SECTIONS 38040-38041

38040.  As used in this chapter: (a) "Financial and compliance audit" means a systematic review orappraisal to determine each of the following: (1) Whether the financial statements of an audited organizationfairly present the financial position and the results of financialoperations in accordance with generally accepted accountingprinciples. (2) Whether the organization has complied with laws andregulations that may have a material effect upon the financialstatements. (b) "Public accountants" means certified public accountants, orstate licensed public accountants. (c) "Independent auditors" means public accountants who have nodirect or indirect relationship with the functions or activitiesbeing audited or with the business conducted by any of the officialsor contractors being audited. (d) "Generally accepted auditing standards" means the auditingstandards 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 theUnited States and incorporating the audit standards of the AmericanInstitute of Certified Public Accountants. (e) "Direct service contract" means any contract provided by astate agency pursuant to Chapter 4 (commencing with Section 38030). (f) "Nonprofit organization" means an organization described inSection 501(c)(3) of the Internal Revenue Code of 1986 that is exemptfrom taxation under Section 501(a) of that code or any nonprofit,scientific or educational organization qualified under Section 23701dof the Revenue and Taxation Code.38041.  (a) Annually, there shall be a single independent financialand compliance audit of nonprofit organizations that contract withthe state under a direct service contract. Any such audit shallinclude an evaluation of the accounting and control systems of thedirect service contractor and of the activities by the contractor tocomply with the financial requirements of direct service contractsreceived by the contractor from the state agency. Audits carried outpursuant to this section shall be audits of the contractor, ratherthan audits of individual contracts or programs. In the case of anycontractor that receives less than twenty-five thousand dollars($25,000) per year from any state agency, the audit required by thissection shall be conducted biennially, unless there is evidence offraud or other violation of state law in connection with the directservice contract. The cost of such audit may be included in directservice contracts up to the proportionate amount that the contractrepresents of the contractor's total revenue. (b) A nonprofit organization shall have responsibility forfinancial and compliance audits of the nonprofit organization and anysubcontractors. The audits shall be made by independent auditors inaccordance with generally accepted auditing standards. The auditshall be completed by the 15th day of the fifth month following theend of the contractor's fiscal year. (c) (1) Nothing in this chapter limits the authority of stateagencies to make audits of direct service contracts; provided,however, that if independent audits arranged for by direct servicecontractors meet generally accepted auditing standards state agenciesshall rely on those audits and any additional audit work shall buildupon the work already done. (2) The state is responsible for conducting, or contracting forthe conduct of, contract performance audits which are not financialand compliance audits. (3) Nothing in this chapter limits the state's responsibility orauthority to enforce state law or regulations, procedures, orreporting requirements arising pursuant thereto.