Single audit report for the year ended ...

              Single Audit Report
For the Year Ended June 30, 2010
Office of the State Auditor
Beth A. Wood, CPA
State Auditor
State of North Carolina
STATE OF
NORTH CAROLINA
SINGLE
AUDIT
REPORT
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OFFICE OF THE STATE AUDITOR
BETH A. WOOD, CPA
STATE AUDITOR
TABLE OF CONTENTS
TRANSMITTAL.......................................................................................................................................1
AUDITOR’S SECTION
Report on Internal Control Over Financial Reporting and on Compliance and Other
Matters Based on an Audit of Financial Statements Performed in Accordance With
Government Auditing Standards......................................................................................................5
Report on Compliance With Requirements That Could Have a Direct and Material
Effect on Each Major Program and on Internal Control Over Compliance in
Accordance With OMB Circular A-133..........................................................................................7
Schedule of Findings and Questioned Costs.........................................................................................13
AUDITEE’S SECTION
Schedule of Expenditures of Federal Awards.....................................................................................195
Summary.....................................................................................................................................196
Detail...........................................................................................................................................207
By State Agency ..........................................................................................................................279
Notes to the Schedule of Expenditures of Federal Awards .........................................................371
Summary Schedule of Prior Audit Findings.......................................................................................375
Corrective Action Plan........................................................................................................................457
Ordering Information ..........................................................................................................................493
North Carolina
Office of the State Auditor
Our Mission and Our Commitment
The critical mission of the Office of the State Auditor is to provide North
Carolina citizens and state leadership with independent, unbiased and professional
assessments of the State’s fiscal accountability and public program performance.
In difficult economic times, that critical mission can provide insight into ways to
operate government more efficiently.
The Office of the State Auditor’s mission is accomplished by conducting
thorough audits and investigations by a highly competent and professional staff
that result in useful and practical recommendations to improve services provided
by North Carolina state government.
This office will always strive for the highest standards in professional conduct,
independence and integrity as we pursue our mission. If we find inefficiency,
waste or abuse, we will report on it without apology because our ultimate
responsibility is to the citizens and taxpayers of North Carolina.
Beth A. Wood, CPA
State Auditor
Beth A. Wood, CPA
State Auditor
STATE OF NORTH CAROLINA
Office of the State Auditor
2 S. Salisbury Street
20601 Mail Service Center
Raleigh, NC 27699-0601
Telephone: (919) 807-7500
Fax: (919) 807-7647
Internet
http://www.ncauditor.net
March 28, 2011
The Honorable Beverly E. Perdue, Governor
The General Assembly of North Carolina
We are pleased to submit the Single Audit Report for the State of North Carolina for the fiscal
year ended June 30, 2010. The audit was conducted in accordance with standards contained in
Government Auditing Standards issued by the Comptroller General of the United States, the
requirements of the Single Audit Act Amendments of 1996, and the provisions of the Office of
Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit
Organizations.
This Single Audit Report reflects federal awards of $24.3 billion. This report includes significant
deficiencies and material weaknesses in internal control relating to major federal programs and
instances of noncompliance, including several that we believe constitute material
noncompliance, that meet the criteria of OMB Circular A-133.
The North Carolina Comprehensive Annual Financial Report for the fiscal year ended
June 30, 2010 has been issued in a separate report by the Office of the State Controller. In
accordance with Government Auditing Standards, we are issuing our report on our consideration
of the State of North Carolina’s internal control over financial reporting and our tests of its
compliance with certain provisions of laws, regulations, contracts, and grant agreements that
have an effect on the financial statements.
The deficiencies in internal control and instances of noncompliance arising from our audit that
are required to be reported by Governmental Auditing Standards or the Single Audit Act and
OMB Circular A-133 are described in the Schedule of Findings and Questioned Costs.
We wish to acknowledge the assistance of the North Carolina Office of the State Controller and
the cooperation of other state agencies, community colleges, and universities in the preparation
of this report.
Respectfully submitted,
Beth A. Wood, CPA
State Auditor
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STATE OF NORTH CAROLINA
AUDITOR’S SECTION
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4
Beth A. Wood, CPA
State Auditor
STATE OF NORTH CAROLINA
Office of the State Auditor
2 S. Salisbury Street
20601 Mail Service Center
Raleigh, NC 27699-0601
Telephone: (919) 807-7500
Fax: (919) 807-7647
Internet
http://www.ncauditor.net
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON
COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF
FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH
GOVERNMENT AUDITING STANDARDS
The Honorable Beverly E. Perdue, Governor
The General Assembly of North Carolina
We have audited the financial statements of the governmental activities, the business-type
activities, the aggregate discretely presented component units, each major fund, and the
aggregate remaining fund information of the State of North Carolina as of and for the year
ended June 30, 2010 (not presented herein), which collectively comprise the State’s basic
financial statements, and have issued our report thereon dated December 8, 2010. Our report
includes a reference to other auditors.
As discussed in Note 23 to the financial statements, the State of North Carolina implemented
Governmental Accounting Standards Board Statement No. 51, Accounting and Financial
Reporting for Intangible Assets, and Statement No. 53, Accounting and Financial Reporting
for Derivative Instruments, during the year ended June 30, 2010.
We conducted our audit in accordance with auditing standards generally accepted in the
United States of America and the standards applicable to financial audits contained in
Government Auditing Standards, issued by the Comptroller General of the United States.
Other auditors audited the financial statements of the North Carolina State Lottery Fund, the
North Carolina Turnpike Authority, the North Carolina Housing Finance Agency, the State
Education Assistance Authority, the University of North Carolina System - University of
North Carolina Health Care System - Rex Healthcare, the Supplemental Retirement Income
Plan of North Carolina, and the cash basis claims and benefits of the North Carolina State
Health Plan, as described in our report on the State of North Carolina’s financial statements.
This report does not include the results of the other auditors’ testing of internal control over
financial reporting or compliance and other matters that are reported on separately by those
auditors. The financial statements of the University of North Carolina System - University of
North Carolina Health Care System - Rex Healthcare and the Supplemental Retirement
Income Plan of North Carolina were not audited in accordance with Government Auditing
Standards. As of the date of our report on the financial statements of the State of North
Carolina, the financial statements of the State Education Assistance Authority were not
audited in accordance with Government Auditing Standards; however, subsequent to that
date, an audit in accordance with Government Auditing Standards was completed.
Internal Control Over Financial Reporting
In planning and performing our audit, we considered the State of North Carolina’s internal
control over financial reporting as a basis for designing our auditing procedures for the
purpose of expressing our opinion on the financial statements, but not for the purpose of
expressing an opinion on the effectiveness of the State’s internal control over financial
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STATE OF NORTH CAROLINA
reporting. Accordingly, we do not express an opinion on the effectiveness of the State’s
internal control over financial reporting.
A deficiency in internal control exists when the design or operation of a control does not
allow management or employees, in the normal course of performing their assigned functions,
to prevent, or detect and correct misstatements on a timely basis. A material weakness is a
deficiency, or a combination of deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity’s financial statements will not be
prevented, or detected and corrected on a timely basis. A significant deficiency is a
deficiency, or combination of deficiencies in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged with governance.
Our consideration of internal control over financial reporting was for the limited purpose
described in the first paragraph of this section and was not designed to identify all
deficiencies in internal control over financial reporting that might be deficiencies, significant
deficiencies or material weaknesses and therefore, there can be no assurance that all
deficiencies, significant deficiencies, or material weaknesses have been identified. However,
we consider the deficiencies described in findings 10-FS-1 and 10-FS-11 in Section II,
Financial Statement Findings, of the accompanying Schedule of Findings and Questioned
Costs, to be material weaknesses in internal control over financial reporting, as defined above.
Furthermore, we consider the remaining deficiencies described in Section II, Financial
Statement Findings, of the accompanying Schedule of Findings and Questioned Costs, to be
significant deficiencies in internal control over financial reporting, as defined above.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the State of North Carolina’s
financial statements are free of material misstatement, we performed tests of its compliance
with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance
with which could have a direct and material effect on the determination of financial statement
amounts. However, providing an opinion on compliance with those provisions was not an
objective of our audit, and accordingly, we do not express such an opinion. The results of our
tests disclosed instances of noncompliance or other matters that are required to be reported
under Government Auditing Standards and which are described in findings 10-FS-3, 10-FS-4,
10-FS-11, and 10-FS-12 in Section II, Financial Statement Findings, of the accompanying
Schedule of Findings and Questioned Costs.
The State of North Carolina’s responses to the findings identified in our audit are described in
Section II, Financial Statement Findings, of the accompanying Schedule of Findings and
Questioned Costs. We did not audit the State’s responses and, accordingly, we express no
opinion on them.
This report is intended solely for the information and use of the Governor, the General
Assembly, the State Controller, management and staff of organizations within the State of
North Carolina reporting entity, and federal awarding agencies and pass-through entities and
is not intended to be and should not be used by anyone other than these specified parties.
Beth A. Wood, CPA
State Auditor
December 8, 2010
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Beth A. Wood, CPA
State Auditor
STATE OF NORTH CAROLINA
Office of the State Auditor
2 S. Salisbury Street
20601 Mail Service Center
Raleigh, NC 27699-0601
Telephone: (919) 807-7500
Fax: (919) 807-7647
Internet
http://www.ncauditor.net
REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A
DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM
AND ON INTERNAL CONTROL OVER COMPLIANCE IN
ACCORDANCE WITH OMB CIRCULAR A-133
The Honorable Beverly E. Perdue, Governor
The General Assembly of North Carolina
Compliance
We have audited the State of North Carolina’s compliance with the types of compliance
requirements described in the OMB Circular A-133 Compliance Supplement that could have a
direct and material effect on each of the State of North Carolina’s major federal programs for
the year ended June 30, 2010. The State of North Carolina’s major federal programs are
identified in the summary of auditor’s results section of the accompanying schedule of
findings and questioned costs. Compliance with the requirements of laws, regulations,
contracts, and grants applicable to each of its major federal programs is the responsibility of
the State of North Carolina’s management. Our responsibility is to express an opinion on the
State of North Carolina’s compliance based on our audit.
The State of North Carolina arranges with local government social services agencies to
perform the “intake function” to determine eligibility for the following major programs:
Medicaid Cluster, Temporary Assistance for Needy Families Cluster, Foster Care-Title IV-E,
Special Supplemental Nutrition Program for Women, Infants and Children, Low-Income
Home Energy Assistance, Adoption Assistance, and the Children’s Health Insurance
Program. We designated these programs to be audited as major programs at certain local
governments by their local government auditors. The results of these audits were furnished to
us, and our opinion, insofar as it relates to the intake function for these programs, is based on
the other auditors’ results. We did not audit the claims paid by the Children’s Health
Insurance Program. Other auditors tested these claims. The results of these audits were
furnished to us, and our opinion, insofar as it relates to the claims paid, is based on the other
auditor’s results.
The State of North Carolina’s financial reporting entity includes the operations of the State
Education Assistance Authority and the North Carolina Housing Finance Agency. These
agencies reported $4.34 billion and $236 million, respectively, in federal awards which are
not included in the Schedule of Expenditures of Federal Awards during the year ended
June 30, 2010. Our audit, described below, did not include the operations of the State
Education Assistance Authority and the North Carolina Housing Finance Agency because
these agencies engaged other auditors to perform an audit in accordance with OMB
Circular A-133.
We conducted our audit of compliance in accordance with auditing standards generally
accepted in the United States of America; the standards applicable to financial audits
contained in Government Auditing Standards, issued by the Comptroller General of the
United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-
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STATE OF NORTH CAROLINA
Profit Organizations. Those standards and OMB Circular A-133 require that we plan and
perform the audit to obtain reasonable assurance about whether noncompliance with the types
of compliance requirements referred to above that could have a direct and material effect on a
major federal program occurred. An audit includes examining, on a test basis, evidence about
the State of North Carolina’s compliance with those requirements and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit and
the reports of the other auditors provide a reasonable basis for our opinion. Our audit does
not provide a legal determination of the State of North Carolina’s compliance with those
requirements.
As described in Section III, Federal Award Findings and Questioned Costs, in the
accompanying Schedule of Findings and Questioned Costs, the State of North Carolina did
not comply with several compliance requirements that are applicable to several of its major
federal programs, as follows:
Finding
Number
Type of Compliance
Requirement CFDA Major Federal Program
10-SA-1 Subrecipient Monitoring 10.553 School Breakfast Program
10-SA-2 Subrecipient Monitoring 10.555 National School Lunch Program
10-SA-4 Subrecipient Monitoring 10.556 Special Milk Program for Children
10-SA-6 Special Tests and Provisions 10.557 Special Supplemental Nutrition Program for
Women, Infants, and Children
10-SA-32 Reporting 17.258 WIA Adult Program
10-SA-34 Special Tests and Provisions 17.258 WIA Adult Program
10-SA-39 Reporting 17.259 WIA Youth Activities
10-SA-41 Special Tests and Provisions 17.259 WIA Youth Activities
10-SA-45 Reporting 17.260 WIA Dislocated Workers
10-SA-47 Special Tests and Provisions 17.260 WIA Dislocated Workers
10-SA-63 Reporting 81.042 Weatherization Assistance for Low-Income
Persons
10-SA-64 Subrecipient Monitoring 81.042 Weatherization Assistance for Low-Income
Persons
10-SA-67 Subrecipient Monitoring 84.010 Title I Grants to Local Educational Agencies
10-SA-68 Subrecipient Monitoring 84.010 Title I Grants to Local Educational Agencies
10-SA-70 Subrecipient Monitoring 84.027 Special Education - Grants to States
10-SA-71 Subrecipient Monitoring 84.027 Special Education - Grants to States
10-SA-72 Subrecipient Monitoring 84.048 Career and Technical Education - Basic
Grants to States
10-SA-73 Subrecipient Monitoring 84.048 Career and Technical Education - Basic
Grants to States
10-SA-78 Subrecipient Monitoring 84.173 Special Education - Preschool Grants
10-SA-79 Subrecipient Monitoring 84.173 Special Education - Preschool Grants
10-SA-81 Subrecipient Monitoring 84.367 Improving Teacher Quality State Grants
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STATE OF NORTH CAROLINA
Finding
Number
Type of Compliance
Requirement CFDA Major Federal Program
10-SA-82 Subrecipient Monitoring 84.367 Improving Teacher Quality State Grants
10-SA-83 Subrecipient Monitoring 84.389 ARRA - Title I Grants to Local Educational
Agencies, Recovery Act
10-SA-84 Subrecipient Monitoring 84.389 ARRA -Title I Grants to Local Educational
Agencies, Recovery Act
10-SA-85 Special Tests and Provisions 84.389 ARRA - Title I Grants to Local Educational
Agencies, Recovery Act
10-SA-89 Subrecipient Monitoring 84.391 ARRA - Special Education Grants to States,
Recovery Act
10-SA-90 Subrecipient Monitoring 84.391 ARRA -Special Education Grants to States,
Recovery Act
10-SA-91 Special Tests and Provisions 84.391 ARRA - Special Education Grants to States,
Recovery Act
10-SA-93 Subrecipient Monitoring 84.392 ARRA - Special Education - Preschool
Grants, Recovery Act
10-SA-94 Subrecipient Monitoring 84.392 ARRA - Special Education - Preschool
Grants, Recovery Act
10-SA-95 Special Tests and Provisions 84.392 ARRA - Special Education - Preschool
Grants, Recovery Act
10-SA-96 Subrecipient Monitoring 84.394 ARRA - State Fiscal Stabilization Fund
(SFSF) - Education State Grants, Recovery
Act
10-SA-97 Special Tests and Provisions 84.394 ARRA - State Fiscal Stabilization Fund
(SFSF) - Education State Grants, Recovery
Act
10-SA-98 Reporting 93.069 Public Health Emergency Preparedness
10-SA-99 Subrecipient Monitoring 93.069 Public Health Emergency Preparedness
10-SA-101 Special Tests and Provisions 93.268 Immunization Grants
10-SA-102 Special Tests and Provisions 93.268 Immunization Grants
10-SA-104 Special Tests and Provisions 93.563 Child Support Enforcement
10-SA-114 Special Tests and Provisions 93.712 ARRA - Immunization
10-SA-115 Special Tests and Provisions 93.712 ARRA - Immunization
10-SA-117 Special Tests and Provisions 93.714 ARRA - Emergency Contingency Fund for
Temporary Assistance for Needy Families
(TANF) State Program
10-SA-133 Subrecipient Monitoring 93.959 Block Grants for Prevention and Treatment of
Substance Abuse
Compliance with such requirements is necessary, in our opinion, for the State of North
Carolina to comply with the requirements applicable to those programs.
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STATE OF NORTH CAROLINA
In our opinion, based on our audit and the work of other auditors described above, except for
the noncompliance described in the preceding paragraphs, the State of North Carolina
complied, in all material respects, with the compliance requirements referred to above that
could have a direct and material effect on each of its major federal programs for the year
ended June 30, 2010. The results of our auditing procedures also disclosed other instances of
noncompliance with those requirements, which are required to be reported in accordance with
OMB Circular A-133 and which are described in the accompanying schedule of findings and
questioned costs in audit findings 10-SA-5, 10-SA-9, 10-SA-13, 10-SA-21, 10-SA-26,
10-SA-28, 10-SA-29, 10-SA-36, 10-SA-37, 10-SA-43, 10-SA-49, 10-SA-53, 10-SA-74,
10-SA-75, 10-SA-80, 10-SA-103, 10-SA-110, 10-SA-112, 10-SA-118, 10-SA-120,
10-SA-121, and 10-SA-124.
Internal Control Over Compliance
Management of the State of North Carolina is responsible for establishing and maintaining
effective internal control over compliance with the requirements of laws, regulations,
contracts, and grants applicable to federal programs. In planning and performing our audit,
we considered the State of North Carolina’s internal control over compliance with the
requirements that could have a direct and material effect on a major federal program to
determine the auditing procedures for the purpose of expressing our opinion on compliance
and to test and report on internal control over compliance in accordance with OMB
Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of
internal control over compliance. Accordingly, we do not express an opinion on the
effectiveness of the State of North Carolina’s internal control over compliance.
Our consideration of internal control over compliance was for the limited purpose described
in the preceding paragraph and was not designed to identify all deficiencies in the internal
control over compliance that might be significant deficiencies or material weaknesses and
therefore, there can be no assurance that all deficiencies, significant deficiencies, or material
weaknesses have been identified. However, as discussed below, we identified certain
deficiencies in internal control over compliance that we consider to be material weaknesses
and other deficiencies that we consider to be significant deficiencies.
A deficiency in internal control over compliance exists when the design or operation of a
control over compliance does not allow management or employees, in the normal course of
performing their assigned functions, to prevent, or detect and correct, noncompliance with a
type of compliance requirement of a federal program on a timely basis. A material weakness
in internal control over compliance is a deficiency, or combination of deficiencies, in internal
control over compliance, such that there is a reasonable possibility that material
noncompliance with a type of compliance requirement of a federal program will not be
prevented, or detected and corrected, on a timely basis. We consider the deficiencies in
internal control over compliance described in Section III, Federal Award Findings and
Questioned Costs, of the accompanying Schedule of Findings and Questioned Costs as items
10-SA-1, 10-SA-2, 10-SA-4, 10-SA-6, 10-SA-8, 10-SA-25, 10-SA-32, 10-SA-34, 10-SA-39,
10-SA-41, 10-SA-45, 10-SA-47, 10-SA-62, 10-SA-63, 10-SA-64, 10-SA-67, 10-SA-68,
10-SA-70, 10-SA-71, 10-SA-72, 10-SA-73, 10-SA-76, 10-SA-78, 10-SA-79, 10-SA-81,
10-SA-82, 10-SA-83, 10-SA-84, 10-SA-85, 10-SA-87, 10-SA-89, 10-SA-90, 10-SA-91,
10-SA-93, 10-SA-94, 10-SA-95, 10-SA-96, 10-SA-97, 10-SA-98, 10-SA-99, 10-SA-100,
10-SA-101, 10-SA-102, 10-SA-104, 10-SA-107, 10-SA-108, 10-SA-113, 10-SA-114,
10-SA-115, 10-SA-116, 10-SA-117, 10-SA-119, 10-SA-129, 10-SA-130, and 10-SA-133, to
be material weaknesses.
A significant deficiency in internal control over compliance is a deficiency, or a combination
of deficiencies, in internal control over compliance with a type of compliance requirement of
a federal program that is less severe than a material weakness in internal control over
compliance, yet important enough to merit attention by those charged with governance. We
consider the deficiencies in internal control over compliance described in Section III, Federal
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STATE OF NORTH CAROLINA
Award Findings and Questioned Costs, of the accompanying Schedule of Findings and
Questioned Costs as items 10-SA-3, 10-SA-7, 10-SA-10, 10-SA-11, 10-SA-12, 10-SA-13,
10-SA-14, 10-SA-15, 10-SA-16, 10-SA-17, 10-SA-18, 10-SA-19, 10-SA-20, 10-SA-22,
10-SA-23, 10-SA-24, 10-SA-26, 10-SA-27, 10-SA-29, 10-SA-30, 10-SA-31, 10-SA-33,
10-SA-35, 10-SA-36, 10-SA-37, 10-SA-38, 10-SA-40, 10-SA-42, 10-SA-43, 10-SA-44,
10-SA-46, 10-SA-48, 10-SA-49, 10-SA-50, 10-SA-51, 10-SA-52, 10-SA-54, 10-SA-55,
10-SA-56, 10-SA-57, 10-SA-58, 10-SA-59, 10-SA-60, 10-SA-61, 10-SA-65, 10-SA-66,
10-SA-69, 10-SA-75, 10-SA-77, 10-SA-86, 10-SA-88, 10-SA-92, 10-SA-105, 10-SA-106,
10-SA-109, 10-SA-110, 10-SA-111, 10-SA-120, 10-SA-121, 10-SA-122, 10-SA-123,
10-SA-125, 10-SA-126, 10-SA-127, 10-SA-128, 10-SA-131, and 10-SA-132 to be significant
deficiencies.
Schedule of Expenditures of Federal Awards
We have audited the financial statements of the governmental activities, the business-type
activities, the aggregate discretely presented component units, each major fund, and the
aggregate remaining fund information of the State of North Carolina, as of and for the year
ended June 30, 2010, which collectively comprise the State’s basic financial statements (not
presented herein) and have issued our report thereon dated December 8, 2010. Our report
includes a reference to other auditors.
As discussed in Note 23 to the financial statements, the State of North Carolina implemented
Governmental Accounting Standards Board Statement No. 51, Accounting and Financial
Reporting for Intangible Assets, and Statement No. 53, Accounting and Financial Reporting
for Derivative Instruments, during the year ended June 30, 2010.
We conducted our audit in accordance with auditing standards generally accepted in the
United States of America and the standards applicable to financial audits contained in
Government Auditing Standards, issued by the Comptroller General of the United States.
Other auditors audited the financial statements of the North Carolina State Lottery Fund, the
North Carolina Turnpike Authority, the North Carolina Housing Finance Agency, the State
Education Assistance Authority, the University of North Carolina System - University of
North Carolina Health Care System - Rex Healthcare, the Supplemental Retirement Income
Plan of North Carolina, and the cash basis claims and benefits of North Carolina State Health
Plan, as described in our report on the State of North Carolina’s financial statements. The
financial statements of the University of North Carolina System - University of North
Carolina Health Care System - Rex Healthcare and the Supplemental Retirement Income Plan
of North Carolina were not audited in accordance with Government Auditing Standards. As
of the date of our report on the financial statements of the State of North Carolina, the
financial statements of the State Education Assistance Authority were not audited in
accordance with Government Auditing Standards; however, subsequent to that date, an audit
in accordance with Government Auditing Standards was completed.
Our audit was performed for the purpose of forming our opinions on the financial statements
that collectively comprise the State of North Carolina’s basic financial statements. The
accompanying Schedule of Expenditures of Federal Awards is presented for purposes of
additional analysis as required by OMB Circular A-133 and is not a required part of the basic
financial statements. Such information has been subjected to the auditing procedures applied
by us and the other auditors in the audit of the basic financial statements and, in our opinion,
based on our audit and the report of other auditors, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
The State of North Carolina’s responses to the findings identified in our audit are described in
the accompanying Schedule of Findings and Questioned Costs. We did not audit the State of
North Carolina’s responses and, accordingly, we express no opinion on the responses.
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STATE OF NORTH CAROLINA
This report is intended solely for the information and use of the Governor, the General
Assembly, the State Controller, management and staff of organizations within the State of
North Carolina reporting entity, federal awarding agencies and pass-through entities and is
not intended to be and should not be used by anyone other than these specified parties.
Beth A. Wood, CPA
State Auditor
March 11, 2011 (except as related to the
Report on the Schedule of Expenditures of Federal Awards,
as to which the date is December 8, 2010)
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SCHEDULE OF FINDINGS AND QUESTIONED COSTS
For the Fiscal Year Ended June 30, 2010
I. Summary of Auditor’s Results.................................................................................................................. 15
II. Financial Statement Findings ................................................................................................................... 19
 Department of Health and Human Services ....................................................................................... 20
 Department of Public Instruction......................................................................................................... 21
 Department of State Treasurer ........................................................................................................... 22
 Department of Transportation ............................................................................................................. 25
 East Carolina University..................................................................................................................... 29
 Employment Security Commission ..................................................................................................... 31
 Office of the State Controller............................................................................................................... 35
III. Federal Award Findings and Questioned Costs .................................................................................... 37
 10.553 School Breakfast Program................................................................................................... 38
 10.555 National School Lunch Program .......................................................................................... 40
 10.556 Special Milk Program for Children ....................................................................................... 41
 10.557 Special Supplemental Nutrition Program for Women, Infants, and Children....................... 42
 10.558 Child and Adult Care Food Program.................................................................................... 47
 10.561 State Administrative Matching Grants for the Supplemental Nutrition Assistance
Program...................................................................................................................... 49
 14.228 Community Development Block Grants / State’s Program and Non-Entitlement
Grants in Hawaii......................................................................................................... 50
 16.738 Edward Byrne Memorial Justice Assistance Grant Program............................................... 57
 16.803 ARRA – Recovery Act - Edward Byrne Memorial Justice Assistance Grant (JAG)
Program / Grants to States and Territories ................................................................ 62
 17.207 Employment Service / Wagner-Peyser Funded Activities ................................................... 63
 17.225 Unemployment Insurance.................................................................................................... 67
 17.258 WIA Adult Program .............................................................................................................. 74
 17.259 WIA Youth Activities............................................................................................................. 85
 17.260 WIA Dislocated Workers...................................................................................................... 88
 17.801 Disabled Veterans’ Outreach Program (DVOP) ................................................................. 91
 17.804 Local Veterans’ Employment Representative Program....................................................... 92
 20.205 Highway Planning and Construction ................................................................................... 93
 66.458 Capitalization Grants for Clean Water State Revolving Funds ........................................... 96
 66.468 Capitalization Grants for Drinking Water State Revolving Funds...................................... 100
 81.042 Weatherization Assistance for Low Income Persons ........................................................ 103
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STATE OF NORTH CAROLINA
 84.010 Title I Grants to Local Educational Agencies..................................................................... 111
 84.027 Special Education – Grants to States ................................................................................ 113
 84.048 Career and Technical Education – Basic Grants to States ............................................... 117
 84.063 Federal Pell Grant Program............................................................................................... 119
 84.126 Rehabilitation Services – Vocational Rehabilitation Grants to States ............................... 121
 84.173 Special Education – Preschool Grants .............................................................................. 124
 84.268 Federal Direct Student Loans ............................................................................................ 125
 84.367 Improving Teacher Quality State Grants ........................................................................... 126
 84.389 ARRA – Title I Grants to Local Educational Agencies, Recovery Act ............................... 128
 84.390 ARRA – Rehabilitation Services – Vocational Rehabilitation Grants to States,
Recovery Act...................................................................................................................... 130
 84.391 ARRA – Special Education Grants to States, Recovery Act ............................................. 131
 84.392 ARRA – Special Education – Preschool Grants, Recovery Act ........................................ 132
 84.394 ARRA – State Fiscal Stabilization Fund (SFSF) – Education State Grants,
Recovery Act............................................................................................................ 133
 93.069 Public Health Emergency Preparedness........................................................................... 134
 93.268 Immunization Grants.......................................................................................................... 137
 93.558 Temporary Assistance for Needy Families........................................................................ 142
 93.563 Child Support Enforcement................................................................................................ 143
 93.568 Low-Income Home Energy Assistance.............................................................................. 147
 93.575 Child Care and Development Block Grant......................................................................... 148
 93.596 Child Care Mandatory and Matching Funds of the Child Care and Development Fund ... 149
 93.658 Foster Care – Title IV-E ..................................................................................................... 150
 93.659 Adoption Assistance .......................................................................................................... 155
 93.712 ARRA – Immunization........................................................................................................ 157
 93.713 ARRA – Child Care and Development Block Grant........................................................... 158
 93.714 ARRA – Emergency Contingency Fund For Temporary Assistance for Needy
Families (TANF) State Program............................................................................... 159
 93.767 Children’s Health Insurance Program................................................................................ 160
 93.778 Medical Assistance Program ............................................................................................. 164
 93.917 HIV Care Formula Grants .................................................................................................. 175
 93.959 Block Grants for Prevention and Treatment of Substance Abuse..................................... 177
Summary of Findings and Questioned Costs ............................................................................................ 181
 By Federal Agency........................................................................................................................... 182
 By State Agency............................................................................................................................... 188
14
STATE OF NORTH CAROLINA
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
I. Summary of Auditor’s Results
For the Fiscal Year Ended June 30, 2010
Financial Statements
 Type of auditor’s report issued? Unqualified
 Internal control over financial reporting:
 Material weaknesses identified? Yes
 Significant deficiencies identified
that are not considered to be
material weaknesses? Yes
 Noncompliance material to financial
statements noted? No
Federal Awards
 Internal control over major programs:
 Material weaknesses identified? Yes
 Significant deficiencies identified
that are not considered to be
material weaknesses? Yes
 Type of auditor’s report issued on
compliance for major programs?
Unqualified for all major programs except
for School Breakfast Program, National
School Lunch Program, Special Milk
Program for Children, Special Supplemental
Nutrition Program for Women, Infants, and
Children, WIA Adult Program, WIA Youth
Activities, WIA Dislocated Workers,
Weatherization Assistance for Low-Income
Persons, Title I Grants to Local Educational
Agencies, Special Education – Grants to
States, Career and Technical Education –
Basic Grants to States, Special Education –
Preschool Grants, Improving Teacher
Quality State Grants, ARRA – Title I Grants
to Local Educational Agencies, Recovery
Act, ARRA – Special Education Grants to
States, Recovery Act, ARRA – Special
Education - Preschool Grants, Recovery
Act, ARRA – State Fiscal Stabilization Fund
(SFSF) – Education State Grants, Recovery
Act, Public Health Emergency
15
STATE OF NORTH CAROLINA
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
I. Summary of Auditor’s Results
For the Fiscal Year Ended June 30, 2010
Emergency Preparedness, Immunization
Grants, Child Support Enforcement, ARRA
– Immunization, ARRA – Emergency
Contingency Fund for Temporary
Assistance for Needy Families (TANF)
State Program, and Block Grants for
Prevention and Treatment of Substance
Abuse which is qualified.
 Any audit findings disclosed that are
required to be reported in accordance
with section 510(a) of Circular A-133? Yes
 Identification of major programs:
CFDA
Number Name of Federal Program or Cluster
CCDF CCDF Cluster
CHNC Child Nutrition Cluster
EMPS Employment Service Cluster
HPCC Highway Planning and Construction Cluster
IMMC Immunization Cluster
MEDC Medicaid Cluster
RD Research and Development Cluster
SCPC CDBG – State-Administered Small Cities Program Cluster
SPED Special Education Cluster (IDEA)
SFSF State Fiscal Stabilization Fund Cluster
SFAC Student Financial Assistance Cluster
SNAP Supplemental Nutrition Assistance Program (SNAP) Cluster
TANF TANF Cluster
TIPA Title I, Part A Cluster
VRHC Vocational Rehabilitation Cluster
WIAC WIA Cluster
10.557 Special Supplemental Nutrition Program for Women, Infants, and Children
10.558 Child and Adult Care Food Program
16.738 Edward Byrne Memorial Justice Assistance Grant Program
16.803 ARRA – Recovery Act - Edward Byrne Memorial Justice Assistance Grant
(JAG) Program / Grants to States and Territories
16
STATE OF NORTH CAROLINA
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
I. Summary of Auditor’s Results
For the Fiscal Year Ended June 30, 2010
CFDA
Number Name of Federal Program or Cluster (continued)
17.225 Unemployment Insurance
66.458 Capitalization Grants for Clean Water State Revolving Funds
66.468 Capitalization Grants for Drinking Water State Revolving Funds
81.042 Weatherization Assistance for Low-Income Persons
84.048 Career and Technical Education – Basic Grants to States
84.367 Improving Teacher Quality State Grants
93.069 Public Health Emergency Preparedness
93.563 Child Support Enforcement
93.568 Low-Income Home Energy Assistance
93.658 Foster Care – Title IV-E
93.659 Adoption Assistance
93.667 Social Services Block Grant
93.767 Children's Health Insurance Program
93.917 HIV Care Formula Grants
93.959 Block Grants for Prevention and Treatment of Substance Abuse
 Dollar threshold used to distinguish
between type A and type B programs? $ 36,404,646
 Auditee qualified as low-risk auditee? No
17
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18
STATE OF NORTH CAROLINA
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
The following findings and recommendations resulted from our audit of the basic financial statements of the
State of North Carolina. Each finding is referenced with a two-digit number representing the fiscal year, a “FS”
to indicate that it is a financial statement finding, and a sequential number. Each finding is also categorized by
type as described below:
Prior Year Finding
A finding presented in the prior year Single Audit Report that affected the current year audit of the basic
financial statements.
Category of Internal Control Weakness
If the finding represents a current year weakness in internal control, one of the following designations will
appear:
 Significant Deficiency – A deficiency, or a combination of deficiencies, in internal control that is less
severe than a material weakness, yet important enough to merit attention by those charged with
governance.
 Material Weakness – A deficiency, or a combination of deficiencies, in internal control such that there
is a reasonable possibility that a material misstatement of the State’s financial statements will not be
prevented, or detected and corrected on a timely basis.
Category of Noncompliance
If the finding represents a current year instance of noncompliance, one of the following designations will
appear:
 Significant Noncompliance – A finding related to fraud or illegal acts (violation of a law or regulation)
that has an effect on the financial statements that is more than inconsequential; or a finding related to
significant violations of contract or grant award provisions.
 Material Noncompliance – Violation of a contract provision or grant agreement or abuse (misuse of
authority or position for personal financial interests or those of an immediate or close family member
or business associate) that has a material effect on the determination of a financial statement amount
or other financial data that is significant to the audit.
19
STATE OF NORTH CAROLINA
DEPARTMENT OF HEALTH AND HUMAN SERVICES
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
10-FS-1 Prior Year
Finding
Material
Weakness
Deficiency in Financial Reporting
The year-end financial information prepared by the Department and submitted
to the Office of the State Controller contained a material misstatement that was
corrected as a result of our audit. The misstatement indicates that the
Department’s internal control over financial reporting was not effective, and
without our correction, the State’s financial statements could have been
misleading to readers.
The federal Supplemental Nutrition Assistance Program uses an electronic
benefits transfer system to make it possible for program beneficiaries to charge
their qualifying food purchases. Revenues and expenditures are then reported
by the Department equal to the underlying food purchases.
The Department incorrectly made an adjusting journal entry to eliminate
$2 billion in previously recorded revenues and expenditures related to electronic
benefit transfer payments for the year ended June 30, 2010. The adjusting
journal entry was prepared and approved by the same staff person, which
bypassed established review procedures. The Department is responsible for the
fair presentation of its financial information; therefore, it is essential that
effective internal control over financial reporting be in place and operating to
provide reasonable assurance regarding the reliability of financial reporting.
Recommendation: The Department should ensure that established internal
control procedures are followed to ensure the completeness and accuracy of
the information submitted to the Office of the State Controller for inclusion to the
State’s financial statements.
Agency Response: The Department concurs with the finding. The error
occurred when a staff person inadvertently eliminated the balance in a revenue
account without full knowledge of the reversing entry and failed to follow written
journal entry review procedures prohibiting journal entries from being prepared
and approved by the same person. The significance of adhering to established
review procedures has since been communicated to the appropriate staff. In
addition, beginning with the compilation of information for the 2010-2011
Comprehensive Annual Financial Report (CAFR), the Department plans to
implement additional levels of review for large CAFR journal entries and for
changes in balances at the division level. These additional internal controls
should help to ensure the completeness and accuracy of the CAFR information.
The additional levels of review will be identified and implement prior to work on
the next CAFR.
20
STATE OF NORTH CAROLINA
DEPARTMENT OF PUBLIC INSTRUCTION
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
10-FS-2 Significant
Deficiency
Inappropriate Access to Information Systems
The Department did not maintain adequate internal control over access to its
computer systems and data. As a result, there is an increased risk that
unauthorized access to accounting systems and inappropriate changes to
financial data could occur and go undetected.
The following deficiencies were noted:
 Two computer programmers had inappropriate database access to two
information systems that process financial data, thus giving them the
ability to update, alter, or delete financial data. The ability to access and
change database information should be restricted to employees with the
need to perform database administrative functions.
 Two former employees had access to the Department’s information
systems. These employees left the Department on August 31, 2009 and
December 31, 2009, respectively, but continued to have access as of
June 2010. The Statewide Information Security Manual requires access
to be immediately terminated upon leaving employment.
Recommendation: The Department should strengthen its access security
procedures. Specifically, the ability to access information systems should be
restricted to a need-to-use basis and should be immediately removed from
individuals no longer with the Department. Periodic reviews should be performed
to ensure that employees’ access is appropriate.
Agency Response: To strengthen security procedures, DPI will review the
current security access of the Technology Services’ staff and replace security to
alter files with read only security. In addition, programming code will be input by
the supervisor or another programmer instead of by the initiating programmer,
and an audit trail of Technology Services’ staff activity will be provided by a
tracking report. All changes will be in place by January 1, 2011 and will be
reviewed quarterly to assure compliance.
DPI requires all separating employees to complete a DPI Out-Processing
Checklist by the end of their last working day. Computer security access is
included on this list. To further ensure that access is terminated, beginning in
December 2010 and each month thereafter, DPI’s Manager of Financial
Systems will review a report of separated staff and verify that access has been
terminated.
21
STATE OF NORTH CAROLINA
DEPARTMENT OF STATE TREASURER
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
10-FS-3 Prior Year
Finding
Significant
Noncompliance
Noncompliance with Statutory Investment Limits
The Department of State Treasurer did not comply with the statutory
requirement limiting the North Carolina retirement systems’ holdings in
alternative investments to five percent of the systems’ invested assets. The limit,
established by North Carolina General Statute 147-69.2(b)(9), was first
exceeded in September 2008. As of June 30, 2010, the retirement systems’
alternative investments holdings were 5.15 percent of all invested assets.
We reported this finding last year. The Department has since requested
legislative changes to the types of investments the retirement systems’ are
authorized to hold. These changes became law, and as a result, investments
previously classified as alternative investments were now considered to be other
types of investments. Reclassifying a portion of the alternative investments
reduced the holdings percentage below the statutory limit. However, the
Department had to invest additional cash in certain alternative investments in
order to meet contractual obligations. This resulted in the Department exceeding
the statutory limit again.
Recommendation: The Department should continue to monitor the retirement
systems’ holdings and seek to identify a solution to achieve compliance with
investment limits set by law.
Agency Response: General Statute 147-69.2(b)(9) governs the Retirement
Systems’ alternative investment allocation. Specifically, § 147-69.2(b)(9) permits
investments in interests of limited partnerships, limited liability companies or
other limited liability investment vehicles that are not publicly traded if the
primary purpose of the vehicle is to invest in public or private equity, or corporate
buyout transactions. The statute requires that alternative investments not
exceed 5% of the market value of all invested assets of the Retirement Systems.
The statutory limitation on the size of the alternatives allocation was initially
exceeded in September 2008 when the stock market plummeted, resulting in
significantly reduced market value of all investment assets (“denominator
effect”). Since that time, the allocation has been as large at 6.3% of the invested
assets of the Retirement Systems. While complying with existing investment
contracts which required the investment of additional capital, the State Treasurer
has also actively taken steps to reduce the alternatives allocation by prudently
redeeming holdings in certain investments. Redemption of monies will continue
in 2011, and we also plan to ask for additional statutory flexibility from the
legislature. In addition, Legislative authorities approved the creation of two new
asset allocations, the credit and inflation allocations, in 2009. Subsequent to the
creation of these new investment allocations, certain limited liability investment
vehicles were reclassified from the alternatives allocation into the credit and
inflation allocations, pursuant to internal and external reviews of the existing
portfolio. These efforts have reduced the holdings that would have otherwise
been included within the 5% alternatives allocation. As of October 31, 2010, the
22
STATE OF NORTH CAROLINA
DEPARTMENT OF STATE TREASURER (continued)
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
statutory limitation on the size of the alternative allocation was exceeded by
approximately .07%.
10-FS-4 Significant
Deficiency
Significant
Noncompliance
Securities Lending Amounts Not Reported or Distributed Timely
The Department of State Treasurer did not report timely all assets and
investment income from securities lending transactions, including changes in the
fair value of investments, in the State Treasurer’s Investment Pool financial
statements. As a result, adjustments had to be made after June 30, 2010 to
record transactions from October 2008 - June 2010 in both the Investment Pool
financial statements and in the basic financial statements of the State’s
Comprehensive Annual Financial Report (CAFR). Also, the Department did not
distribute the net impact of these transactions to Pool participants.
From October 2008 to June 2009, the Department earned approximately
$108 million of realized income on investments made with collateral received
from securities lending transactions. Historically, this income had been
recognized monthly in the Investment Pool’s financial records and distributed to
participants whose assets were invested by the Department. However, the
Department did not report the earned revenue or related asset in the 2009 fiscal
year, and thus neither did the entities who participate in the Pool.
In addition, as of June 30, 2009, the fair value of the investments purchased with
cash collateral received from securities lending activity significantly decreased in
value, resulting in the fair value of the investments held at year-end being
approximately $771 million less than their cost value. Such a large change in
value had not previously been experienced on these investments. The
Department did not properly adapt to the change in circumstances and did not
report this loss in the 2009 fiscal year.
The net impact of not reporting the investment transactions in the 2009 fiscal
year resulted in the Investment Pool’s June 2009 net assets being overstated by
approximately $663 million. When preparing its 2010 year-end financial
statements, the Department recorded a restatement to the Investment Pool’s
financial statements to correct the error. Furthermore, the Office of the State
Controller had to record restatements to various financial statements in the
State’s CAFR to record the 2009 transactions for the entities who participate in
the Pool. Since the transactions were not recorded timely in the Investment Pool
financial records, the net loss, along with approximately $27.5 million of realized
income earned in the 2010 fiscal year, was not distributed to Pool participants.
Under North Carolina General Statutes 147-69.1 and 147-69.3, the State
Treasurer’s duties include preparing statements that report all moneys invested,
all revenues derived from the investments and all investments for which the
State Treasurer is responsible. The income received from deposits and
investments are to accrue pro rata among the funds whose assets are invested
according to a formula prescribed by the State Treasurer and approved by the
23
STATE OF NORTH CAROLINA
DEPARTMENT OF STATE TREASURER (continued)
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
approved by the Governor and Council of State.
Recommendation: The Department should enhance its internal control
procedures to ensure that all financial transactions are reported timely and in the
proper accounting period. Timely reporting in the Investment Pool’s financial
records is critical to ensure that entities that invest in the Pool have the
information they need to properly report investment transactions in the State’s
financial statements.
Agency Response: As noted above, when preparing the 2010 year-end financial
statements, the Department recorded a restatement to the Investment Pool’s
financial statements to properly disclose the asset, realized income, and
unrealized loss associated with the securities lending cash collateral pool for
fiscal year 2009. All amounts were properly reflected in the 2010 fiscal year-end
financial statements for the Investment Pool. The Department
interprets the phrase “interest or income received and accruing,” found in
Section 147-69.1(d), to mean net, as opposed to gross, income. The
Department as a fiduciary deemed it prudent to set aside future earnings from
securities lending in dedicated reserve accounts to net against the unrealized
losses in the securities lending collateral pools. At the point reserves are
deemed sufficient to cover the final projected liabilities, net revenues from
securities lending will be distributed to the participants. The Department will
ensure that the appropriate investment income (loss) from securities lending is
recorded accurately and timely in the Pool’s financial statements.
Auditor Comment: While it is true that the Department made the necessary
restatement to reflect the proper amounts in the 2010 financial statements, this
was not done in time to ensure that all transactions were reported in the
appropriate fiscal year. Also, if for income distribution purposes the Department
believes it prudent to treat the net income from these transactions differently
from other Investment Pool income and losses, then it should adopt a policy to
that effect and obtain any necessary approvals required by statute. However,
measures will need to be taken to ensure that all Investment Pool participants
receive the information necessary to properly report their investment assets at
fair value as required by generally accepted accounting principles.
24
STATE OF NORTH CAROLINA
DEPARTMENT OF TRANSPORTATION
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
10-FS-5 Prior Year
Finding
Significant
Deficiency
Payroll Time Entries Not Verified
The Department’s control procedures to ensure the accuracy of payroll time
entries are not being followed. As a result, there is an increased risk of
improper payroll payments.
A report is produced from the payroll system after each employee’s time has
been entered into the payroll system. The Department’s policy requires the
hours on this report to be agreed to the timesheets. The policy also states that
a copy of the report should be printed, initialed, dated, and retained along with
original timesheets.
In our sample of 60 employees, we noted the following:
 Three instances where the payroll reports were not printed, initialed,
dated, or retained along with the original timesheets.
 Ten instances where the payroll reports were not initialed or dated to
confirm that the accuracy of time entry was checked.
 Nine instances where the payroll reports were not dated to confirm
when the accuracy of the time entry was verified.
This finding was also reported in the prior year.
Recommendation: The Department should ensure that policies and procedures
regarding time entry and approval are followed to ensure that time entered into
the payroll system is properly verified.
Agency Response: NCDOT will intensify efforts to educate time keepers of the
control procedures that must be followed to ensure time entered into financial
system is properly verified. An Employee News notification will be distributed to
all NCDOT system users in January, 2011. Quarterly reminders will be sent to
time keepers and paymasters through automated system workflow messages.
A quick view reminder will be developed and distributed to serve as a checklist
for those entering time into the system in
February, 2011. Areas identified in the audit were contacted and proper
procedures were reviewed in October, 2010.
Anticipated Completion Date: Various
10-FS-6 Significant
Deficiency
Inappropriate Access to Information Systems
The Department did not maintain adequate internal control over access to its
computer systems and data. As a result, there is an increased risk that
unauthorized access to accounting systems and inappropriate changes to
25
STATE OF NORTH CAROLINA
DEPARTMENT OF TRANSPORTATION (continued)
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
financial data could occur and go undetected.
The following deficiencies were noted:
 Four of 11 terminated employees tested did not have their access to the
accounting system terminated for at least 30 days after they were
separated. One of the four was terminated for conduct but continued to
have access to the accounting system for 54 days. The Statewide
Information Security Manual requires access to be immediately
terminated upon leaving employment.
 The Department’s accounting system and highway construction
management subsystem inactivity parameters are not in compliance
with statewide standards. A user’s access is automatically disabled
after 60 days of inactivity in the accounting system and 90 days of
inactivity in the highway construction management subsystem. The
Statewide Information Security Manual states that user IDs must be
disabled after 30 days of inactivity.
 The Department did not review and has never recertified the access
rights granted to users of the highway construction management
subsystem. Statewide standards require a documented review of users’
rights semi-annually.
Recommendation: The Department should ensure that its procedures for
promptly disabling separated employees’ access are followed. The Department
should set parameters in both the accounting system and the highway
construction materials system to disable a user’s ID after 30 days of inactivity.
Semi-annual reviews should be performed to ensure that employees’ access is
appropriate.
Agency Response: The NCDOT Information Technology Unit at BSIP (Business
System Improvement Project) receives an automated report of terminated
employees from the State’s Human Resource Information System (Beacon) that
is run daily and emailed to BSIP Security. The BSIP Security team then works
this report daily to revoke user access of terminated employees based on the
data provided. The data on this report is only as accurate as the data entered to
Beacon by the business units when the actual dates of termination occur. The
IT unit continues to work with our Human Resources Unit to stress that a delay
in entering the dates of termination causes delays in system revocation of
access. There is no other source to notify us to revoke access of users so
dependency on correct and timely entry of termination is critical.
After review of our accounting system and highway construction management
system for inactivity parameters, both systems are being corrected to be 30
consecutive days of inactivity, per the Statewide Information Security Manual.
26
STATE OF NORTH CAROLINA
DEPARTMENT OF TRANSPORTATION (continued)
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
Anticipated Completion Date: March 31, 2011
Statewide standards require a documented review of users’ rights semi-annually.
To accomplish this for HiCAMS the Information Technology Unit will
generate a report semi-annually for review by the Central Construction Unit
(CCU) and Materials & Tests Unit (M&T) of all NCDOT users rights to the
system for internal users. For external users, IT will generate a report,
segregated by company, for review by CCU and M&T, which can be forwarded
to each material supplier/producer for review of users with rights to enter/review
data for their company.
Anticipated Completion Date: February 28, 2011
10-FS-7 Significant
Deficiency Approval Procedures Not Followed For Right of Way Acquisitions
The Department paid for right of way acquisitions without obtaining the
approvals that were required by its policy. The lack of proper approval increases
the risk that claims for the acquisition of right of way or other property could be
made in error or that fraudulent transactions could occur.
The final report form and other supporting documents are assembled after
negotiations have been concluded with a property owner for the acquisition of
rights of way. The Department’s policy states that these documents will be
submitted to either the Manager of Right of Way or the Assistant Manager of
Right of Way for acceptance and approval for payment. The policy also states
that the State Highway Administrator must approve claims with total payments
exceeding $500,000.
Our test of 89 disbursements for right of way acquisitions revealed the following:
 One right of way final report was approved by the right of way
accountant instead of the right of way manager or assistant manager.
This presents a segregation of duties problem since the accountant
also has the ability to enter and approve the payment in the accounting
system.
 Three of the five right of way documents in our sample that were for
amounts exceeding $500,000 were not approved by the State Highway
Administrator as required by the Department’s policy.
Three of the four errors noted above were for acquisitions funded by the
Highway Construction Grant.
Federal Grant Award Information: Highway Planning and Construction 2010
Recommendation: The Department should ensure that all final reports for right
of way acquisitions are approved in accordance with the guidelines set forth in
27
STATE OF NORTH CAROLINA
DEPARTMENT OF TRANSPORTATION (continued)
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
its Right of Way Manual. Care should be taken when assigning tasks to ensure
that duties are adequately segregated.
Agency Response: The Right of Way Branch has reinforced with staff members
the need to follow established procedures and guidelines in the approval of final
reports for right of way acquisitions. In addition, a check list has been developed
to better track required reviews and approvals and ensure segregation of duties.
This has been incorporated in the Right of Way Manual.
Anticipated Completion Date: October, 2010
28
STATE OF NORTH CAROLINA
EAST CAROLINA UNIVERSITY
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
10-FS-8 Significant
Deficiency
Inadequate Control Over Access to the University’s HealthSpan Electronic
Health Record System
We identified deficiencies in the University’s oversight and management of
access to the HealthSpan Electronic Health Record System. Improper access to
computer systems can result in both intentional and unintentional security
breaches that place the confidentiality and integrity of information at risk.
The HealthSpan Electronic Health Record System is used by The Brody School
of Medicine at the University as an electronic medical record and patient billing
system. The information and data are housed on the University Health System
(UHS) server and is maintained by UHS personnel (not University personnel).
UHS serves as the application service provider for the University for this specific
information system.
During our review of system access, we found that programmers have the
ability to access and update patient information, including billing, payment, and
outstanding accounts receivable data. Access to systems and data should be
limited to the minimum access necessary for the job function. If the
programmers’ rights cannot be removed, then procedures should be in place to
monitor their activity. In addition, we determined that periodic reviews of user
access for this system have not been performed as frequently as required by
statewide information technology standards.
Maintaining proper access controls over computer systems helps to protect the
confidentiality and integrity of information by preventing alteration, unauthorized
use, or loss of data. Statewide information technology standards specify that
system access be controlled and prescribe procedures requiring documented
reviews of users’ rights.
Recommendation: The University should improve internal control over granting
and managing access to the HealthSpan Electronic Health Record System.
Procedures should be in place to limit access to just those employees who need
it for their assigned job function. When programmers must have access to
production programs or data, their activity should be monitored. In addition,
periodic security reviews should be conducted at intervals that meet the
minimum schedule as required by statewide information security standards to
ensure that access is restricted to authorized users and employee user access
rights are systematically evaluated to ensure privileges granted are appropriate
for the necessary job requirements.
Agency Response: East Carolina University agrees with the State Auditor’s
recommendation:
 We have already begun coordination with our HealthSpan Application
Service Provider (ASP), University Health Systems of Eastern Carolina,
to remove: (1) programmers’ access to change production data, and (2)
29
STATE OF NORTH CAROLINA
EAST CAROILNA UNIVERSITY (continued)
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
data, and (2) programmers’ ability to move programming changes into
production. If this is not possible, then we will work with the ASP to
ensure that programmers’ activity in the production environment is
closely monitored and controlled.
 A process for periodic review of HealthSpan user access is already in
place and was reviewed by the State Auditor during the audit fieldwork.
We will ensure that user access is reviewed at least twice annually, as
required by the statewide information technology standards. We will
also ensure that our ASP (University Health Systems of Eastern
Carolina) reviews its employees’ access to University data at least twice
annually.
30
STATE OF NORTH CAROLINA
EMPLOYMENT SECURITY COMMISSION
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
10-FS-9 Prior Year
Finding
Significant
Deficiency
Inappropriate Information System Access
The Employment Security Commission allowed employees to have system
access rights that were not necessary for their assigned job functions. As a
result, there is an increased risk of errors and fraudulent transactions. We noted
the following access deficiencies:
 In the prior year audit, we identified employees with one or more
instances of inappropriate update access rights to the unemployment
insurance tax and/or unemployment insurance benefits systems. Of the
over 4,000 instances found, most remained uncorrected as of the end of
the 2010 fiscal year. These improper access rights allowed various
users the ability to manipulate data impacting employer contribution
rates and amount of benefits paid, as well as access to confidential
information.
 We identified 18 instances where users were assigned multiple user
names in error by the Commission’s information systems help desk.
Additionally, the Commission did not have a designated information technology
security officer that would be responsible for defining and enforcing information
technology security policies and procedures, including ensuring proper reviews
of system access rights. The Commission designated someone to this position
after the end of the fiscal year.
Maintaining proper access controls over computer systems helps protect the
confidentiality and integrity of information by preventing alteration, unauthorized
use, or loss of data. Statewide information technology standards specify that
system access be controlled and prescribe procedures such as documented
reviews of users’ rights.
Significant aspects of this finding were reported in the prior year.
Federal Award Information: Unemployment Insurance - funding from the State
and Federal Unemployment Trust Funds.
Recommendation: The Commission should continue to improve internal controls
and emphasize security policies to ensure periodic security reviews are
conducted and personnel are granted only the necessary system access to
perform their job duties.
Agency Response: The Commission has implemented corrective action and will
continue to improve internal controls over information system access. Corrective
action was completed December 1, 2010.
The ESC Help Desk distributes a RACF access listing on a quarterly basis.
31
STATE OF NORTH CAROLINA
EMPLOYMENT SECURITY COMMISSION (continued)
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
Managers and supervisors are required to review this report and certify that the
employees under their supervision require the stated clearances to perform their
job duties. Unneeded clearances may be deleted by so indicating on the report.
Any additional clearances must be requested by the manager via the Network
User Request (NUR) process.
The ESC Help Desk distributes a RACF access listing to data owners on a semi-annual
basis. Data owners are required to review this report and confirm that the
employees listed require the stated clearances to perform their job duties.
Unneeded clearances are to be deleted in accordance with the “Revision to
RACF Data Access Policy and Procedure” issued on
October 8, 2010. When coupled with the quarterly RACF review, this process
provides an access cross check and verification process.
The instances of inappropriate access identified by the auditors have been
corrected. The ESC Help Desk will run additional checks prior to the issuance of
new user IDs to preclude the erroneous assignment of multiple user IDs to the
same employee. The Help Desk also will conduct periodic reviews to assure the
process is working as designed.
10-FS-10 Prior Year
Finding
Significant
Deficiency
Weaknesses Noted in Cash Reconciliation Process
The Employment Security Commission did not fully reconcile the cash balance in
its accounting records to the balance in the bank. Failure to properly reconcile
accounts and resolve outstanding items may lead to unrecorded or improperly
recorded transactions, resulting in financial reporting errors and possibly
misappropriations that go undetected.
The Commission’s reconciliation for the State Treasurer account begins with the
bank balance but only reconciles to a daily recap spreadsheet of checks written,
cancelled, cleared, and voided. It does not clearly reconcile to the balance in the
accounting records.
The reconciliations have several reconciling items that have been outstanding
for months and even years. In addition the State Treasurer account
reconciliation as of June has unspecified reconciling variances for each month of
the fiscal year, with the highest difference exceeding $54,000. Also, the U.S.
Treasury account reconciliation as of June had a $166,000 amount that could
not be reconciled and a $319,000 reconciling item that had not cleared since
October 2008.
Additionally, the Commission maintains numerous manual spreadsheets on a
daily basis to track the flow of cash, support the monthly entries to the
accounting records, and to reflect the cash balance for the monthly
reconciliations. We identified multiple occasions where the underlying
spreadsheets did not clearly support the entries posted to the accounting
records. In these cases, agency personnel had identified revisions that were
32
STATE OF NORTH CAROLINA
EMPLOYMENT SECURITY COMMISSION (continued)
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
necessary before the amounts were posted; however, the supporting
spreadsheets were not updated to clearly explain why the changes were
necessary. The inconsistencies noted impact the cash balance and potentially
contribute to the numerous reconciling items in the month-end reconciliations.
Aspects of this finding were reported in the prior year.
Federal Award Information: Unemployment Insurance - funding from the State
and Federal Unemployment Trust Funds.
Recommendation: The Commission should implement internal controls to
ensure that complete and proper reconciliations are performed. Management
should also implement a workflow that allows for consistent recording and
maintenance of source documentation. Management should dedicate the
necessary resources to ensure that balances in the accounting records are
clearly reconciled to the bank balances and that reconciling items are properly
investigated and resolved.
Agency Response: Management is reviewing internal controls to ensure
complete and proper reconciliations are performed and adjustments are made
timely.
The Commission is developing an automated workflow process which will be
more efficient, eliminate errors, and provide consistent recording and
maintenance of source documentation.
10-FS-11 Material
Weakness
Significant
Noncompliance
Computer Programming Resulted in Payments From Incorrect Funding Source
The unemployment benefits system was not programmed to ensure second year
unemployment benefits were appropriately determined and expended from the
proper funding source. This resulted in $147 million of new unemployment
insurance claims being paid from the State unemployment trust fund when the
recipient should have continued to receive benefits under previous benefit
programs paid with federal unemployment trust funds or federal recovery funds.
The problem was identified in late December 2009 by federal reviewers;
however, the Commission did not implement changes in the benefits system
until May 2010. Reports to determine the amount of improper payments paid
from January through May 2010 were not generated until September 2010, after
fiscal year-end closing. As a result, the year-end financial information prepared
by the Commission and submitted to the Office of the State Controller contained
a material misstatement that was corrected as a result of our audit adjustment.
Since the State unemployment trust fund had been depleted and the State was
in a borrowing status to pay benefits, the problem caused the revolving line of
33
STATE OF NORTH CAROLINA
EMPLOYMENT SECURITY COMMISSION (continued)
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
credit liability to be overstated by $147 million with a corresponding
understatement in federal intergovernmental receivables. This adjustment also
impacted several notes to the financial statements as well as the cash flow
statement. Additionally, the presentation of federal expenditures on the Schedule
of Expenditure of Federal Awards and notes thereto were impacted by the
change in funding source.
The Commission is responsible for compliance with program payment
requirements and the fair presentation of its financial statements; therefore, it is
essential that effective internal control over program changes be established to
provide reasonable assurance regarding the reliability of financial data and the
preparation of financial statements.
Federal Award Information: Unemployment Insurance - funding from the State
and Federal Unemployment Trust Funds.
Recommendation: The Commission should enhance internal controls to ensure
that programming changes are in accordance with regulations. Future system
corrections should be made timely to ensure amounts are correct for
presentation in the financial statements.
Agency Response: The Commission will review and develop additional internal
controls over the process for implementing changes/revisions of benefit payment
requirements to ensure programming changes are made timely and in
accordance with regulations so that benefit payments are paid from the correct
funding source.
The Unemployment Insurance (UI) Division submitted a Service Request on
January 13, 2010, to Information Systems to provide assistance in identifying
and implementing additional programming verification(s) to ensure federal
compliance. These changes were implemented in phases from May to
September 2010. The UI Division is in agreement and supports
recommendations made in the findings.
34
STATE OF NORTH CAROLINA
OFFICE OF THE STATE CONTROLLER
II. Financial Statement Findings
For the Fiscal Year Ended June 30, 2010
Type of Finding Findings and Recommendations
10-FS-12 Prior Year
Finding
Significant
Deficiency
Significant
Noncompliance
Bank Account Inadequately Reconciled
The Office of the State Controller has not fully reconciled the monthly bank
balance in the State’s payroll account since the new payroll system was
implemented in January 2008. This increases the risk that a misstatement in the
State of North Carolina’s financial statements could go undetected and
uncorrected.
The State’s payroll system is used to process over $350 million of monthly
payroll and related costs. The Office of State Controller prepares a monthly bank
reconciliation, but each month “balancing entries,” which represent a net
difference between the book and bank balance, have been reported in the
reconciliation. These monthly differences must be accumulated to make the
payroll records reconcile to the bank account each month. Over the period of
January 2008 to June 2010, these “balancing entries” have ranged from an
understated book balance of $48,000 to an overstated book balance of $52,000.
Although the Office of State Controller has attempted to resolve the differences,
the cause of these reconciling items was not identified or resolved as of June 30,
2010.
The North Carolina Administrative Code (Section 20 NCAC 01C.0402) requires
all agencies to reconcile their bank statements. In addition, the Department of
the State Treasurer requires agencies to verify that reconciliations have been
performed.
Significant aspects of this finding were reported as a result of the last two
financial statement audits.
Recommendation: The Office of the State Controller should ensure that the bank
statement for the State’s payroll account is fully reconciled each month.
Adequate reconciliation procedures include promptly investigating and resolving
unexplained variances.
Agency Response: The Office of State Controller concurs with your audit finding
that our office had not fully reconciled the monthly bank balance in the State’s
payroll disbursing account as of June 30, 2010. The Office continues to refine
the bank reconciliation internal procedures to identify causes and make
appropriate adjustments for differences between the bank balance and the
general ledger balance for this account. It is also important to note that no
material misstatements were made in the State of North Carolina’s financial
statements due to the bank account not being fully reconciled.
35
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36
STATE OF NORTH CAROLINA
SCHEDULE OF FINDINGS AND QUESTIONED COSTS
III. Federal Award Findings and Questioned Costs
For the Fiscal Year Ended June 30, 2010
The following findings, recommendations, and questioned costs are the results of the single audit of the State
of North Carolina for the fiscal year ended June 30, 2010. Each finding is referenced with a two-digit number
representing the fiscal year audited, a “SA” to indicate that it is a single audit finding, and a sequential number.
The findings are presented by federal program and are classified according to federal and state department,
type of compliance requirement, category of internal control weakness, and category of noncompliance.
Findings included in this section are related to major programs.
Category of Internal Control Weakness
If the finding represents a weakness in internal control, one of the following designations will appear:
 Material Weakness – A material weakness in internal control over compliance is a deficiency, or
combination of deficiencies, in internal control over compliance, such that there is a reasonable
possibility that material noncompliance with a type of compliance requirement of a federal program will
not be prevented, or detected and corrected, on a timely basis.
 Significant Deficiency – A significant deficiency in internal control over compliance is a deficiency, or
a combination of deficiencies, in internal control over compliance with a type of compliance
requirement of a federal program that is less severe than a material weakness in internal control over
compliance, yet important enough to merit attention by those charged with governance.
Category of Noncompliance Findings
If the finding represents an instance of noncompliance, one of the following designations will appear:
 Material Noncompliance – A finding related to a major federal program which discusses conditions
representing noncompliance with federal laws, regulations, contracts, or grants, the effects of which
have a material effect in relation to a type of compliance requirement or audit objective identified in
OMB Circular A-133 Compliance Supplement.
 Questioned Cost Finding – A finding which discusses known or likely questioned costs that are
greater than $10,000 for a type of compliance requirement, unless the conditions giving rise to the
questioned costs are otherwise reported as a material noncompliance finding.
37
STATE OF NORTH CAROLINA
10.553 SCHOOL BREAKFAST PROGRAM
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Public Instruction
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
10-SA-1 Subrecipient
Monitoring:
Material
Weakness
Material
Noncompliance
Management Decisions Not Issued to Subrecipients
The Department did not issue management decisions on audit findings after
receipt of its subrecipients’ audit reports. Management decisions are required
to clearly state whether the audit finding is sustained, the reasons for the
decision, and the expected auditee action. Without formal management
decisions, the subrecipients cannot clearly demonstrate to their auditors or
others that the prior audit findings have been resolved and that the corrective
action taken was accepted.
We reviewed the Department’s monitoring tracking sheet and noted that
21 subrecipients had findings related to federal awards. The Department
communicated with the subrecipients through e-mails and/or phone calls and
ensured that corrective action was taken on the findings. However, the
Department did not issue formal management decisions on those audit findings.
OMB Circular A-133 requires a pass-through agency to issue a management
decision on audit findings within six months after receipt of the subrecipient’s
audit report and ensure that the subrecipient takes appropriate and timely
corrective action.
This finding was also reported in the prior year.
Federal Award Information: This finding impacts these federal programs:
a. School Breakfast Program, National School Lunch Program, and Special
Milk Program for Children: Federal funding Period October 1, 2008 -
September 30, 2009 (5NC300327).
b. Title I Grants to Local Education Agencies: Federal funding period
July 1, 2008 - September 30, 2009 (S010A080033A).
c. Title I Grants to Local Education Agencies, Recovery Act: Federal funding
period February 17, 2009 - September 30, 2010 (S389A090033).
d. Special Education - Grants to States: Federal funding period July 1 2008 -
September 30, 2009 (H027A080092A).
e. Special Education - Preschool Grants: Federal funding periods
July 1, 2008 - September 30, 2009 (H173A080096).
f. Special Education Grants to States, Recovery Act: Federal funding period
February 17, 2009 - September 30, 2010 (H391A090092A).
38
STATE OF NORTH CAROLINA
10.553 SCHOOL BREAKFAST PROGRAM (continued)
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Public Instruction
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
g. Special Education - Preschool Grants, Recovery Act: Federal funding
period February 17, 2009 - September 30, 2010 (H392A090096A).
h. Career and Technical Education - Basic Grant to States: Federal funding
period July 1 2008 – September 30, 2009 (V048A080033A).
i. Improving Teacher Quality State Grants: Federal funding period
July 1 2008 - September 30, 2009 (S367A080032A).
Recommendation: The Department should comply with federal regulations by
issuing a management decision on audit findings to its subrecipients within
six months after receipt of the audit report unless a waiver is granted.
Agency Response: The Department will issue a management decision on audit
findings to all subrecipients within six months after receipt of the audit.
39
STATE OF NORTH CAROLINA
10.555 NATIONAL SCHOOL LUNCH PROGRAM
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Public Instruction
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
10-SA-2 Subrecipient
Monitoring:
Material
Weakness
Material
Noncompliance
Management Decisions Not Issued to Subrecipients
The Department did not issue management decisions on audit findings after
receipt of its subrecipients’ audit reports. Management decisions are required
to clearly state whether the audit finding is sustained, the reasons for the
decision, and the expected auditee action. Without formal management
decisions, the subrecipients cannot clearly demonstrate to their auditors or
others that the prior audit findings have been resolved and that the corrective
action taken was accepted. See finding 10-SA-1 for a description.
10-SA-3 Subrecipient
Monitoring:
Significant
Deficiency
Failure to Monitor Subrecipients for State Revenue Match
The Department did not monitor subrecipients of the National School Lunch
Program (NSLP) to ensure subrecipients used state revenue matching funds for
authorized purposes. As a result, there is an increased risk that the state
revenue matching funds will be used for unallowable program activities.
The Department provided subrecipients approximately $7.6 million in state
funds to comply with the federal matching requirement of the NSLP. The
Department monitored subrecipients for the use of federal funds. However, it
did not monitor subrecipients to determine whether state matching funds were
used for allowable program expenses.
Title 7 CFR section 3016.40 requires grantees to monitor grant and subgrant
supported activities to ensure compliance with applicable federal requirements
and that performance goals are being achieved. Expenditures have to be for
allowable activities in order to qualify as matching funds.
Federal Award Information: This finding impacts federal funding period
October 1, 2008 - September 30, 2009 (5NC300327).
Recommendation: The Department should establish and implement monitoring
procedures to ensure subrecipients use state matching funds for allowable
program activities.
Agency Response: The Department believes internal controls and fiscal
monitoring procedures, which were recently revised as a result of this audit
finding, ensure subrecipients use state matching funds for allowable program
activities.
40
STATE OF NORTH CAROLINA
10.556 SPECIAL MILK PROGRAM FOR CHILDREN
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Public Instruction
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
10-SA-4 Subrecipient
Monitoring:
Material
Weakness
Material
Noncompliance
Management Decisions Not Issued to Subrecipients
The Department did not issue management decisions on audit findings after
receipt of its subrecipients’ audit reports. Management decisions are required
to clearly state whether the audit finding is sustained, the reasons for the
decision, and the expected auditee action. Without formal management
decisions, the subrecipients cannot clearly demonstrate to their auditors or
others that the prior audit findings have been resolved and that the corrective
action taken was accepted. See finding 10-SA-1 for a description.
41
STATE OF NORTH CAROLINA
10.557 SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS, AND CHILDREN
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Health and Human Services
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
10-SA-5 Eligibility:
Questioned Cost
Finding
Documentation Lacking in County WIC Case Files
Certified Public Accountants performing the county audits tested 1,210 case
files for Special Supplemental Nutrition Program for Women, Infants, and
Children (WIC) recipients and found deficiencies in seven cases. There were
no questioned costs identified by the local auditors; however, we believe that it
is likely that questioned costs exceed $10,000 in the population. The
deficiencies noted are described below:
 Three client files were missing documentation related to the proof of
residency and verification of identity. The local auditor could not verify
eligibility due to the lack of supporting documentation; however, no
questioned costs were determined by the local auditor.
 Three client files did not have all required documentation completed by the
applicant and/or the counselor.
 One case file could not be located. The local auditor could not verify
eligibility due to this lack of information; however, no questioned costs were
determined by the local auditor.
Federal Award Information: This finding affects Special Supplement Nutrition
Program for Women, Infants, and Children (WIC) federal grant award
#5NC700705 for the federal fiscal years ended September 30, 2009 and 2010.
Recommendation: The auditors recommended that the counties implement
procedures and provide reinforcement training to ensure that eligibility
determinations are made per program requirements and documents relating to
participant eligibility are maintained.
Agency Response: The Department concurs with the finding and
recommendation. The Nutrition Services Branch Head met with the Local
Health Director’s Liaison Committee on February 16, 2011, to discuss the need
for local agencies to properly maintain files related to participant eligibility. In
addition, the Nutrition Services Branch Operations Manager met with Regional
Nutrition Consultants and central office staff responsible for monitoring local
agencies on February 24, 2011, to discuss the importance of performing
technical assistance and monitoring related to participant eligibility
documentation during site visits. Technical assistance visits are being
conducted within three local Health Departments where issues were noted. The
Nutrition Services Branch Head will send a memo to Local Agency Women,
Infants and Children (WIC) Directors and Local Health Directors reminding them
of program requirements related to participant eligibility and the need to have
42
STATE OF NORTH CAROLINA
10.557 SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS, AND CHILDREN
(continued)
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Health and Human Services
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
the need to have policies and procedures related to maintenance of
documentation. The anticipated date for corrective action to be completed is
April 30, 2011.
10-SA-6 Special Tests and
Provisions:
Material
Weakness
Material
Noncompliance
Deficiencies Identified in the Monitoring of WIC High-Risk Vendors
The Department’s monitoring plan does not sufficiently address high-risk
vendors identified in the Special Supplemental Nutrition Program for Women,
Infants, and Children (WIC). As a result, there is an increased risk that the
Department may not perform compliance investigations for those vendors
determined to have the greatest potential for program noncompliance or loss of
funds.
Federal regulations require the Department to conduct compliance
investigations for a minimum of five percent of authorized vendors. Additionally,
federal regulations require that if the Department determines that more than five
percent of authorized vendors are considered high-risk, the Department must
prioritize the vendors in order to determine which ones will be subject to
compliance investigations.
The Department determined that more than five percent of its authorized
vendors were categorized as high-risk; however, it did not clearly identify how
the vendors who were subject to compliance investigations were selected, nor
did they have a monitoring plan that addressed the prioritization of high-risk
vendors. In addition, the Department only conducted 81% (71 of 88) of the
required compliance investigations for high-risk vendors.
A similar finding was written in the prior year.
Federal Award Information: This finding affects Special Supplemental Nutrition
Program for Women, Infants, and Children (WIC) grant award #5NC700705 for
the federal fiscal year ended September 30, 2009.
Recommendation: The Department should strengthen controls to ensure that
high-risk vendors are prioritized for review based on each entity’s potential for
program noncompliance or loss of funds. The Department’s monitoring plan
should be adjusted to ensure compliance investigations are completed for all
identified high-risk vendors.
Agency Response: The Department concurs with the finding and
recommendation. Effective January 13, 2011, the WIC Vendor Unit uses the
43
STATE OF NORTH CAROLINA
10.557 SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS, AND CHILDREN
(continued)
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Health and Human Services
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
coefficient of variation (COV) and Mean Report to identify high-risk vendors. A
vendor having a coefficient of variation less than 0.1 and/or a mean at or near
the Maximum Allowable Price (MAP) is considered a high-risk vendor. The
COV report is used as the primary means to identify high-risk vendors and the
Mean report is used as a secondary source.
In accordance with federal regulations, the Department must conduct
compliance investigations of a minimum of five percent of the number of
vendors authorized by the State agency as of October 1st of each fiscal year.
The Department must conduct compliance investigations on all high-risk
vendors up to the five percent minimum.
The minimum number of vendors to be investigated during the fiscal year is
determined by calculating five percent of the total authorized vendors as of
October 1st from the NC WIC Vendor Tracking database.
If fewer than five percent of the authorized vendors have a coefficient of
variation of less than 0.1 on the COV report, additional high-risk vendors (up to
a total of 5%) are identified using the Mean report. If fewer than five percent of
the total authorized vendors are identified as high-risk using the COV and Mean
reports, additional vendors are randomly selected for compliance investigation
sufficient to meet the five percent requirement. Geographic proximity to high-risk
vendors identified for investigation may be considered when randomly
selecting additional vendors for investigation. Consideration may also be given
to vendors that have not been identified as high-risk on either report, but
complaints have been received from the general public, local agencies and/or
other vendors. A complete list of all vendors selected is generated, with the
reason for selection noted. A monitoring plan that prioritizes high-risk vendors
is also maintained. Staff is provided with a schedule, which is based on the
high-risk report and monitoring plan. The schedule is re-baselined throughout
the year to ensure appropriate follow-up visits are performed in order to
establish patterns of violations and close cases.
The Vendor Manager will review reports to ensure compliance with the
regulations. These reviews will be documented, signed and recorded.
44
STATE OF NORTH CAROLINA
10.557 SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS, AND CHILDREN
(continued)
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Health and Human Services
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
10-SA-7 Special Tests and
Provisions:
Significant
Deficiency
Weaknesses in the Monitoring of the Calculation of the WIC Maximum
Allowable Reimbursement Rates
The Department is not adequately monitoring the calculation of the maximum
allowable reimbursement rates applicable to redeemed food instruments in the
Special Supplemental Nutrition Program for Women, Infants, and Children
(WIC) program. As a result, there is an increased risk that predominately-WIC
vendors (those with more than 50% of annual food sales attributed to WIC
transactions) could be receiving a higher reimbursement rate than is allowed by
the governing regulations.
The Department must establish competitive price criteria and allowable
reimbursement levels for its vendor food instrument redemption system. That
process includes establishing the maximum allowable reimbursement rate by
food instrument package types. The Department’s fiscal agent calculates these
rates on a monthly basis; however, the Department did not begin its monitoring
procedures of the fiscal agent’s calculations until after our audit period. In
addition, we noted that those procedures should be enhanced to ensure that the
calculation process excludes certain vendors as required by federal regulations.
Nonetheless, our tests of a sample of maximum allowable reimbursement rate
calculations did not identify any errors despite the lack of adequate monitoring
procedures.
A similar finding has been reported for three years.
Federal Award Information: This finding affects Special Supplemental Nutrition
Program for Women, Infants, and Children (WIC) federal grant award
#5NC700705 for the federal fiscal years ending September 30, 2009 and 2010.
Recommendation: The Department should establish monitoring procedures to
ensure that sufficient data is obtained from its fiscal agent to verify the correct
calculation of the maximum allowable reimbursement rate for redeemed food
instruments.
Agency Response: The Department concurs with the finding and
recommendation. Effective January 13, 2011, the Division established a
procedure to ensure Maximum Allowable Reimbursement (MAR) rates are
calculated properly by our banking contractor. Quarterly, one month of data is
tested by randomly selecting 5 food instrument (FI) types and having the
Division of Information Resource Management (DIRM) generate a report that
includes the total count and value of all FIs redeemed, the total count and value
45
STATE OF NORTH CAROLINA
10.557 SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS, AND CHILDREN
(continued)
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Health and Human Services
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
value of all FIs redeemed by PWVs, and the total count and value of all FIs
redeemed by regular vendors. Using the DIRM report, Vendor Unit staff
manually calculate the MAR and compare them to the MAR calculations
provided by the banking contractor. The Vendor Unit Manager will verify MAR
calculations using this procedure and document the review a minimum of one
time per quarter.
46
STATE OF NORTH CAROLINA
10.558 CHILD AND ADULT CARE FOOD PROGRAM
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Health and Human Services
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
10-SA-8 Subrecipient
Monitoring:
Material
Weakness
Deficiencies Identified in the Monitoring Controls for Nongovernmental
Subrecipients
We identified deficiencies in the Department’s monitoring controls for
nongovernmental subrecipients. As a result, there is an increased risk that the
Department may not adequately monitor its subrecipient activities.
Federal regulations require the Department to monitor the activities of
subrecipients as necessary to ensure that federal awards are used for
authorized purposes in compliance with laws and regulations. The Department
has created a tracking system for its nongovernmental entities to assist in its
monitoring efforts. Our review of the tracking system identified the following
deficiencies:
 Reconciliation between the departmental listing and the NC Grants listing
(maintained by the North Carolina Office of State Budget and Management)
identified 113 nongovernmental subrecipients that had received funding
from the Department, but were not listed on the departmental listing.
 Five subrecipients that received funding at a level that required the
organization to receive an audit were omitted from the departmental listing.
 Six subrecipients were identified as requiring an audit; however, the audit
had not been received by the Department according to the departmental
listing. Subsequent auditor review determined that the audits had been
received, but the information in the tracking system was incorrect or had not
been properly updated. Additional errors were noted with the correctness
and the consistency of information being maintained in the tracking system.
Failure to adequately monitor subrecipients could result in federal funds being
expended for unallowable purposes as well as subrecipients not properly
administering federal programs.
Federal Award Information: This finding affects the following federal programs:
 HIV CARE Formula Grant awards #2X07HA00051-19-00, #6X07HA00051-
19-01,#1X08HA16859-01-00, #2X07HA00051-20-00, and #6X07HA00051-
20-01 for the federal fiscal years ending June 30, 2009 and 2010.
47
STATE OF NORTH CAROLINA
10.558 CHILD AND ADULT CARE FOOD PROGRAM (continued)
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Health and Human Services
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
 Child Care Development Fund award #0901NCCCDF for the federal fiscal
year ended September 30, 2009.
 Child and Adult Care Food Program grant award #5NC300300 for the
federal fiscal years ended September 30, 2009 and 2010.
Recommendation: The Department should strengthen its monitoring procedures
and its nongovernmental subrecipient tracking system to ensure that its
monitoring activities encompass all organizations receiving departmental
funding and results of monitoring activities are completed in accordance with
federal requirements.
Agency Response: The Department concurs with the finding and
recommendation. The Audit Resolution and Monitoring Branch (ARM) within the
Department of Health and Human Services (DHHS) Office of the Controller will
develop and implement procedures to address the identified issues. New
procedures will include requiring divisions to report new grant awards to
appropriate ARM staff at the time they are recorded in the online
www.NCGrants.gov reporting system. In addition, ARM staff will investigate the
possibility of using reports generated from the Department’s Contracts
Database and Nongovernmental Audit Confirmation website to ensure the
tracking log and NCGrants.gov contain all appropriate grant data. ARM staff
will also utilize new reports available in the online www.NCGrants.gov reporting
system to confirm the current nongovernmental subrecipient tracking
mechanism accurately captures the appropriate level of State funding for each
subrecipient. ARM will strengthen its internal controls to include periodic
supervisory review of the manual tracking logs in comparison to data in the
NCGrants system to verify data is updated in a timely manner. Corrective
action, including revisions to existing policies and procedures, will be completed
prior to June 30, 2011.
48
STATE OF NORTH CAROLINA
10.561 STATE ADMINISTRATIVE MATCHING GRANTS FOR THE SUPPLEMENTAL NUTRITION
ASSISTANCE PROGRAM
III. Federal Award Findings and Questioned Costs
U.S. Department of Agriculture
N.C. Department of Health and Human Services
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
10-SA-9 Allowable
Costs/Cost
Principles:
Questioned Cost
Finding
$11,071
Identified Questioned Costs at the Subrecipient Level
Federal monitoring efforts for the Supplemental Nutrition Assistance Program
(SNAP) identified expenditures at a subrecipient that were determined to be
unallowable costs. As a result, $11,071 of the total paid to the subrecipient by
the Department is considered questioned costs and may require repayment to
the federal oversight agency.
The federal USDA Food and Nutrition Services performed a management
evaluation review on the State’s administration of the Supplemental Nutrition
Assistance Program. During the review, it was noted that a subrecipient was
reimbursed for activities outside the scope of its approved nutritional education
plan. The costs were identified as unallowable costs. The State was to conduct
a review by October 1, 2010 of the subrecipient for all 2009 federally
reimbursed expenditures to determine a final unallowable amount and make
appropriate revisions to its SF-269 financial status report. However, this review
had not been performed as of the end of our audit.
Federal regulations provide that the State is accountable for the contents and
implementation of the nutrition education plans, making allowable cost
decisions, and monitoring to ensure the appropriate expenditure of funds. In
addition, the State is fully liable for the repayment of federal funds that are
subsequently determined unallowable.
Federal Award Information: This finding affects Supplemental Nutrition
Assistance Program grant award #5NC400406 for the federal fiscal year ended
September 30, 2009.
Recommendation: The Department should conduct the review of the
subrecipient expenditures as identified in its corrective action plan and make the
appropriate adjustments to its financial reporting to account for any unallowable
costs.
Agency Response: The Department agrees in part with the finding and
recommendation. The federal review of all 2009 federally reimbursed
expenditures was conducted and completed by October 1, 2010.
The Nutrition Education/Outreach Coordinator conducted the audit of all
Supplemental Nutrition Assistance Program (SNAP)-Education expenditures for
the identified health center and the center is being billed to recoup the
unallowable cost. These funds will be returned to the USDA for FY 2009 by
June 30, 2011.
49
STATE OF NORTH CAROLINA
14.228 COMMUNITY DEVELOPMENT BLOCK GRANTS / STATE’S PROGRAM AND NON-ENTITLEMENT
GRANTS IN HAWAII
III. Federal Award Findings and Questioned Costs
U.S. Department of Housing and Urban Development
N.C. Department of Commerce
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
10-SA-10 Reporting:
Significant
Deficiency
Deficiencies in Federal Reporting
For the Community Development Block Grant, the Department of Commerce
did not implement effective internal control procedures to ensure compliance
with the federal reporting requirements described in the OMB Circular A-133
Compliance Supplement. As a result, there is an increased risk that reports
submitted to the federal agency could be misstated.
During our test of the federal reports for the Community Development Block
Grant (CDBG) and the National Stabilization Program (NSP), we noted the
following deficiencies:
 The 2009 CDBG Annual Performance Report, Section 3 Summary Report,
was not submitted to the U.S. Department of Housing and Urban
Development (HUD) by March 31, 2010 in accordance with federal
requirements. It is the Department’s procedure to submit this annual report
in November, which according to HUD is an outdated reporting
requirement. The Department has not updated their procedures to comply
with changes in the federal reporting requirements that have been in place
for over a year.
 While testing documentation supporting the annual Section 3 Summary
Report, we reviewed a sample of 28 subrecipient Annual Performance
Reports and found that six did not agree to the information contained in the
2008 Minority Business Enterprise Report submitted to HUD. As a result,
not all activity was included in the annual report that was submitted to HUD.
Internal controls were not effectively implemented to ensure that the
information collected from the subrecipients was accurately documented by
the Division of Community Assistance in the Division’s subsystem (i.e. in
the Grants Management System (GMS)). For the six errors in our test, the
data submitted by the subrecipients were reviewed by Division staff for
reasonableness; however it was not accurately entered into GMS.
Therefore, the annual report to HUD, which is generated directly from GMS,
was incorrect.
 The reconciliation control that was designed to ensure the completeness
and accuracy of the NSP Quarterly Performance Report was not
consistently performed. The reconciliation was not performed for the fourth
quarter NSP Quarterly Performance Report until after the auditor inquired
about the procedure. Without the execution of proper control procedures,
there is an increased risk that inaccurate data could be accumulated and
not detected prior to submitting the report to HUD.
50
STATE OF NORTH CAROLINA
14.228 COMMUNITY DEVELOPMENT BLOCK GRANTS / STATE’S PROGRAM AND NON-ENTITLEMENT
GRANTS IN HAWAII (continued)
III. Federal Award Findings and Questioned Costs
U.S. Department of Housing and Urban Development
N.C. Department of Commerce
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
The OMB Circular A-133 Compliance Supplement requires recipients of federal
awards to have controls in place to ensure compliance with the following
reporting requirements: reports for federal awards are required to include all
activity of the reporting period, be supported by applicable records, and be fairly
presented in accordance with program requirements.
Federal Award Information: This finding affects the following:
 CFDA 14.228 Community Development Block Grant award
B-09-DC-37-0001 awarded January 1, 2009; award B-08-DC-37-0001
awarded January 1, 2008; award B-07-DC-37-0001 awarded
January 1, 2007; award B-06-DC-37-0001 awarded January 1, 2006;
award B-05-DJ-37-0001 awarded May 25, 2005; award
B-05-DC-37-0001 awarded January 1, 2005; award B-04-DC-37-0001
awarded January 1, 2004; award B-03-MC-37-0001 awarded
January 1, 2003; award B-02-DC-37-0001 awarded January 1, 2002;
award B-01-DC-37-0001 awarded January 1, 2001; award
B-00-DC-37-0001 awarded January 1, 2000; and
 CFDA 14.228 National Stabilization Program award B-08-DN-37-0001 for
the award period March 9, 2009 - March 9, 2013.
Recommendation: The Department should strengthen internal controls to
ensure reports are prepared in accordance with federal reporting requirements.
Agency Response: 13 of 14 sections of the 2009 Annual Performance Report
were submitted to U.S. HUD by the March 31, 2010 deadline as required. The
Section 3 Report has since been completed and submitted. All previous and
subsequent NSP Quarterly Performance Reports were reconciled. Due to office
relocation during this time period, the reconciliation occurred after submission.
As of this date, the NSP (Fourth) Quarterly Performance Report has been
reconciled and will be corrected in the subsequent quarterly submission per
recommendation by U.S. HUD staff. The division staff is in the process of
developing internal control procedures to ensure timely and accurate reporting
as required for both reports.
Anticipated Completion Date: July 1, 2011
51
STATE OF NORTH CAROLINA
14.228 COMMUNITY DEVELOPMENT BLOCK GRANTS / STATE’S PROGRAM AND NON-ENTITLEMENT
GRANTS IN HAWAII (CONTINUED)
III. Federal Award Findings and Questioned Costs
U.S. Department of Housing and Urban Development
N.C. Department of Commerce
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
10-SA-11 Subrecipient
Monitoring:
Significant
Deficiency
Subrecipient Monitoring Needs Improvement
For projects funded by the Community Development Block Grant, the
Department of Commerce did not establish adequate monitoring procedures to
ensure that the subrecipients were in compliance with all federal requirements.
As a result, there is an increased risk that noncompliance with federal
requirements could occur at the subrecipient level and not be detected by the
Department.
During our review of the Department’s on-site monitoring procedures and
inspection documentation, we noted the following deficiencies:
 The Department’s procedures do not include monitoring their subrecipients’
activities to ensure that the subrecipients are not entering into transactions
with suspended or debarred entities. Although the Department obtains a
certification from the subrecipients stating they are not contracting with or
making sub-awards to suspended or debarred parties, the Department does
not have effective procedures in place to ensure the subrecipients have
evidence to support this certification.
 The Department’s procedures do not include monitoring the subrecipients
for compliance with the requirements associated with equipment purchased
with federal funds. As a result, the Department did not ensure that
subrecipients maintained proper equipment records, safeguarded the
equipment, and properly maintained and disposed of the equipment.
The Department uses a monitoring tool to help ensure all federal compliance
requirements are covered. However, the monitoring tool prepared and used by
the Department did not include provisions to monitor subrecipients for the
suspension and debarment or equipment compliance requirements.
The OMB Circular A-133 Compliance Supplement states that subrecipients
should be monitored to provide reasonable assurance that the subrecipient
administers federal awards in compliance with laws, regulations, and the
provisions of contracts or grant agreements.
Federal Award Information: This finding affects CFDA 14.228 Community
Development Block Grant award B-10-DC-37-0001 awarded January 1, 2010;
award B-09-DC-37-0001 awarded January 1, 2009; award B-08-DC-37-0001
awarded January 1, 2008; and award B-07-DC-37-0001 awarded
January 1, 2007.
52
STATE OF NORTH CAROLINA
14.228 COMMUNITY DEVELOPMENT BLOCK GRANTS / STATE’S PROGRAM AND NON-ENTITLEMENT
GRANTS IN HAWAII (continued)
III. Federal Award Findings and Questioned Costs
U.S. Department of Housing and Urban Development
N.C. Department of Commerce
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
Recommendation: The Department should strengthen internal controls to
ensure all applicable federal compliance requirements are included in their
subrecipient monitoring procedures.
Agency Response: Suspension/debarment requirements are included in the
Grant Agreements (contracts) with division subrecipients. Additionally, division
staff conducts on-site monitoring of the contracts. There were no instances
where subrecipients entered into transactions with suspended or debarred
entities. The division has implemented the Auditor’s recommendation to include
additional provisions on the monitoring tool related to suspension and
debarment.
Requirements regarding equipment purchases using Federal funds are included
in the Grant Agreement (contract) and in 4 NCAC 19 L. There were no
instances found where regulations covering equipment purchases were
violated; and the division has incorporated the Auditor’s recommendation to
enhance the monitoring checklist related to equipment compliance.
Anticipated Completion Date: May 1, 2011.
10-SA-12 Special Tests and
Provisions:
Significant
Deficiency
Errors Noted in the Schedule of Expenditures of Federal Awards (SEFA)
The Department of Commerce did not prepare the Schedule of Expenditures of
Federal Awards (SEFA) in accordance with guidelines prescribed by OMB
Circular A-133. Errors in the SEFA reduce the usefulness of the report.
OMB Circular A-133 requires the reporting of all actual expenditures for the year
by federal program and separate identification of ARRA funds. During our
review of the Department’s SEFA, we noted the following deficiencies:
a. The expenditure amounts reported on the SEFA for the Workforce
Investment Act (WIA) Cluster were not supported by the expenditures
reported in the accounting records and were not properly reported on a
cash basis in accordance with state policy. The Department misstated the
total federal awards expended and the total amount provided to
subrecipients of the WIA Cluster. We found that the total federal awards
expended were misstated by $7.2 million and the total amount provided to
subrecipients were misstated by $7.6 million as follows:
 For the WIA Adult Programs, the federal awards expended from
ARRA were understated by $2 million and overstated by
$1.3 million for the regular grant. For the amounts provided to
53
STATE OF NORTH CAROLINA
14.228 COMMUNITY DEVELOPMENT BLOCK GRANTS / STATE’S PROGRAM AND NON-ENTITLEMENT
GRANTS IN HAWAII (continued)
III. Federal Award Findings and Questioned Costs
U.S. Department of Housing and Urban Development
N.C. Department of Commerce
For the Fiscal Year Ended June 30, 2010
Type of Finding/
Questioned Costs
Findings and Recommendations
subrecipients, the ARRA grant was understated by $1.9 million and
the regular grant was overstated by $992,000.
 For the WIA Youth Activities, the federal awards expended from
ARRA were understated by $933,000 and overstated by
$1.2 million for the regular grant. For the amounts provided to
subrecipients, the ARRA grant was understated by $809,700 and
the regular grant was overstated by $128,500.
 For the WIA Dislocated Workers, the federal awards expended from
ARRA were overstated by $4 million and overstated by
$2.1 million for the regular grant. For the amounts provided to
subrecipients, the ARRA grant was overstated by $4.2 million and
the regular grant was overstated by $3.4 million;
 In addition, the ARRA Health Coverage Tax Credit (HCTC) grant
was classified as part as the Workforce Investment Act Cluster in
CFDA 17.260 for ARRA WIA Dislocated Workers, thus overstating
the federal awards expended and amounts provided to
subrecipients from this grant by an additional $1.6 million. The
HCTC expenditures should be classified under CFDA 17.276 as
ARRA.
b. The amount reported on the SEFA for the Community Development Block
Grant (CDBG) program was not supported by the accounting records. The
total federal awards expended were understated by $1.4 million.
c. The amounts reported on the SEFA for the ARRA Weatherization
Assistance grant and the regular Weatherization Assistance grant were not
supported by the accounting records. The total federal awards expended
for the ARRA Weatherization Assistance grant were overstated by
$615,585. The total federal awards expended for the regular
Weatherization Assistance grant were understated by $1,000. The amount
provided to subrecipients for the regular Weatherization Assistance grant
was understated by $135,680.
d. In addition, the accounting subsystem for WIA was used to prepare the
SEFA for its applicable grants. This subsystem did not reconcile to the
North Carolina Accounting System (NCAS) by a net value of $4.9 million.
The Department was unable to identify and resolve the discrepancies, thus
increasing the risk of errors reported on the SEFA.
54
STATE OF NORTH CAROLINA
14.228 COMMUNITY DEVELOPMENT BLOCK GRANTS / STATE’S PROGRAM AND NON-ENTITLEMENT
GRANTS IN HAWAII (continued)
III. Feder