Internal Control Over Financial Reporting In planning and performing our audit, we considered the Lottery's internal control over financial reporting as a basis for designing our auditin
Trang 1(A COMPONENT UNIT OF THE STATE OF KANSAS) COMBINING STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS
YEAR ENDED JUNE 30, 2010
Kansas Lottery
Operating revenues:
Total operating revenues 236,846,653 21,647,459 258,494,112 Operating expenses:
Total operating expenses 166,027,528 17,914,664 183,942,192
Nonoperating revenues (expenses):
Transfers to the State Gaming
Transfers to the State General Fund (26,898) (4,546,077) (4,572,975)
Total nonoperating revenues (expenses) (67,914,654} (4,959,357) (72,874,011) Income (loss) before contributions 2,904,471 (1,226,562) 1,677,909
Net assets, end of year $ 6,035,594 $ 7,889,090 $ 13,924,684
** Expanded Lottery operations reflect only the operations from
opening date in December 2009 through June 30,2010
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Trang 2(A COMPONENT UNIT OF THE STATE OF KANSAS) COMBINING STATEMENT OF CASH FLOWS YEAR ENDED JUNE 30, 2010
Kansas Lottery
Cash flows from operating activities:
Cash received from sales and reimbursements $ 236,242,999 $ 21,566,118 $ 257,809,117 Cash paid for prizes, commissions, and other expenses (161,763,430) (15,523,835) (177,287,265)
Net cash provided by operating activities 70,038,790 5,610,839 75,649,629 Cash flows from non capital financing activities:
Net cash used by non capital financing activities (69,026,898) (4,891,660) (73,918,558) Cash flows from capital and related financing activities:
Net cash used by capital and related financing
Reconciliation of operating income to net cash
provided by operating activities:
Adjustments to reconcile operating income to net cash
provided by operating activities:
Changes in operating assets and liabilities:
Accounts payable and accrued liabilities 142,254 732,823 875,077
Net cash provided by operating activities $ 70,038,790 $ 5,610,839 $ 75,649,629
Noncash capital and related financing activities:
** Expanded Lottery operations reflect only the operations from
opening date in December 2009 through June 30,2010
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Trang 3(A COMPONENT UNIT OF THE STATE OF KANSAS)
BALANCE SHEETS - LOTTERY JUNE 30, 2010 AND 2009
Lottery
2010 ASSETS
Current Assets:
Cash:
Accounts receivable, net of allowance for
doubtful accounts of $618,583 and $480,163
Capital assets, net of depreciation:
2009
3,944,668 991,212
2,912,262 5,748,353 212,576 2,008,267 15,817,338
464,742
LIABILITIES AND NET ASSETS
Current liabilities:
Net assets:
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Trang 4(A COMPONENT UNIT OF THE STATE OF KANSAS) SCHEDULES OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS - LOTTERY YEARS ENDED JUNE 30, 2010 AND 2009
Operating revenues:
Net game revenues
Phone reimbursements
Retailer fees and miscellaneous income
Total operating revenues
Operating expenses:
Game prizes
Retailer commissions
On-line games service bureau
Salaries and benefits
Cost of instant tickets
Advertising
Other administrative expense
Telecommunications
Professional services
Depreciation
Total operating expenses
Operating income
Nonoperating revenues (expenses):
Transfers to the State Gaming
Revenue Fund
Transfers to the State General Fund
Write-off and adjustment of capital assets
Total nonoperating revenues (expenses)
Change in net assets
Net assets, beginning of year
Net assets, end of year
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Lottery
2010
951,265 481,220 236,846,653
132,609,974 13,670,875 5,611,400 4,440,779 3,819,565 2,935,830 2,464,705 183,950 168,032 122,418 166,027,528 70,819,125
(67,750,000) (26,898) (137,756) (67,914,654) 2,904,471 3,131,123
2009
941,450 691,759 232,138,877
130,911,165 13,446,468 5,327,748 4,227,749 4,814,812 3,317,511 2,352,474 130,233 387,557 132,178 165,047,895 67,090,982
(67,250,000) (937,612)
(68,187,612) (1,096,630) 4,227,753
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Trang 5(A COMPONENT UNIT OF THE STATE OF KANSAS) SCHEDULES OF CASH FLOWS - LOTTERY YEARS ENDED JUNE 30, 2010 AND 2009
Lottery
Cash flows from operating activities:
Cash received from sales and reimbursements $ 236,242,999 $ 232,991,850 Cash paid for prizes, commissions, and other expenses (161,763,430) (160,280,453)
Net cash provided by operating activities 70,038,790 67,910,839 Cash flows from noncapital financing activities:
Payments to State Gaming Revenue Fund (69,000,000) (67,500,000)
Net cash used by noncapital financing activities (69,026,898) (68,437,612) Cash flows from capital and related financing activities:
Net cash used by capital and related financing
Reconciliation of operating income to net cash
provided by operating activities:
Adjustments to reconcile operating income to net cash
provided by operating activities:
Changes in operating assets and liabilities:
Accounts payable and accrued liabilities 142,254 (738,428)
Net cash provided by operating activities $ 70,038,790 $ 67,910,839
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Trang 6- & 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
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
Legislative Post Audit Committee Kansas State Legislature:
We have audited the 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, and have issued our report thereon dated December 27, 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
Internal Control Over Financial Reporting
In planning and performing our audit, we considered the Lottery's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Lottery's internal control over financial reporting Accordingly, we do not express an opinion on the effectiveness of the Lottery's internal control over financial reporting
Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting 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 described in the accompanying schedule of findings and responses, we identified certain deficiencies in internal control over financial reporting that we consider to be material weaknesses and deficiencies that we consider to be significant deficiencies
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 We consider the deficiencies described in the accompanying Schedule of Findings and Responses as item 2010-1 to be material weaknesses
A significant deficiency is 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 We consider the deficiencies described in accompanying Schedule of Findings and Responses as items 2010-2 and 2010-3 to be significant deficiencies
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Trang 7As part of obtaining reasonable assurance about whether the Lottery'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 no instances of noncompliance or other matters that are required to be reported under
Government Auditing standards
We noted certain matters that we reported to management of the Lottery, in a separate letter dated December 27,2010
The Lottery's responses to the findings identified in our audit are described in the accompanying schedule of findings and responses We did not audit the Lottery's responses and, accordingly, we express no opinion on them
This information is intended solely for the use of the Legislative Post Audit Committee, Kansas Lottery Commission and management of the Kansas Lottery and is not intended to be and should not be used by anyone other than these specified parties
December 27, 2010
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Trang 8(A Component Unit of the State of Kansas) Schedule of Findings and Responses Year Ended June 30, 2010
Finding 2010-1 - Material Weaknesses
Financial Statement Preparation
Condition - Under our professional standards, we are required to assess the Lottery's controls over financial statement preparation including assessing the controls necessary to prevent, detect, and correct a material misstatement As part of our audit, management requested us to prepare a draft of the Lottery's financial statements and the related notes Management reviewed, approved, and accepted responsibility for those statements prior to their issuance The outsourcing of these services is not unusual; however, we cannot be considered part of the Lottery's internal control over financial reporting Our audit procedures identified certain financial statement misstatements which required adjustment in order to accurately report the Lottery's financial information and to agree balances to the underlying supporting documentation provided to us These adjustments included the following:
> An adjustment was required to record electronic gaming machines contributed to the Expanded Lottery for the Boot Hill Casino & Resort operations totaling $9,115,652 The related accumulated depreciation of the machines totaling $1,226,562 was also required
> An adjustment was required to write-off certain capital assets no longer in use and agree amounts recorded on the Lottery's books of account to physical inventory records as of June 30, 2010 The reduction to gross capital assets was $2,873,628, offset by an adjustment to reduce accumulated depreciation of $2,735,872, with the difference of $137,756 reflected as a decrease of operating income
> Adjustments were required to account for Expanded Lottery activities including adjustments to cash, accounts receivable and accounts payable to correct accounting errors The net impact of these entries was an increase to liabilities by $436,719, an increase to revenues of $183,309, and an increase to expenses of $620,028
> An adjustment was made to correct year-end accounts payable which resulted in an increase to accounts payable of $376,834, an increase in retailer fees of $39,883, and an increase in expenses totaling $416,716
> An adjustment was made to record an additional prize liability primarily related to unpaid taxes resulting in an increase to liabil ities and game prize expense of $497,158
> An adjustment was made to capital assets to expense items erroneously capitalized resulting in a decrease in capital assets of $220,746, a decrease in depreciation expense of $27,302, and an increase in supplies expense of $248,048
> An Adjustment was made to correct an error in operating cash balance resulting in an increase in cash and income of $196,386
> An adjustment was made to the instant ticket inventory to correct year-end purchase cutoff The net impact of this entry resulted in an increase to instant ticket inventory and accounts payable of
$166,130
Criteria - A system of internal control over financial reporting includes controls over financial statement preparation, including footnote disclosures and includes identifying and correcting misstatements and reconciling account balances to the underlying supporting documents
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Trang 9or detect a misstatement in the financial statements We noted that for many of the accounts associated with the corrected misstatements, the Lottery only performs a reconciliation of the balance on an annual basis
Effect -The financial statements may be materially misstated and/or not contain all required disclosures
Recommendation - We recommend that management review processes for making year-end closing entries and reviewing account balances to ensure that accounts agree to reconciliations and underlying supporting documentation We also recommend that management perform more frequent reconciliations for significant accounts, in particular the Lottery's cash accounts and accounts receivable Performing more frequent reconciliations will allow staff to more easily identify differences as they occur, and quickly make adjusting entries to correct if necessary In addition, due to the complexities of financial statement reporting including inclusion of required disclosures, we recommend that management explore various alternatives to improving the controls over financial reporting including the use of continuing education and training courses and the use of reference guides provided by the Government Finance Officers Association, (GFOA), the American Institute of Certified Public Accountants, (AICPA), the Governmental Accounting Standards Board (GASB) and other various financial publishing companies
Management's Response (Unaudited)-The last few years the prior auditors prepared the final statements and updated the footnotes When the new auditors came in they mentioned that the prior auditors had completed these tasks, and they suggested that they could update them also In the future we will not take their offer Preparing the financial pages and footnotes is not a problem for us They asked for a trial balance, which was provided Also provided to them was the format that we wished the financials to be presented They chose a different format
The cash balance and other accounts were reconciled daily in the Accounts & Reports system STARS, and they are also monitored daily in the new system SMART The accounts were not reconciled often in our accounting software package The new SMART management system is posted directly from the vouchers and deposits Thus our daily review of the cash balance and other accounts is being completed on a daily basis
Finding 2010-2 - Significant Deficiency
Journal Entry Preparation and Approval
Condition -We noted that journal entries are not formally reviewed and approved prior to being entered into the general ledger Additionally, we noted there is no formal process for documenting journal entries and the related support
Criteria - A system of internal controls over financial reporting includes the formal review and approval of journal entries
Cause - The Lottery does not have policies and procedures that require formal supervisory review and approval of all journal entries
Effect -The financial statements may be materially misstated
Recommendation -We recommend that management review and revise current poliCies and procedures to require formal supervisory review and approval of all journal entries While we did not note any journal entries that were not adequately supported during our testing, we believe that formalization of this process would greatly strengthen internal controls over financial reporting To accomplish this, we recommend that management consider developing a standard form to use for all journal entries Such a form should document what accounts the entry is posted to and who prepared, posted, and approved each entry Supporting documentation could then be attached to each form to clearly document that all journal entries are accurate and are properly reviewed and approved
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Trang 10In our old accounting package, journal entries were for routine entries The entry format has been reviewed
by supervisors and used regularly therefore each entry did not accompany a reviewer sign-off There is supporting documentation for the entry In our current environment most reports and paperwork is electronic
in spreadsheets or scanned in PDF or TIF, and can be located rapidly for review The new SMART system requires several levels of approval for all transactions, electronically recorded
Finding 2010-3 - Significant Deficiency
Expanded Lottery Monitoring
Condition - In accordance with the Kansas Lottery Act (the Act), the Lottery is responsible for the collection and distribution of Expanded Lottery revenues, and is responsible for the operations of the gaming facilities
in accordance with the Act The Kansas Racing and Gaming Commission (KRGC) is responsible for the regulatory compliance with the Act of the facility manager including but not limited to oversight of internal controls We understand that certain reports related to internal control activities either prepared by KRGC or the gaming facility's internal audit department were not requested by or provided to Lottery management
We have also been informed that certain required gaming facility manager's internal audit reports are behind schedule
Recommendation - We recommend that Lottery management obtain and review all internal control related reports prepared by either the KRGC or the gaming facility's internal audit department to evaluate and monitor any process or control changes related to significant findings or recommendations contained in the reports
Management's Response (unaudited)
The Lottery staff, the casino staff, and the Kansas Racing and Gaming Commission (KRGC) staff work closely in regard to daily internal controls at the casino We are advised on only major changes in KRGC policies and procedure KRGC has the regulatory duties at the casinos and a strict separation of duties from the Lottery's ownership The relationship in regard to reports will be reviewed before the next year's audit
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