Finding 2009-1 Kansas Lottery (A Component Unit of the State of Kansas) Schedule of Prior Year Findings and Responses Year Ended June 30, 2010 Condition - The prior auditors' identified adjustments to the trial balance that were not initially identified by the Lottery's internal control structure. Recommendation - The prior auditors' recommended that the lottery review its trial balance at year end to ensure that all adjustments have been made. Current Status - Significant adjustment were made during the current year's audit. This finding is repeated in the current year as is included with finding 2010-1. Finding 2009-2 Condition - The Lottery was not able to reconcile the accounts receivable balance per the general ledger to the actual accounts receivable balance at year end. Recommendation - The prior auditors' recommended that the lottery reconcile its accounts receivable balance monthly to underlying support to ensure that the balance is appropriate and reflects the true balanceof accounts receivable. - Current Status - This finding is repeated in the current year and is included with finding 2010-1. 40 This is trial version www.adultpdf.com KANSAS LOTTERY (A COMPONENT UNIT OF THE STATE OF KANSAS) REQUIRED COMMUNICATIONS For the Year Ended June 30, 2010 This is trial version www.adultpdf.com Required Communications Kansas Lottery Required Communications For the Year Ended June 30, 2010 Table of Contents Listing of Uncorrected Misstatements Page Number 1-4 5 This is trial version www.adultpdf.com 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 December 27,2010 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. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards and Government Auditing Standards, as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our engagement letter to you dated March 13, 2010. Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Lottery are described in Note 1 to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during 2010. However, Lottery operations and financial reporting changed as a result of inclusion of Expanded Lottery activities which began in December 2009. We noted no transactions entered into by the Lottery during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the Lottery's financial statements were the actuarial assumptions and methods used by the actuary to prepare the annual actuarial valuation report related to the other postemployment healthcare benefits plan, the allowance for doubtful accounts, the estimate useful lives of capital assets, and prize liabilities. Difficulties Encountered in Performing the Audit We experienced some difficulties in dealing with management during the performance and completion of our audit. Specifically, we did not obtain full cooperation and support from the Lottery's management regarding our requests for information required to conduct our audit. The request included information which was directly related to the Expanded Lottery operations including oversight and monitoring of internal controls by the Kansas Racing and Gaming Commission (KRGC). We were informed by KRGC personnel that certain areas of concern in internal control were noted in connection with their monitoring activities. Accordingly, we believe that our requests for the above information were both ordinary and necessary. However, we were informed by Lottery management that the information requested was not required to conduct our audit. In addition, we view this information fundamental to subsequent audit periods as the Expanded Lottery continues to open new facilities. Lack of full cooperation from management of the Lottery led to increased difficulty in the completion and conduct of our engagement. 1 This is trial version www.adultpdf.com Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. The attached schedule summarizes uncorrected misstatements of the financial statements. Management has determined that their effects are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. The following material misstatements detected as a result of auditing procedures were corrected by management: ~ 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 liabilities 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. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditors' report. See previous comment noted in connection with "Difficulties Encountered in Performing the Audit" Management Representations We have requested certain representations from management that are included in the management representation letter dated December 27, 2010. 2 This is trial version www.adultpdf.com Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the governmental unit's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the governmental unit's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. In planning and performing our audit of the financial statements of the Kansas Lottery as of and for the year ended June 30, 2010, in accordance with auditing standards generally accepted in the United States of America, we considered the Lottery's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Lottery's internal control. Accordingly, we do not express an opinion on the effectiveness of the Lottery's internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be significant deficiencies or material weaknesses and therefore there can be no assurance that all such deficiencies have been identified. However, as discussed below, we identified certain deficiencies in internal control that we consider to be material weaknesses and other 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 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 our 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 and the related Schedule of Findings and Responses as item 2010-1 included at pages 37-38 in the Lottery's Financial Compliance and Audit Report for the Years Ended June 30, 2010 and 2009 to be a material weakness. 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 our 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 and the related Schedule of Findings and Responses as items 2010-2 and 2010-3 included at pages 38-39 in the Lottery's Financial Compliance and Audit Report for the Years ended June 30, 2010 and 2009 to be Significant deficiencies. 3 This is trial version www.adultpdf.com CONCLUSION Our audit procedures required us to obtain an understanding of controls over primary systems affecting the financial statement amounts. The Lottery may be able to benefit from additional, in-depth reviews of internal controls in other areas. We look forward to discussing opportunities to continue to assist the Lottery. 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 4 This is trial version www.adultpdf.com LISTING OF UNCORRECTED MISSTATEMENTS This is trial version www.adultpdf.com Kansas Lottery Listing of Uncorrected Misstatements June 30, 2010 Accounts and Description Accounts Receivable, net Net game revenues Adjust accounts receivable to reconciled balance 5 Amount DR. CR. $ 105,761 $ 105,761 This is trial version www.adultpdf.com . 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. Professional standards require. lottery reconcile its accounts receivable balance monthly to underlying support to ensure that the balance is appropriate and reflects the true balance of accounts receivable. - Current Status. Unit of the State of Kansas) Schedule of Prior Year Findings and Responses Year Ended June 30, 2010 Condition - The prior auditors' identified adjustments to the trial balance