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LAWFUL GAMBLING FUND OF

CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )

REGULATORY BASIS FINANCIAL STATEMENTS


AND SUPPLEMENTARY INFORMATION

YEARS ENDED DECEMBER 31, 2013 AND 2012


LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
TABLE OF CONTENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012

INDEPENDENT AUDITORS' REPORT 1

FINANCIAL STATEMENTS

STATEMENTS OF ASSETS, LIABILITIES AND PROFIT CARRYOVER


REGULATORY BASIS 2

STATEMENTS OF REVENUES, EXPENSE AND CHANGES IN PROFIT


CARRYOVER - REGULATORY BASIS 3

NOTES TO FINANCIAL STATEMENTS 4

INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY


INFORMATION 10

SUPPLEMENTARY INFORMATION

RECONCILIATION OF GAMES USED REGULATORY BASIS 11

ANALYSIS OF MAXIMUM ALLOWABLE EXPENSES REGULATORY BASIS


12

RECONCILIATION OF PROFIT CARRYOVER REGULATORY BASIS 13

REPORT ON REGULATORY CHECKLIST QUESTIONNAIRE 14

REGULATORY CHECKLIST QUESTIONNAIRE 15

REPORT ON INTERNAL CONTROL 16

YOUR FIRM NAME 20


INDEPENDENT AUDITORS' REPORT

Board of Directors and Members


CLIENT NAME
City, State

We have audited the accompanying financial statements of Lawful Gambling Fund of XYZ
Organization, which comprise the statements of assets, liabilities and profit carryover regulatory
basis as of December 31, 2013 and 2012, and the related statements of revenues, expenses and
changes in profit carryover regulatory basis for the years then ended, and the related notes to the
financial statements.

Management's Responsibility for the Financial Statements


Management is responsible for the preparation and fair presentation of these financial statements in
accordance with the regulatory basis of accounting as described in Note 1; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation
of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditors judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity's
preparation and fair presentation of the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall presentation
of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.

(1)
Board of Directors and Members
CLIENT NAME

Basis for Qualified Opinion


The Organization has eliminated inventory and began reporting costs of sales on the cash basis to
conform to the monthly tax and informational filings. The regulatory basis of accounting is based on
Minnesota Rule 8122 which has not been updated for changes in the monthly tax filings and
continues to require the recording of inventory and costs of games on the accrual basis. The effects
on the financial statements of converting to the cash basis for costs of games have not been
determined.

In addition, the Organization sells electronic pull-tabs. The distributor of these games electronically
calculates the fees, receipts and prizes paid as a service organization. We were unable to obtain
sufficient appropriate audit evidence to ensure the accuracy of the data provided by the service
organization.

Qualified Opinion
In our opinion, except for the effects of converting to the cash basis for costs of games in 2012 and
the possible effects of relying on the service organization for electronic pull-tabs, the financial
statements referred to above present fairly, in all material respects, the financial position of the Lawful
Gambling Fund of XYZ Organization as of December 31, 2013 and 2012, and the results of its
operations for the year then ended in accordance with the regulatory basis of accounting described in
Note 1.

Basis of Accounting
We draw attention to Note 1 of the financial statements, which describes the basis of accounting. The
financial statements are prepared on the regulatory basis of accounting, which is a basis of
accounting other than accounting principles generally accepted in the United States of America. Our
opinion is not modified with respect to this matter.

Emphasis of Matter
As Discussed in Note 1 to the financial statements, the entity has elected to change its method of
accounting for inventory. Our opinion is not modified with respect to this matter.

Restriction on Use

Our report is intended solely for the information and use of the board of directors, members and
management of the XYZ Organization and Minnesota Revenue and is not intended to be and should
not be used by anyone other than these specified parties.

YOUR FIRM
Minneapolis, Minnesota
REPORT DATE

Principal Auditor:

Address:

Telephone and Fax Numbers:

(2)
LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
STATEMENTS OF ASSETS, LIABILITIES AND PROFIT CARRYOVER
REGULATORY BASIS
DECEMBER 31, 2013 AND 2012

See accompanying Notes to Financial Statements.


(2)
LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
STATEMENTS OF REVENUES, EXPENSE AND CHANGES IN PROFIT CARRYOVER
REGULATORY BASIS
YEARS ENDED DECEMBER 31, 2013 AND 2012

See accompanying Notes to Financial Statements.


(3)
LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Organization
Beginning in ________, the Organization commenced lawful gambling. The Organization
currently has _______ permitted gambling operation site(s) to increase its program
services and thereby better serve the Community. The Organization has a charitable
gambling license. The forms of gambling conducted by the Organization during 2013 and
2012 included pull-tab, electronic pull-tabs, tipboard, bingo, electronic linked bingo, raffle,
and paddlewheel games. Revenues in excess of allowable expenses generated by the
Lawful Gambling Fund can only be used for lawful purposes and board approved
expenditures as defined by Minnesota statutes.

Basis of Presentation
The regulatory basis of accounting is the basis of accounting prescribed by the State of
Minnesota, which is a comprehensive basis of accounting other than U.S. generally
accepted accounting principles. The regulatory basis of accounting differs from the accrual
method of accounting in that under the regulatory method, substantially all costs other
than state gambling taxes payable are expensed when paid. Under the regulatory method,
these state gambling taxes are expensed when paid. Also, under the regulatory method,
the cost of equipment is expensed, whereas under U.S. generally accepted accounting
principles, such expenditures are capitalized and depreciated over the assets estimated
useful life.

Use of Estimates
The preparation of financial statements in conformity with the regulatory basis of
accounting requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.

Cash - Starting Game Banks


Starting game banks consist of imprest amounts which are used to fund open play of
games.

Prepaid Gaming Prizes


Prepaid gaming prizes represent amounts paid for non-cash prizes that have not yet been
awarded.

(4)
LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Inventories
Effective January 1, 2012, the Organization changed its method of accounting for
inventory to the cash basis and are expensed when paid. Inventory, net of vendor payable
at December 31, 2011 at $_______ has been accounted for as a cumulative adjustment to
profit carryover.

Due from General Fund


Due from general fund represents excess cash shortages required to be reimbursed by
the general fund.

Deferred Fund Losses


Deferred fund losses represent significant fund losses requiring Gambling Control Board
approval prior to deduction.

Electronic Pull-Tabs
During 2013, the Organization began selling electronic pull-tabs. The Organization
maintains a single starting cash bank for the electronic pull-tabs. At the end of each
session, the net receipts in excess of the starting bank are deposited. Net disbursements
are carried over and occasionally reimbursed. A report is provided by the distributor of the
electronic pull-tabs which includes the expected net receipts or disbursements for the
games played. Cash long and short is allocated to games played during the session.

At the end of each month a report is provided by the distributor which calculates the rental
and games fees.

Bingo Receipts
Gross receipts represent amounts collected from customers net of bingo coupons and
discounts.

Progressive Tipboard
The Organization has submitted a $50 fee to the Minnesota Gambling Control Board to
receive a waiver to discontinue playing progressive tipboards.

Raffle Receipts
Raffle receipts and the related prizes are reported in the period the raffle is conducted.

Subsequent Events
In preparing these financial statements, the Company has evaluated events and
transactions for potential recognition or disclosure through [Insert date], the date the
financial statements were available to be issued.

(5)
LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012

NOTE 2 INVENTORIES

The Organization expenses the cost of game purchases, including sales tax, on the cash
basis. In addition, the Organization maintains a perpetual inventory of games on hand.
These games are extend at cost excluding sales tax and consist of the following at
December 31, 2013 and 2012.

NOTE 3 COMMITMENTS AND CONTINGENCIES

The Organization leases space for the site(s) of its lawful gambling activities within the City
of _________. The lease agreement(s) require $________ per month rent and can be
terminated by either party with a (30)-day notice. Rent expense for the years ended
December 31, 2013 and 2012 was $________ and $_______, respectively.

The Organization also leases electronic gaming devices. The lease payments are based
on a percentage of sales and can be terminated by either party with a (30)-day notice.
Rent expense for the year ended December 31, 2013 was $_______.

NOTE 4 INCOME TAXES

The Organization is exempt from state and federal income taxes under Section 501(c)( )
of the Internal Revenue Code. However, the Organization is required to pay state and
federal income taxes on unrelated business income. Under the regulatory method, income
taxes are recognized when paid. At December 31, 2013, the Organization had net
operating loss carry forwards available to reduce future unrelated business income taxes
of $X,XXX which begin to expire in 20XX.

The Organization has not been audited by the Internal Revenue Service or Minnesota
Revenue, and accordingly the unrelated business income tax returns for the past three
and one-half years are open to examination.

(6)
LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012

NOTE 5 BOARD APPROVED EXPENDITURES

During 201X, the Gambling Control Board approved the monthly payment of a 20-year
mortgage by the Organization using gambling funds. The status of these approved
expenditures are as follows:

In addition, during 201X, the Gambling Control Board approved a theft loss of $_______.

NOTE 6 RESULTS OF GAME TESTING

Subsequent to year-end, the Organization's independent auditors selected 20 pull-tab


games from all active sites, including games with unsold tickets, 10 tipboard games, 10
bingo sessions, and 10 paddlewheel games to be tested as part of their audit.

[Option #1:] No exceptions were noted during testing.

[Option #2:] No exceptions greater than $1 were noted.

[Option #3]: The exceptions of their testing, as reported to the Organization, are as
follows:

(7)
LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012

NOTE 6 RESULTS OF GAME TESTING (CONTINUED)

On January 1, 2014, the inventory of games was observed by the Organizations


independent accountants [two members, officers, or employees of the Organization not
directly involved in the Organizations gambling activities who have been appointed by the
Organizations board]. No exceptions in the Organizations perpetual inventory records
were noted. In addition, cash on hand of $________ was counted.

For the year ended December 31, 2013, Site 001 has progressive tipboard accumulated
jackpot prizes in the amount of $500, Site 003 has progressive tipboard accumulated
jackpot prizes in the amount of $1,000.

NOTE 7 RELATED PARTY TRANSACTIONS

During 2013 and 2012, the Organizations Lawful Gambling Fund donated $_______ and
$_______, respectively, to its parent Organization to further promote the parents mission.
These amounts were pre-approved by the Gambling Control Board.

During 2013 and 2012, the Organizations General Fund reimbursed the Lawful Gambling
Fund for excess allowable expenses in the amount of $_______ and $_______,
respectively.

NOTE 8 CONTINGENT LIABILITY OF UNRELATED BUSINESS INCOME TAXES

During the years ended December 31, 2013 and 2012, the Organization failed to file
federal and state exempt organization and unrelated business income tax returns. As a
result, the Organization may be subject to penalties, not to exceed $10,000, and interest
on the amounts due for those years.

(8)
LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012

NOTE 9 OTHER CONTINGENT LIABILITIES

The Organization's profit carryover, as stated in its gambling tax return at December 31,
2013, was overstated by approximately $________. Actions required by Minnesota
Revenue include either reconciling the shortage or reimbursing the gambling account
using funds from sources other than gambling.

The City of _______________ requires ____ percent of contributions made by the


Organization to be within the _________________ trade area. As of December 31, 2013,
the Organization was not in compliance with this ordinance. The impact on the
Organization of not being in compliance with this ordinance is unknown.

The Compliance Review Group of the Minnesota Department of Gaming recently


completed a review of the Organization's gambling operations. The results of this review
have not yet been communicated to the Organization. As such, the impact on the
Organization as a result of this review are not known.

(9)
INDEPENDENT AUDITORS' REPORT ON
SUPPLEMENTARY INFORMATION

Board of Directors and Members


CLIENT NAME
City, State

We have audited the financial statements of CLIENT NAME as of and for the year ended December
31, 2013 and 2012, and have issued our report thereon dated REPORT DATE, which contained a
qualified opinion on those financial statements, relating to effects of converting to the cash basis for
costs of games in 2012 and the possible effects of relying on the service organization for electronic
pull-tabs. Our audit was performed for the purpose of forming an opinion on the financial statements
regulatory basis as a whole. The supplementary information on pages 11 through 13 is presented for
purposes of additional analysis and is not a required part of the financial statements regulatory
basis. Such information is the responsibility of management and was derived from and relates directly
to the underlying accounting and other records used to prepare the financial statements regulatory
basis. 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 regulatory basis or to the financial statements regulatory basis themselves, and other
additional procedures in accordance with auditing standards generally accepted in the United States
of America. In our opinion, except for the effects of converting to the cash basis for costs of games in
2012 and the possible effects of relying on the service organization for electronic pull-tabs, the
information is fairly stated in all material respects in relation to the financial statements regulatory
basis as a whole.

This report is intended solely for the information and use of the board of directors, members and
management of the CLIENT NAME, and Minnesota Revenue and is not intended to be and should not
be used by anyone other than these specified parties.

YOUR FIRM
Minneapolis, Minnesota
REPORT DATE

(10)
LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
RECONCILIATION OF GAMES USED REGULATORY BASIS
REGULATORY BASIS
YEARS ENDED DECEMBER 31, 2013 AND 2012

(11)
LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
ANALYSIS OF ALLOWABLE EXPENSES AND STAR RATING
REGULATORY BASIS
YEARS ENDED DECEMBER 31, 2013 AND 2012

(12)
LAWFUL GAMBLING FUND OF
CLIENT NAME
(License # )
(MN Taxpayer ID # )
(Federal ID # )
RECONCILIATION OF PROFIT CARRYOVER
REGULATORY BASIS
DECEMBER 31, 2013 AND 2012

(13)
INDEPENDENT AUDITORS REPORT ON
COMPLIANCE WITH REGULATORY CHECKLIST QUESTIONNAIRE

Board of Directors and Members


CLIENT NAME
City, State

We have audited, in accordance with auditing standards generally accepted in the United States of
America, the financial statements regulatory basis of the Lawful Gambling Fund of CLIENT NAME,
which comprise the statement of assets, liabilities and profit carryover regulatory basis as of
December 31, 2013 and the related statement of revenues, expense and changes in profit carryover
regulatory basis for the year then ended, and the related notes to the financial statements, and have
issued our report thereon dated ________________.

In connection with our audit, nothing came to our attention that caused us to believe that CLIENT
NAME failed to comply with the terms, covenants, provisions, or conditions of the regulatory checklist
questionnaire per Minnesota Rule 8122.055 Subp. 6B, inclusive, as included on page 15, insofar as
they relate to accounting matters. However, our audit was not directed primarily toward obtaining
knowledge of such noncompliance. Accordingly, had we performed additional procedures, other
matters may have come to our attention regarding the Companys noncompliance with the above-
referenced terms, covenants, provisions, or conditions of the indenture, insofar as they relate to
accounting matters.

This report is intended solely for the information and use of the board of directors, members and
management of the CLIENT NAME and Minnesota Revenue and is not intended to be and should not
be used by anyone other than these specified parties.

YOUR FIRM
Minneapolis, Minnesota
REPORT DATE

(14)
REGULATORY CHECKLIST QUESTIONNAIRE
Minnesota Rule 8122.0550 Subp. 6B

Name of Organization

Organization License Number Date of Audit or Review


[Year(s) Being Reported
on]

(15)
REPORT ON INTERNAL CONTROL

Members and Board of Directors


CLIENT NAME
Minneapolis, Minnesota

In planning and performing our audit of the financial statements regulatory basis of the Lawful
Gambling Fund of the CLIENT NAME as of and for the year ended December 31, 2013, in
accordance with auditing standards generally accepted in the United States of America, we
considered CLIENT NAMEs internal control over financial reporting (internal control) as a basis for
designing our auditing procedures that are appropriate in the circumstances for the purpose of
expressing our opinion on the financial statements regulatory basis, but not for the purpose of
expressing an opinion on the effectiveness of the Organizations internal control. Accordingly, we do
not express an opinion on the effectiveness of the Organizations 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 material weaknesses
or significant deficiencies and, therefore, material weaknesses or significant deficiencies may exist
that were not 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 a
combination of deficiencies, in internal control, such that there is a reasonable possibility that a
material misstatement of the entitys financial statements regulatory basis will not be prevented, or
detected and corrected on a timely basis. We consider the following deficiencies in CLIENT NAMEs
internal control to be material weaknesses:

[Describe the material weaknesses identified during the audit.] [Sample paragraphs are below.]

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 following deficiencies in [Client Name]s internal control to be significant
deficiencies:

[Describe the significant deficiencies identified during the audit.] [Sample paragraphs are below.]

(16)
Members and Board of Directors
CLIENT NAME

CLIENT NAMEs written response to the material weaknesses and significant deficiencies identified in
our audit has not been subjected to the audit procedures applied in the audit of the financial
statements regulatory basis and, accordingly, we express no opinion on it. [Delete if not applicable]

We noted other matters involving internal control and its operation that we have reported to
management of CLIENT NAME in a separate letter dated [Date]. [Delete if not applicable]

OR

During our audit, we became aware of other deficiencies in internal control and other matters that are
opportunities to strengthen your internal control and improve the efficiency of your operations. While
the nature and magnitude of the other deficiencies in internal control were not considered important
enough to merit the attention of the Board, they are considered of sufficient importance to merit
managements attention and are included herein to provide a single, comprehensive communication
for both those charged with governance and management. [Delete if not applicable]

Oversight of the financial reporting process


Management is responsible for establishing and maintaining internal controls and for the fair
presentation of the assets, liabilities and profit carryover, and the results of its operations and changes
in its profit carryover for the years then ended, on the regulatory basis accounting. The Organization
does not have a system of internal controls that would enable management to conclude the financial
statements and related disclosures are complete and presented in accordance with the regulatory
basis of accounting. As such, management requested us to prepare a draft of the financial statements
regulatory basis, including the related footnote disclosures. The outsourcing of these services is not
unusual in Organizations of your size and is a result of managements cost benefit decision to rely on
our accounting expertise rather than incurring this internal resource cost. However, errors can occur in
the financial statements that may not be detected by management.

Segregation of Duties
Although the small size of the Organizations staff limits the extent of the segregation of duties, we
believe certain steps can be taken to separate incompatible duties. The basic premise is that no one
employee should have access to both physical assets and the related accounting records or to all
phases of the transaction. One of the most critical areas of segregation is cash, where we noted that
the accountant makes disbursements and prepares a reconciliation of the monthly bank statement.
Accordingly, an inappropriate disbursement can occur and not be detected by management. A
designated person should receive and review the bank statements and canceled checks before
turning them over to the accountant to prepare the bank reconciliations. Consideration should also be
made for reviewing and approving the reconciliations after they are prepared. These simple steps
would not require the addition of any new employees or add significant time to anyones schedule.

Inventory is another critical area of segregation of duties. It is our understanding that perpetual
inventory records are now maintained. Sufficient controls over inventory are now in place given the
adoption of a perpetual inventory system that is reconciled to the physical inventory of games and
bingo paper at month end. We encourage the board to monitor the reconciliations on a monthly basis.

(17)
Members and Board of Directors
CLIENT NAME

Safeguarding of Assets
During our tour of the organizations site at the New Town Bar, we noted that a safe is not available to
the sites cash over night. Instead, a removable locked box is used. Accordingly, cash can more easily
be stolen. We recommend the Organization consider purchasing a drop-in safe to provide additional
protection of cash assets.

OR

Pre-signed checks were delivered to your outside accountant to prepare the payroll checks during
200X. Any unused checks are destroyed by the accountant and are not returned to the Organization.
This procedure allows the accountant to have too much control over disbursements as he reconciles
the bank statement, records the expenditures on a spreadsheet, and writes out the checks. Blank
checks should not be pre-signed at any time since they can be used for inappropriate purposes. In
addition, the board should be approving all checks written over a specified dollar amount and
reviewing the bank statements and reconciliations for any unusual items monthly.

OR

In performing our audit, we noted that a significant amount of currency is maintained to fund the
starting banks. Accordingly, theft of cash would result in excessive losses. We also noted that this
amount is not controlled by recording the amount of cash stored in the accounting records. We
recommend that an ongoing listing of cash held in the safe be maintained. In addition, the amount
should be reconciled on a monthly basis to the general ledger.

Cash Shortages
Cash shortages from gambling activities remain relatively high. We recommend continued emphasis
be placed on the reconciliation of cash during shift changes. As a rule of thumb, cash shortages
should consistently be less than .3% of gross receipts.

Delinquent Payment of Taxes


The Organization has repeatedly submitted payment of their combined receipts tax late. While this
practice has not resulted in significant penalties, payment of these taxes should be made on a timely
basis.

Lack of Adequate Accounting Records


The Organization recently acquired gambling tax return preparation software along with upgraded
computer equipment in order to assist the preparation of the monthly gambling tax return. As noted in
prior years, the Organization has had difficulty in preparing its monthly gambling tax return on both a
timely and accurate basis. This gambling software, along with purchased software support, was
expected to provide the assistance necessary to ensure preparation of an accurate and timely
gambling tax return. However, as we noted during our audit, the monthly tax returns were not
accurately prepared. As such, items such as cash shortages, paddlewheel receipts and the profit
carryover reconciliation schedule were misstated. We believe that due to the complexity of the
Organizations gambling operation and due to its size, that the addition of the system alone cannot
provide adequate assistance to ensure that the gambling tax returns are prepared accurately and
timely. We recommend the Organization pursue outside assistance in the preparation of its gambling
tax return. Due to the commonalty of the software system selected, it is expected that the
Organization will not have to absorb the cost of the system since an outside party can utilize it on
behalf of the Organization.
(18)
Members and Board of Directors
CLIENT NAME

OR

Although the Organization has a set of accounting journals for summarizing transactions, it does not
use a general ledger accounting system to summarize account activity and balances. A general ledger
is beneficial in assisting with the preparation of the monthly tax returns. In addition, it will provide
timely financial information that will aid in making management decisions. More importantly, it provides
the fundamental records necessary to ensure accurate reporting of financial activities.

We recommend the complete adoption of a formal accounting system based on the accounting
system prescribed by the State of Minnesota through the accounting manual prepared by the
Department of Gaming.

Lack of Adequate Accounting Records (Continued)


The standard set of accounting records should include the following:

General Ledger
Cash Receipts Journal
Cash Disbursements Journal
Payroll Register
Perpetual Inventory System
Check Register

It should also be noted that the accounting records noted above, excluding the general ledger, are
required by law. In addition, the general ledger is useful in that it will provide the checks and balances
to ensure that all transactions are recorded, thus making the preparation of Schedule F of the monthly
tax return easier and less time consuming.

Bank Reconciliations
During our audit, we noted that the cash accounts were not reconciled as of December 31, ____ due
to the bank statement cut-off date. Accordingly, error would not have been detected timely. We
recommend that this reconciliation be performed as of year-end to obtain a better cutoff of receipts
and disbursements related to the current year. To assist in this process, the Organization has changed
their business account so that the bank will provide a month end cutoff.

Reconciliation of Games Played


Our testing of the Organizations inventory and purchases revealed 35 unreported games. Sixteen of
these games were found to be played during 201X and the remaining 19 were played during 201Y.
We recommend that the Organization file amended tax returns and recalculate additional required
taxes. The Organization has the approximate additional tax liabilities as follows:

Combined Receipts Tax $4,200


Federal Waging Tax 500
City and Local Tax 200

Perpetual Inventory

(19)
Members and Board of Directors
CLIENT NAME

During our audit, we noted that the Organization does not maintain perpetual inventory records as
required by state regulations. We recommend the Organization maintain perpetual inventory records
utilizing the forms included in the accounting manual developed by Minnesota Revenue.

Inadequate Deposit Tickets


Based on test counts of pull-tab games, it was noted that several of the prizes paid did not agree to
the reported amounts. The differences occurred because employees were depositing cash receipts
and paying prizes out of incorrect drawers. Upon testing the cash deposits that are made on an
interim basis, we noted the inconsistency of accurate deposits with the game records. Alternative
procedures were performed by us to gain assurance on the deposits. We recommend that your
accounting implement the use of a spreadsheet to summarize all daily deposits made, with summary
totals for each month, to assist in reconciling to the general ledger activity. These records should
clarify which games are reflected by the deposits.

Inadequate Lawful Purpose Expenditures


The Organization has a projected star rating of 2, based on activity to date. An adequate star rating is
determined to be three or greater. Accordingly, the Organization needs to increase its lawful purpose
expenditures or will be subject to fines or sanctions by the state. To do this, the Organization may
need to better control its allowable costs.

Lawful Versus Allowable Expenses


It is our understanding that the Department of Gaming is starting to review and question lawful
purpose expenditures. As a result, we recommend the Organization simplify the designation of
expenses as lawful purpose as much as possible. The concept that any expense of a 501c(3)
Organization is a lawful purpose has been questioned by the Department of Gaming. Examples of
disallowed lawful purpose expenditures include the reimbursement of officer expenses and the
purchase of supplies. We believe the Organization can adequately limit its lawful purpose
expenditures to ice costs and tournament fees, without requiring other expenses to be reimbursed to
ensure proper disposition of all net profits from gambling.

Fund Losses
During the past year, the Organization experienced a fund loss resulting from a theft at its
_________________ location. When fund losses of this nature occur, the Organization must report
the theft to the police as soon as possible, as well as complete the required LG-250 Fund Loss
Report. Otherwise, the Organizations general fund may be required to reimburse the gambling fund
for its losses.

Follow-Up on Prior Year Comments


Last year, we identified a reportable condition related to ___________________________. During our
current audit, we noted that the Organization has not yet implemented our recommendation. We
recommend the Organization continue its efforts to _______________________________.

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Members and Board of Directors
CLIENT NAME

******

This communication is intended solely for the information and use of management, the board of
directors, members, others within the organization, and Minnesota Revenue and is not intended to be
and should not be used by anyone other than these specified parties.

YOUR FIRM NAME

Minneapolis, Minnesota
REPORT DATE

(21)