Reviewed salvage and removal costs; and
    (4) Searched for unrecorded retirements.
    (f) Other reserves. The CPA's workpapers must include an account 
analysis for all other material plant reserves, such as the reserve for 
the amortization of plant acquisition adjustments. Based upon the CPA's 
determination of materiality, an appropriate sample of transactions must 
be selected for testing. The CPA's workpapers must document that 
appropriate tests of transactions were performed.
    (g) Narrative. The CPA must prepare and include in the workpapers a 
comprehensive narrative on the scope of work performed, observations 
made, and conclusions reached. Specific matters covered in this 
narrative must include:
    (1) The nature of construction and other additions;
    (2) The control over, and the accuracy of pricing retirements;
    (3) The accuracy of distributing costs to classified utility plant 
accounts;
    (4) An evaluation of the method of:
    (i) Capitalizing the direct loadings on labor and material costs;
    (ii) Distributing transportation costs and other expense clearing 
accounts; and
    (iii) Capitalizing overhead costs;
    (5) The tests of depreciation;
    (6) A review of agreements such as those relating to acquisitions, 
property sales, and leases which affect the plant accounts; and
    (7) Notations, if applicable, of RUS approval of property sales and 
the propriety of the disposition of the proceeds.

[[Page 1039]]

Sec. 1773.40  Regulatory assets.

    The CPA's workpapers must document whether all regulatory assets 
comply with the requirements of SFAS No. 71. For electric borrowers 
only, the CPA's workpapers must document whether all regulatory assets 
have received RUS approval.

[59 FR 660, Jan. 6, 1994]

Sec. 1773.41  Extraordinary retirement losses.

    The CPA's workpapers must contain an analysis of retirement losses, 
including any required approval by a regulatory commission with 
jurisdiction in the matter, or RUS, in the absence of commission 
jurisdiction.

Sec. 1773.42  Clearing accounts.

    The CPA's workpapers must contain an analysis of all clearing 
accounts. Based upon the CPA's determination of materiality, an 
appropriate sample of transactions should be selected for testing. The 
CPA's workpapers must document that transactions were reviewed for 
proper allocation between expense and capital accounts.

Sec. 1773.43  Capital and equity accounts.

    (a) Capital stock. For privately owned companies, the workpapers 
must include analyses of all stock transactions during the audit period. 
Based upon the CPA's determination of materiality, an appropriate sample 
of transactions must be selected for testing. The CPA's workpapers must 
document that he/she:
    (1) Reviewed the subsidiary records and reconciled them to the 
general ledger control account;
    (2) Reviewed authorizations and issuances or redemptions of capital 
stock for proper approvals by the board of directors, stockholders, and 
regulatory commissions;
    (3) Determined that transactions were made in accordance with the 
appropriate provisions of the articles of incorporation, bylaws, and RUS 
loan documents; and
    (4) Determined that transactions were recorded in accordance with 
the Uniform System of Accounts.
    (b) Memberships. For cooperative organizations, the workpapers must 
include an analysis of the membership transactions during the audit 
period. Based upon the CPA's determination of materiality, an 
appropriate sample of transactions must be selected for testing. The 
CPA's workpapers must document that he/she:
    (1) Reviewed the subsidiary records and reconciled them to the 
general ledger control account; and
    (2) Determined that transactions were made in accordance with the 
appropriate provisions of the articles of incorporation, bylaws, and RUS 
loan documents.
    (c) Patronage capital, retained earnings, margins, and other 
equities. The workpapers must include an analysis of the patronage 
capital, retained earnings, margins and other equities, and any related 
reserve accounts. Based upon the CPA's determination of materiality, an 
appropriate sample of transactions must be selected for testing. The 
CPA's workpapers must document that he/she:
    (1) Determined that the transactions were made in accordance with 
the appropriate provisions of the articles of incorporation, bylaws, RUS 
loan documents, Uniform System of Accounts, or orders of regulatory 
commissions;
    (2) Traced payments to underlying support; and
    (3) Determined whether, under the terms of the RUS security 
instrument, restrictions of retained earnings or margins are required 
and, if so, whether they have been properly recorded.

Sec. 1773.44  Long-term debt.

    The CPA's workpapers must document that he/she:
    (a) Confirmed RUS, FFB, and RTB debt to the appropriate confirmation 
schedule (RUS Form 690, Confirmation Schedule Obligation to the FFB as 
of: or Form 691, Confirmation Schedule--Long-term Obligation to RUS as 
of; or RTB Form 12, Confirmation Schedule);
    (b) Confirmed other long-term debt directly with the lender;
    (c) Examined notes executed or canceled during the audit period; and
    (d) Tested accrued interest computations.

[[Page 1040]]

Sec. 1773.45  Regulatory liabilities.

    The CPA's workpapers must document whether all regulatory 
liabilities comply with the requirements of SFAS No. 71. For electric 
borrowers only, the CPA's workpapers must document whether all 
regulatory liabilities have received RUS approval.

[59 FR 660, Jan. 6, 1994]

Sec. Sec. 1773.46-1773.49  [Reserved]