FINANCIAL AUDIT REPORT Kansas Lottery Fiscal Year 2010 _part1 pptx

FINANCIAL AUDIT REPORTKansas Lottery Fiscal Year 2010 A Report to the Legislative Post Audit Committee By Cochran Head Vick & Co., P.A., Under Contract with the Legislative Division of

FINANCIAL AUDIT REPORT

Kansas Lottery Fiscal Year 2010

A Report to the Legislative Post Audit Committee

By Cochran Head Vick & Co., P.A., Under Contract with

the Legislative Division of Post Audit

State of Kansas February 2011

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Legislative Post Audit Committee

Legislative Division of Post Audit

The Legislative Post Audit Committee and its

audit agency, the Legislative Division of Post Audit, are

the audit arm of Kansas government The programs

and activities of State government now cost about $10

billion a year As legislators and administrators try

increasingly to allocate tax dollars effectively and make

government work more efficiently, they need information

to evaluate the work of government agencies The audit

work performed by Legislative Post Audit helps provide

that information

We conduct our audit work in accordance with

applicable government auditing standards set forth by

the U S Government Accountability Office These

stan-dards pertain to the auditor’s professional qualifications,

the quality of the audit work, and the char acteristics of

professional and meaningful reports These audit

stan-dards have been endorsed by the American Institute of

Certified Public Accountants and adopted by the

Legisla-tive Post Audit Committee

The Legislative Post Audit Committee is a

bipartisan committee comprising five senators and

five representatives Of the Senate members, three

are appointed by the President of the Senate and two

are appointed by the Senate Minority Leader Of the

representatives, three are appointed by the Speaker of

the House and two are appointed by the House Minority

Leader

As part of its audit responsibilities, the Division

is charged with meet ing the requirements of the

Legisla-tive Post Audit Act which address audits of financial

matters Those requirements call for two major types of

audit work

First, the Act requires an annual audit of the

State’s financial statements Those statements,

pre-pared by the Department of Administration’s Division of

Ac counts and Reports, are audited by a certified public

accounting firm under contract with the Legislative

Divi-sion of Post Audit The firm is selected by the Contract

Audit Com mittee, which comprises three members of

the Legislative Post Audit Committee (including the

Chair man and Vice-Chairman), the Secretary of Adminis-tration, and the Legislative Post Auditor This audit work also meets the State’s audit responsibilities under the federal Single Audit Act

Second, the Act provides for a regular audit presence in every State agency by requiring that audit work be conducted at each agency at least once every three years Audit work done in addition to the annual financial statement audit focuses on compliance with le-gal and procedural requirements and on the adequacy of the audited agency ’s internal control procedures These compliance and control audits are conducted by the Division’s staff under the direction of the Legislative Post Audit Committee

The Legislative Division of Post Audit supports full access to the services of State government for all citizens Upon request, Legislative Post Audit can provide its audit reports in large print, audio, or other appropriate alternative format to accommodate persons with visual impairments Persons with hearing or speech disabilities may reach us through the Kansas Relay Center at 1-800-766-3777 Our office hours are 8:00 a.m to 5:00 p.m., Monday through Friday.

LEGISLATIVE POST AUDIT COMMITTEE

Representative John Grange, Chair Representative Tom Burroughs Representative Ann Mah Representative Peggy Mast Representative Virgil Peck Jr

Senator Mary Pilcher-Cook, Vice-Chair Senator Terry Bruce

Senator Anthony Hensley Senator Laura Kelly Senator Dwayne Umbarger

LEGISLATIVE DIVISION OF POST AUDIT

800 SW Jackson Suite 1200 Topeka, Kansas 66612-2212 Telephone (785) 296-3792 FAX (785) 296-4482 E-mail: LPA@lpa.ks.gov Website: http://www.kansas.gov/postaudit

Scott Frank, Legislative Post Auditor

HOW DO I GET AN AUDIT APPROVED?

By law, individual legislators, legislative committees, or the Governor may request an audit, but any audit work conducted by the Division must be approved by the Legislative Post Audit Committee, a 10-member committee that oversees the Division’s work Any legislator who would like to request an audit should contact the Division directly at (785) 296-3792.

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LegisLature of Kansas

L egisLative D ivision of P ost a uDit

800 S outhweSt J ackSon S treet , S uite 1200

t opeka , k anSaS 66612-2212

t elephone (785) 296-3792

F ax (785) 296-4482 e- mail : lpa@lpa.ks.gov

January 28, 2011

To: Members, Legislative Post Audit Committee

Representative John Grange, Chair

Representative Tom Burroughs

Representative Ann Mah

Representative Peggy Mast

Representative Virgil Peck Jr

Senator Mary Pilcher-Cook, Vice-Chair Senator Terry Bruce,

Senator Anthony Hensley Senator Laura Kelly Senator Dwayne Umbarger This report contains significant findings, conclusions, and recommendations from the

completed financial audit of the Kansas Lottery for fiscal year 2010 Cochran Head Vick & Co.,

P.A., a certified public accounting firm under contract with the Legislative Division of Post

Audit, conducted this audit

We would be happy to discuss these recommendations or any other items in the report

with any legislative committees, individual legislators, or other State officials

Scott Frank Legislative Post Auditor

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KANSAS LOTTERY

(A COMPONENT UNIT OF THE STATE OF KANSAS)

Financial and Compliance Audit Years Ended June 30, 2010 and 2009

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KANSAS LOTTERY (A COMPONENT UNIT OF THE STATE OF KANSAS)

Introduction

Financial and Compliance Audit Years Ended June 30,2010 and 2009

TABLE OF CONTENTS

Schedule of Findings and Recommendations

Independent Auditors' Report

Management's Discussion and Analysis

Financial Statements:

Balance Sheets

Statements of Revenues, Expenses, and Changes in Net Assets

Statements of Cash Flows

Notes to Financial Statements

Required Supplementary Information:

ii iii-iv 1-10

11

12

13 14-27

Schedule of Funding Progress - Health Insurance Post Employment Benefits 28 Other Supplementary Information:

Combining Statement of Revenues, Expenses, and Changes in Net Assets 30 Combining Statement of Cash Flows 31

Schedules of Revenues, Expenses, and Changes in Net Assets - Lottery 33 Schedules of Cash Flows - Lottery 34 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 35-36

Schedule of Findings and Responses 37-39 Schedule of Prior Year Findings and Responses 40

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KANSAS LOTTERY (A COMPONENT UNIT OF THE STATE OF KANSAS)

INTRODUCTION Year Ended June 30, 2010

The accompanying report represents the results of the financial and compliance audit of the operations of the Kansas Lottery (the Lottery) for the fiscal year ended June 30, 2010

The Lottery was created as an independent component unit of the State of Kansas to operate lottery games and manage expanded gaming operations The Lottery is administered by the Executive Director and the five members of the Lottery Commission appointed by the Governor The Lottery is an enterprise fund wherein the activities are financed and operated through user charges similar to a private business enterprise

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KANSAS LOTTERY (A COMPONENT UNIT OF THE STATE OF KANSAS)

SCHEDULE OF FINDINGS AND RECOMMENDATIONS

Year Ended June 30, 2010

A SUMMARY OF AUDIT RESULTS

1 The auditors' report expresses an unqualified opinion on the financial

statements of the Kansas Lottery

2 Material weaknesses and significant deficiencies related to the audit of the financial statements are reported in the Report on Internal Controls Over Financial Reporting and on Compliance and Other Matters Based on an Audit

of Financial Statements Preformed in Accordance with Governmental Auditing

Standards

3 No instances of noncompliance material to the financial statements of the Kansas Lottery were disclosed during the audit

B FINDINGS - FINANCIAL STATEMENT AUDIT

See Schedule of Findings and Responses

C PRIOR YEAR FINDINGS

See Schedule of Prior Year Findings and Responses

ii

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COCHRAN HEAD VICK & CO., P.A

& Co

1333 Meadowlark Lane

Kansas City, KS 66102

(913) 287-4433

(913) 287-0010 FAX

Other Offices

1251 NW Briarcliff Pkwy

Suite 125

Kansas City, MO 64116

(816) 453·7014

(816) 453·7016 FAX

400 Jules Street

Suite 415

St, Joseph, MO 64501

(816) 364-1118

(816) 364-6144 FAX

6700 Antioch Rd, Suite 460

Merriam, Kansas 66204

(913) 378·1100

(913) 378·1177 FAX

Certified Public Accountants

INDEPENDENT AUDITORS' REPORT

Legislative Post Audit Committee Kansas State Legislature:

We have audited the accompanying financial statements of the Kansas Lottery (the Lottery), a component unit of the State of Kansas, as of and for the year ended June 30, 2010, as listed in the table of contents These financial statements are the responsibility of the Lottery's management Our responsibility

is to express an opinion on these financial statements based on our audit The financial statements of the Lottery as of June 30, 2009, were audited by other auditors whose report dated December 11, 2009 expressed an unqualified opinion on those statements

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 Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation We believe that our audit provides a reasonable basis for our opinion

As discussed in Note 1, the financial statements present only the Kansas Lottery and do not purport to, and do not, present fairly the financial position of the State

of Kansas as of June 30, 2010, and the changes in its financial position, or, where applicable, its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Kansas Lottery, as of June 30,

2010, and the changes in financial position and cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America

In accordance with Government Auditing Standards, we have also issued our report dated December 27, 2010, on our consideration of the Lottery's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting

or on compliance That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit

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Accounting principles generally accepted in the United States of America require that management's discussion and analysis and the schedule of funding progress as listed in the table

of contents be presented to supplement the financial statements Such information, although not

a part of the financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the financial statements

in an appropriate operational, economic, or historical context We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the financial statements, and other knowledge we obtained during our audit of the financial statements We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance

Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Lottery's financial statements as a whole The combining financial statements and schedules are presented for purposes of additional analysis and are not a required part of the financial statements The combining financial statements and schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the financial statements The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole

December 27,2010

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KANSAS LOTTERY

MANAGEMENT'S DISCUSSION AND ANALYSIS YEARS ENDED JUNE 30, 2010 AND 2009

The following management's discussion and analysis (MD&A) provides a general overview

of the Kansas Lottery's (the Lottery) financial performance and financial activities for the fiscal years ended June 30, 2010 and 2009 We encourage readers to consider this information in conjunction with the Lottery's financial statements and notes, which follow the MD&A The financial statements reflect only the activities of the Kansas Lottery, which

is a component unit of the State of Kansas

Fiscal Year Financial Highlights

• Online and instant Lottery sales for fiscal year 2010 were $235.4 million reflecting an increase of $4.9 million or 2.1 % compared to fiscal year 2009 The addition of two new online games, the Mega Millions (a Multi-State Lottery (MUSL) game) and the Holiday Raffle game contributed to the increase in sales over the prior year

• In Mid-December 2009, the State's first casino, the Boot Hill Casino and Resort was opened The Lottery is responsible for distributing the net revenues of the casino in accordance with the Expanded Lottery Act For 2010, Expanded Lottery net revenues

activities were made to the State General Fund

an increase of $0.5 million over 2009

Using this Financial Report

This report consists of a series of financial statements and reflects the self-supporting activities of the Kansas Lottery The Balance Sheets provide information about the Lottery's assets and liabilities and reflect the Lottery's financial position as of June 30, 2010 and 2009 The Statements of Revenues, Expenses and Changes in Net Assets report the activities of selling online and instant lottery tickets for the 12-month periods ended June 30, 2010 and

2009, as well as the Expanded Lottery casino gaming activities for the 7 months ended June

30, 2010 Lastly, the Statements of Cash Flows reflect the cash inflows and outflows attributed to the sales of lottery tickets for the same 12-month periods, as well as the cash inflows and outflows of the Expanded Lottery casino activity for the 7 months ended June 30,2010

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