State Agricultural Society
Financial Audit Division
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Table of Contents
Report Summary
Report on Compliance and Internal Control over Financial Reporting
Current Findings and Recommendations
Status of Prior Audit Issues
State Agricultural Society's Response
Audit Participation
Claudia Gudvangen, CPA Deputy Legislative Auditor
Jeanine Leifeld, CPA, CISA Audit Manager
Chris Buse, CPA, CISA Audit Manager
Scott Tjomsland, CPA Auditor-in-Charge
Marisa Isenberg Auditor
Jacqueline Wessel Intern
Exit Conference
We discussed the results of the audit at an exit conference with the following staff of the State Agricultural Society on April 1, 2003:
Jerry Hammer Executive Vice President
Marshall Jacobson Controller
Report Summary
Key Findings and Recommendations
· The State Agricultural Society has not appropriately resolved the information technology security risks we identified in our prior audit report. We found significant security weaknesses during our review of information technology controls at the Society. We recommended that the Society build a comprehensive security infrastructure that addresses current information technology risks. (Finding 1, page 5)
· The Society did not completely reconcile its general ledger cash account to bank cash balances. We recommended that the Society improve its cash reconciliation procedures to completely reconcile cash balances in bank accounts to cash recorded in the general ledger each month. In addition, it should consider maintaining separate cash accounts in the general ledger for each bank account or consolidating its bank accounts. (Finding 2, page 5)
· The Society did not establish internal controls to ensure the accuracy of the daily average ticket price of carnival tickets sold at the State Fair. We recommended that the Society establish these internal controls. (Finding 3, page 6)
· The Society made $300 contributions to the deferred compensation accounts of two employees who were not entitled to the benefit. We recommended that the Society recover the contributions made to the two employees' deferred compensation accounts. (Finding 4, page 7)
Background
The State Agricultural Society operates Minnesota's annual state fair and maintains the state fairgrounds. The Society earned about $27.9 million in operating revenues during fiscal year 2002 and had total assets of over $33 million on October 31, 2002.
The primary objective of our audit was to issue an opinion on the financial statements of the State Agricultural Society for the year ended October 31, 2002. The Society's Annual Report for fiscal year 2002 includes our opinion thereon dated March 14, 2003. This report addresses internal control weaknesses we found during our audit. The Society's response to the issues is included in the report.
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Report on Compliance and on Internal Control over Financial Reporting
Based on an Audit of Financial Statements Performed in Accordance with Government
Auditing Standards
Representative Tim Wilkin, Chair
Legislative Audit Commission
Members of the Legislative Audit Commission
Mr. Howard Recknor, President
Board of Managers
State Agricultural Society
Members of the State Agricultural Society
Mr. Jerry Hammer, Executive Vice President
State Agricultural Society
We have audited the financial statements of the State Agricultural Society as
of and for the year ended October 31, 2002, and have issued our report thereon
dated March 14, 2003. 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.
Compliance
As part of obtaining reasonable assurance about whether the State Agricultural Society's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grants, 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 one instance of noncompliance that is required to be reported under Government Auditing Standards, as described in Finding 4 of the accompanying section entitled Current Findings and Recommendations.
Internal Control Over Financial Reporting
In planning and performing our audit, we considered the State Agricultural
Society's internal control over financial reporting in order to determine our
auditing procedures for the purpose of expressing our opinion on the financial
statements and not to provide assurance on the internal
control over financial reporting. However, we noted certain matters involving
the internal control over financial reporting and its operation that we consider
to be reportable conditions. Reportable conditions involve matters coming to
our attention relating to significant deficiencies in the design or operation
of the internal control over financial reporting that, in our judgment, could
adversely affect the State Agricultural Society's ability to record, process,
summarize, and report financial data consistent with the assertions of management
in the financial statements. We describe reportable conditions as Findings 1
through 3 in the accompanying section entitled Current Findings and Recommendations.
A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce, to a relatively low level, the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses. However, we consider the reportable condition described in Finding 1 to be a material weakness. This report is intended solely for the information and use of the State Agricultural Society's management and the Legislative Audit Commission and is not intended to be and should not be used by anyone other than these specified parties.
James R. Nobles Claudia J. Gudvangen, CPA
Legislative Auditor Deputy Legislative Auditor
March 14, 2003
Current Findings and Recommendations
1. PRIOR FINDING PARTIALLY RESOLVED: The State Agricultural Society has not appropriately resolved its information technology security risks.
Our prior audit of the State Agricultural Society identified significant information technology security weaknesses. The Society lacked a comprehensive security foundation and had not addressed many relevant technology risks. We communicated the general nature of these weaknesses to Society's management in our written audit report. However, to minimize exposure to the organization, we also provided the Society with a confidential report of specific, detailed security findings and recommendations.
The Society's systems remain vulnerable to unauthorized access. It has taken
steps to address some of the weaknesses. However, more work needs to be done
to reduce the organization's exposure to an acceptable level. We are concerned
that the Society still does not have a written information technology security
policy, procedures, or standards. This documentation is important because it
constitutes the framework to positively control information technology resources.
We also are concerned that many high-risk findings in our confidential report
have not been addressed.
Recommendation
· The State Agricultural Society should build a comprehensive security infrastructure that addresses current information technology risks.
2. The Society did not completely reconcile its general ledger cash account
to bank cash balances.
During fiscal year 2002, the Society was unable to completely reconcile cash balances in its four bank accounts to the cash balance recorded in its general ledger. As a result, at year-end the Society had to write off $7,300 of cash recorded in the general ledger to equal the cash balances in the bank accounts. Some of the difference appears to have been caused by errors in posting subsidiary accounting transactions to the general ledger. Other differences relate to voided checks.
Although the Society attempted to monthly reconcile the cash balances in the bank accounts to the general ledger cash balance, it did not identify the reasons for some differences. In addition, the Society did not make immediate corrections to resolve identified reconciling items, which made subsequent reconciliations more complicated. Completely reconciling the cash balances in the bank accounts to the cash balance in the general ledger is a key control to ensure that cash is properly accounted for, and that the Society's financial activity is accurately recorded in the general ledger.
The Society's reconciliation process was further complicated by the fact that it had four bank accounts, but a single cash account in the general ledger. One of the four bank accounts was the primary account, while the other three were clearing accounts for specific activities. To reconcile the three clearing accounts, the Society compared the account bank balances to the amount of uncleared checks from those accounts, but did not verify that the related financial activity had been accurately recorded in the general ledger. In addition, Society transfers to the three clearing accounts did not always match the actual amount of checks generated from those accounts, which created reconciling items between bank accounts. However, these reconciling items were not apparent in the general ledger, because the Society's general ledger only had one cash account. Establishing separate general ledger cash accounts for each bank account would eliminate transfer errors as reconciling items, would allow the Society to record transfers between accounts in the general ledger, and would allow the Society to use the monthly reconciliations to ensure that all cash activity in the accounts is accurately recorded in the general ledger. Alternatively, consolidating the bank accounts into a single account would also improve the effectiveness of the reconciliations by eliminating transfer activity altogether.
Recommendations
· The Society should improve its cash reconciliation procedures to completely reconcile cash balances in bank accounts to cash recorded in the general ledger each month. It should resolve all differences and promptly make adjusting entries, as needed.
· The Society should consider maintaining separate cash accounts in the general ledger for each bank account or consolidating its bank accounts.
3. The Society did not establish internal controls to ensure the accuracy of
the daily average ticket price of carnival tickets sold at the State Fair.
The Society did not establish procedures to ensure its calculations of daily average ticket prices of carnival tickets sold at the State Fair were accurate. These calculations formed the basis for payments to carnival ride and game operators. Carnival ride and game operators collected tickets from customers then turned in the tickets collected each day to the Society. The Society used the average carnival ticket price to calculate the gross revenue earned by the operators for the tickets collected. The Society then paid each operator the appropriate percent of the gross revenue as specified in operator license agreements.
During the 2002 State Fair, the Society miscalculated the average ticket price of carnival tickets for 7 of the 12 days. One of those errors caused the Society to overpay carnival ride and game operators by more than $19,000, while the other errors resulted in smaller overpayments or underpayments to those operators. Because the Society sold carnival tickets at a variety of prices, depending on quantities purchased, it calculated an average carnival ticket price each day. Society staff performed the calculation of average price on manual worksheets at the end of each day. However, the ticket price worksheets for seven days contained errors, which included using the wrong number of tickets sold and a variety of mathematical errors. To ensure it accurately pays carnival ride and game operators, the Society needs to accurately calculate the average carnival ticket price.
Recommendation
· The Society should establish internal controls to ensure the accuracy of the daily average ticket price of carnival tickets sold at the State Fair.
4. The Society made $300 contributions to the deferred compensation accounts
of two employees who were not entitled to the benefit.
The Society made $300 contributions to the deferred compensation accounts of two employees who also converted vacation hours to their deferred compensation accounts in the same year. The Society's employee plan states that employees may either convert up to 80 hours of vacation to deferred compensation accounts or receive a $300 matching contribution to deferred compensation accounts from the Society. In each instance, the employee received the $300 contribution from the Society in the first half of the year, then converted vacation hours at the end of the year. Since the value of the converted vacation hours is greater than the $300 Society matching contribution, the Society should recover the $300 from each employee.
Recommendation
· The Society should recover the contributions made to the two employees' deferred compensation accounts.
Status of Prior Audit Issues
As of March 14, 2003
Most Recent Audit
The Office of the Legislative Auditor performs an annual audit of the State Agricultural Society. Legislative Audit Report 02-23, dated April 4, 2002, covered the fiscal year ended October 31, 2001. The audit scope included those areas material to the Society's financial statements. The report contained one finding, related to the Society's technology security risks. While the Society has taken some steps to address the issue, further action is necessary to fully resolve the finding. Therefore, we repeat the issue as Finding 1 in this report.