A-21 TERMS AND CONCEPTS
In almost any audit involving proposed or actual costs, whether direct or indirect, auditors will be looking for evidence to answer these questions:
- Are the costs allowable?
- Are they allocable?
- Are they reasonable?
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- 1. ALLOWABILITY
- Allowability for costs related to government-funded sponsored projects is determined by the provisions of the governing sponsored agreement, or by cost principles established by the federal government in OMB Circular A-21. For example, A-21 defines certain types of expenses, e.g., alcohol,
lobbying, or entertainment, as categorically unallowable. Other costs may be unallowable per the specific terms of an award, e.g., unapproved foreign travel, patient care, or administrative costs. These types of expenses are therefore, by definition, unallowable. Auditors are always alert to the possibility that unallowable costs might have been charged, and may devote considerable energies to testing specific transactions to see if they fall into an unallowable category.
A reminder about allowability: A cost which is unallowable for a sponsored project may be an appropriate expense for Stanford University. For example, fund-raising is a very appropriate Stanford activity. Fund-raising expenses, however, are unallowable, i.e., they may not be charged to the government directly or indirectly.
- 2. ALLOCABILITY
- An expense is allocable to a project if the material or service being charged benefits that project. Allocability is not the same as allowability; an otherwise allowable cost, e.g., salary or travel, may be unallocable to a particular account if the project supported by that account did not benefit from the cost. Note that a cost can be allocable to a project or activity as either a direct or an indirect cost, depending on whether the cost can be specifically identified to the project or activity.
- 3. REASONABLENESS
- Reasonableness is a subjective quality that requires application of the "prudent person" test. An auditor may legitimately question a cost that is clearly allocable and not otherwise unallowable if, in the auditor's judgment, the cost exceeds what a reasonable
person would have paid in similar circumstances.
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