Part A - Policy and Guidance for Resolving Audit Findings

This Part primarily consolidates, and to some extent updates, the material previously presented in DCS-87-77, DCS-83-28, and DCS-84-60. These memos address the comparable responsibilities which DHS and county agencies have for reviewing audit reports of entities to which they provide funding and for resolving audit findings disclosed in the reports. A main objective of this Part is to provide policy and guidance for the resolution of audit findings.


The Department's policy for resolving audit findings disclosed in county agency audit reports is based on making the distinction between: (1) internal control findings, (2) audit adjustments, and (3) compliance audit exceptions. For each of these areas, the Audit Resolution Policy addresses options available to the Department of Health and Social Services.

  1. INTERNAL CONTROL FINDINGS: The audit report or management letter will include the auditor's findings based on the study and evaluation of the county agency's system of internal accounting control. The county agency will be required to address the audit findings in the Corrective Action Plan it submits to the Department of Health and Social Services for approval, as part of the audit resolution process. However, if the internal control weaknesses disclosed are of a critical nature or repetitive, the Department will consider an audit disallowance. Disallowances will be discussed with the county agency as part of the audit resolution process.
  2. AUDIT ADJUSTMENTS: This term is used to describe fiscal adjustments to reported expenditures that were omitted from the agency's expenditure report and should have been included and/or expenditures that are included in the agency's expenditure report but should not have been included. These adjustments are usually identified at the time the reconciliation is performed and when the expenditures are reviewed for appropriateness. Examples of expenditures that would increase the reported expenditure amount are costs included on the county clerk's records but not included in the agency records. Adjustments that would require a reduction to reported expenditures are accounting errors, unallowable costs, non-matchable costs, etc.

    A 100% disallowance will be taken on audit adjustments when they occur.


    Category A: The majority of these exceptions are due to non-compliance with the Department's purchase of service requirements developed under Wis. Statute Section 46.036. One or more of these items occur in virtually every audit. (Please note that items 1-5 apply to social service and mental hygiene audits while item 6 applies to income maintenance only.)

    1. No vendor "Financial and Compliance Audit Report" or waiver on file.
    2. No written vendor contract to support purchase of service expenses or approved waiver on file. (NOTE: Any written documents of agreement signed by both parties constitute a legal contract.)
    3. Expenses exceed contract limits.
    4. No client service authorization policy and procedure on file.
    5. Specific service eligibility requirements not met.
    6. AFDC client remains in non-mandatory protective payee status for more than twenty-four months.

    A 10% disallowance guideline will apply to Category A with the exception of "No Vendor Contract" which has a 20% guideline. The Department staff responsible for resolving audits may recommend a higher or lower disallowance amount to the Division Administrator. For example, a higher figure may be considered when there are a large number of exceptions or a pattern of repetitive non-compliance.

    Category B: There are two specific audit exceptions which have been included in this category:

    1. Payments to a non-certified vendor for alcohol abuse services.
    2. Payments in excess of the five day average limit on alcohol detoxification, and twenty-one day limit on drug detoxification.

    A 100% disallowance will be taken on these exceptions.

    Under-Reported County Costs (State or Federal Funds):

    Under DCS 84-23, the Department's policy, effective with the CY 1985 county audits, was to not reimburse counties for any incorrectly under-reported costs discovered through an audit. This policy was modified by DCS-87-77 to be less restrictive. The current policy applies to under-reported costs supported by state or federal funds. The intention is to give the county credit for the allowable expenses without the state supplanting unclaimable federal funds.

    When an audit identifies federal funds due to a county, the Department will recognize the under-reported costs only up to the amount of any negative audit adjustments or compliance audit exceptions to net any cash payment to the county or state to zero (0), unless otherwise specified in a state/county contract. In short, while the Department will not reimburse counties for under-reported costs found in the audit, the county will be allowed to use the dollars as an offset against any amount owed to the state.

    In addition, when the county has generated excess matching funds, even though these funds may not generate additional revenue, the county will be allowed to use the overmatch as an offset against any amount owed to the state.

To resolve the county agency specific audit findings under this policy, those Department staff members with audit resolution responsibilities will direct the completion of a corrective action plan authored by the audited agency. The resolution of Single Audit findings which apply to funds provided by more than one Division within the Department will be coordinated by the Department's Office of Program Review and Audit. The corrective action plan is intended to detail how the agency will correct the problems identified in the final audit report. The plan will be submitted to the Department staff responsible for resolving the audit. These staff will work with the audited entity to obtain a written agreement that the audited entity will implement a mutually acceptable corrective action plan.

When this agreement has been obtained, and any funds due to the Department have been returned, the audit may be considered resolved. Program Division staff responsible for audit resolution activities will monitor the implementation of the plan to ensure that the agreed upon corrections are made. Additionally, subsequent audits will include a review of prior audit resolution plans and their implementation.


The introductory section of this memo indicates the broad audit responsibilities that counties have for the providers with which they contract as a result of the Single Audit Act and OMB Circular A-128.

In addition, Wisconsin Statutes Section 46.036(4)(c) states that each provider under contract shall

"Unless waived by the department, biennially, or annually if required under federal law, provide the purchaser with a certified financial and compliance audit report if the care and services purchased exceed $25,000. The audit shall follow standards that the department prescribes."

The conditions under which a waiver may be obtained are contained in the Department's Purchase of Service Instructions. (These instructions have in the past been issued as part of the DCS Memo Series, and are now included as Part B, Chapter 7 of this manual.) Any requested waiver must be obtained from the Department by the county prior to the county signing the contract with the provider agency.

The Provider Agency Audit Guide contains the standards prescribed by the Department for audits of provider agencies (vendors). The audit guide provides a uniform audit approach and uniform documentation procedures for audits of organizations providing care and services purchased under the provisions of Section 46.036(4)(c) of the Wisconsin Statutes. It also provides instructions and assistance on specific items which should be considered when contracting for audits. This guide is intended to assist providers and their auditors in assuring that the audits meet minimum state and federal requirements.

The material below provides some more specific information concerning the counties responsibilities for audits of the provider agencies with which they contract.

  1. The county should receive the provider agency's annual audit report no later than 180 days from the close of the provider agency's fiscal year, unless a different submission date is specified in the contract.
  2. Audit requirements are based on the amount of funds a provider agency receives. OMB Circular A-133, "Audits of Institutions of Higher Education and Other Non-Profit Organizations," issued March 8, 1990 states:
    1. Non-profit institutions that receive $100,000 or more a year in federal awards shall have an audit made in accordance with the provisions of the circular. However, non-profit institutions receiving $100,000 or more but receiving awards under only one program have the option of having an audit of their institution prepared in accordance with the provisions of the circular or having an audit made of the one program.
    2. Non-profit institutions that receive at least $25,000 but less than $100,000 a year in federal awards shall have an audit made in accordance with this circular or have an audit made of each federal award in accordance with federal laws and regulations governing the programs in which they participate.
    3. Non-profit institutions receiving less than $25,000 a year in Federal awards are exempt from federal audit requirements, but records must be available for review by appropriate officials of the federal grantor agency or subgranting entity.
    Audits of provider agencies should be made in accordance with the provisions of OMB Circular A-133, Government Auditing Standards published by the Comptroller General of the United States, and the Department of Health and Social Services' Provider Agency Audit Guide.
  3. The number and kind of individual reports that will be contained in a vendor agency's audit report depends on a variety of different circumstances. Section X of the Provider Agency Audit Guide lists the various types of reports that may be issued, and the reader is referred to that source for further information.
  4. The county should review the provider agency audit report to determine:
    • that the audit is adequate (i.e. the provider agency had a financial and compliance audit which meets the applicable federal, state and county requirements and notes any problems in meeting the same, and that funding source requirements have been met);
    • the nature and amount of questioned costs;
    • any items of noncompliance and the fiscal impact thereof, and;
    • material internal control weaknesses.

    Additionally, the county must reconcile the amounts included in the audit report to the Board or DSS records by funding source and contract period. The reconciliation should be kept on file with the audit report.

  5. The county must follow up and resolve in writing:
    • any questioned costs and items of noncompliance;
    • recommendations and comments of the audit firm's management letter regarding the accounting system and internal controls, etc.;
    • requests for the return of unearned funds advanced and returned to the Department accordingly, and/or;
    • payments of earned funds not advanced.
  6. Funds disallowed as the result of the audit should be reported to the state with identification of source/contract addendum. Audits should be brought to a conclusion within six months upon receipt from the agency.

    As part of the compliance audit of a county, provider agency audit reports will be reviewed on a selected basis to ensure that the audits have been properly handled. Deficiencies in the county's review process will be dealt with on an individual basis with emphasis on corrective action.


The previous section defined the responsibility of county agencies for resolving audits of their provider agencies. The purpose of this section is to establish a Provider Agency Audit Disallowance Policy regarding the treatment of fiscal and compliance audit exceptions and adjustments identified in provider audits. This policy is modeled closely on the policy the Department has developed for resolving audits of county agencies. In the future, the Department will update the disallowance policy, as needed, to reflect changing audit requirements.

The Provider Agency Audit Disallowance Policy is based on the distinction between: (1) Internal Control Findings, (2) Fiscal Audit Exceptions and Audit Adjustments, and (3) Compliance Audit Exceptions.

The county agency is expected to complete an Audit Resolution Letter which addresses these points. This letter is to be filed with the audit report. In general, the county agency is being given the same flexibility and constraints for resolving provider audits that the Program Divisions of the Department have in resolving county audits.

  1. INTERNAL CONTROL FINDINGS: The audit report and Management Letter will include the auditor's findings based on the study and evaluation of the provider agency's system of internal accounting control. Generally, the county agency will be required to identify the type of corrective action to be taken by the provider, and specify what action the provider plans to implement in the Audit Resolution Letter. However, if the findings of internal control weaknesses are of a critical nature or repetitive, the County must consider an audit disallowance. Disallowances must be discussed with the provider agency as part of the audit resolution process.
  2. FISCAL AUDIT EXCEPTIONS AND AUDIT ADJUSTMENTS: These terms are used here and applied to provider audits in the same manner the Department applies them to county agency audits. They include problems identified through the review of provider expenditure reports and agency records, instances of fraud, accounting errors, unallowable costs, non-matchable costs, etc. For example, over or under payment to a provider agency typically results from audited expenditures not reconciling to reported expenditures.

    A 100 percent disallowance should be taken on any Fiscal Audit Exception or Audit Adjustment whenever it occurs. These items are considered to be required adjustments where there is little room for negotiation.

  3. COMPLIANCE AUDIT EXCEPTIONS: The definition of compliance as used in provider audits differs from the compliance aspect of county agency audits. Compliance exceptions for county agency audits are due to non-compliance with the Department's purchase of services requirements developed under Wisconsin Statutes 46.036. For the purpose of provider agency audits, the compliance aspect involves testing for compliance to the major provisions of the county/Provider Agency contract(s), the compliance requirements found in the Provider Agency Audit Guide, the Department's Allowable Cost Policy Manual, and the federal compliance requirements associated with federal funds that have been distributed to provider agencies (these requirements are found in the compliance supplements associated with OMB Circulars A-133 and A-128).

    A 10 percent disallowance guideline will apply to those compliance exceptions which do not come under Part II. The county may take a higher or lower amount based on individual circumstances. For example, a higher figure may be considered when there are a large number of exceptions or a pattern of repetitive non-compliance.

    (NOTE: In those cases where the county has overmatched funds provided through the Department of Health and Social Services, the disallowance collected from the provider agency by the county can be retained by the county. If a county is not overmatched, the disallowances collected must be returned to the Department.)

    The Audit Resolution Letter must specify the amount of any disallowance, and to whom it is owed. If the county retains any or all of the disallowance based on the overmatch criterion noted above, the Department will confirm the amount of overmatch based upon the county expenditure reports. Any funds due to the Department should be forwarded to the Department within thirty (30) days or the amount will be deducted from a subsequent county payment.

    The county may, at its discretion, allow provider agencies to offset any amounts owed to the county against under-reported expenditures or excess local match in the same way that the Department applies this provision to counties.

    It is important to note that money owed to a provider agency for a prior year based upon the audit findings, may not be charged against the current year contract of the county agency.

    The Audit Resolution Letter should record agreement between the county and the vendor agency on a corrective action plan and implementation timetable for addressing any problems disclosed during the audit. Audits will be considered resolved only when agreement on a corrective action plan has been reached and any funds due to the county have been paid. The Department of Health and Social Services will monitor county performance in resolving audits of provider agencies by reviewing the Single Audit reports of the counties. Based on the results of this review, the Department, acting through the Program Division staff who have audit resolution responsibilities, may restrict the flexibility of individual counties to resolve provider agency audits.

Last Revised: November 23, 2016