38040-38041

HEALTH AND SAFETY CODE
SECTION 38040-38041




38040.  As used in this chapter:
   (a) "Financial and compliance audit" means a systematic review or
appraisal to determine each of the following:
   (1) Whether the financial statements of an audited organization
fairly present the financial position and the results of financial
operations in accordance with generally accepted accounting
principles.
   (2) Whether the organization has complied with laws and
regulations that may have a material effect upon the financial
statements.
   (b) "Public accountants" means certified public accountants, or
state licensed public accountants.
   (c) "Independent auditors" means public accountants who have no
direct or indirect relationship with the functions or activities
being audited or with the business conducted by any of the officials
or contractors being audited.
   (d) "Generally accepted auditing standards" means the auditing
standards set forth in the financial and compliance element of the
"Standards for Audit of Governmental Organizations, Programs,
Activities, and Functions" issued by the Comptroller General of the
United States and incorporating the audit standards of the American
Institute of Certified Public Accountants.
   (e) "Direct service contract" means any contract provided by a
state agency pursuant to Chapter 4 (commencing with Section 38030).
   (f) "Nonprofit organization" means an organization described in
Section 501(c)(3) of the Internal Revenue Code of 1986 that is exempt
from taxation under Section 501(a) of that code or any nonprofit,
scientific or educational organization qualified under Section 23701d
of the Revenue and Taxation Code.



38041.  (a) Annually, there shall be a single independent financial
and compliance audit of nonprofit organizations that contract with
the state under a direct service contract. Any such audit shall
include an evaluation of the accounting and control systems of the
direct service contractor and of the activities by the contractor to
comply with the financial requirements of direct service contracts
received by the contractor from the state agency. Audits carried out
pursuant to this section shall be audits of the contractor, rather
than audits of individual contracts or programs. In the case of any
contractor that receives less than twenty-five thousand dollars
($25,000) per year from any state agency, the audit required by this
section shall be conducted biennially, unless there is evidence of
fraud or other violation of state law in connection with the direct
service contract. The cost of such audit may be included in direct
service contracts up to the proportionate amount that the contract
represents of the contractor's total revenue.
   (b) A nonprofit organization shall have responsibility for
financial and compliance audits of the nonprofit organization and any
subcontractors. The audits shall be made by independent auditors in
accordance with generally accepted auditing standards. The audit
shall be completed by the 15th day of the fifth month following the
end of the contractor's fiscal year.
   (c) (1) Nothing in this chapter limits the authority of state
agencies to make audits of direct service contracts; provided,
however, that if independent audits arranged for by direct service
contractors meet generally accepted auditing standards state agencies
shall rely on those audits and any additional audit work shall build
upon the work already done.
   (2) The state is responsible for conducting, or contracting for
the conduct of, contract performance audits which are not financial
and compliance audits.
   (3) Nothing in this chapter limits the state's responsibility or
authority to enforce state law or regulations, procedures, or
reporting requirements arising pursuant thereto.