Internal Audits

1. Internal Audits Presentation to California State Lottery CommissionApril 26, 2012 Director’s Report 6e

2. Overview • Mission and Purpose • Role and Objectivity • Organization and Independence • Sample Audits/Reviews • Audit Committee • Mandated External Audits • Other Activities

3. Mission and Purpose • Internal Audits is an independent, objective assurance and consulting activity designed to add value and improve Lottery operations ensuring games are fair, honest and secure. • Internal audit activities are in accordance with the International Standards for the Professional Practice of Internal Auditing. • Lottery management, Audit Committee, Lottery Commission, other regulatory agencies and the public rely on activities performed by Internal Audits.

4. Role and Objectivity • Internal Audits does not exercise authority over the organization or develop and implement policies and procedures. • Internal Audits is free to review and appraise policies, plans, procedures, and other internal controls in any area of the Lottery, and to report audit findings and recommendations. • However, Internal Audits does not relieve management of its assigned responsibilities.

5. Organization and Independence • The chief of Internal Audits reports to the Director, Audit Committee and the California Lottery Commission; ensuring independence essential to the effectiveness of internal auditing. • Internal Audits is composed of seven positions; • Audit Chief • Audit Manager • Four Auditors • One Office technician • Several contract auditors/consultants

6. Sample Audits/Reviews • Camelot Contract • Asset Management • Confidential Funds • Scratcher Ticket Activation • FISMA 2011 • Travel Program • Gamo Petty Cash Fund • Website Incident • Special Event Retailers – Control Considerations • Retailers Reimbursements

7. Audit Committee • Audit Committee was established in January 2009. • Composed of three members appointed by the Lottery Commission. • The goal of the Audit Committee is to ensure audits are conducted in an ethical, professional, and efficient manner to protect the people of the State of California. • Audit Committee reviews all internal and external audit reports and approves the annual Internal Audit Plan.

8. Mandated External Audits • The State Controller’s Office (SCO). They perform audits of the Lottery on a continuous basis. • Annual Financial Statement Audit. This audit is due in October of each year and is performed by a CPA firm hired by the Lottery. • Daily Draw Observations. The Lottery Act requires that all Lottery drawings (except Hotspot) be witnessed by an independent contractor hired by the Lottery. • Security Review of Lottery Operations. On a biennial basis, the Lottery’s operations are reviewed by and independent contractor hired by the Lottery.

9. Other Activities • Statistical Analysis of Lottery Games • Ball Weighing Certifications • Draw Equipment Certifications • Validation Audits of Scratchers Games • Security Audits of Scratcher Printer Vendors • Public Website Review • External Audit Coordination and Response • Mega Millions Agreed Upon Procedures • Governance Committees

10. The End Questions?