Arizona State Lottery - Report of Independent …the Lottery to vendors, to employees for wages and benefits, to prize winners, and to other State funds. Fund net position represents

Report of Independent Auditors andFinancial Statements for

Arizona State LotteryA Proprietary Fund of the State of Arizona

June 30, 2015

CONTENTS PAGEREPORTOFINDEPENDENTAUDITORS 1–3MANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED) 4–8BASICFINANCIALSTATEMENTS Statementofnetposition 9 Statementofrevenues,expenses,andchangesinnetposition 10 Statementofcashflows 11 Notestobasicfinancialstatements 12–25REQUIREDSUPPLEMENTARYINFORMATION Scheduleofproportionateshareofthenetpensionliability 26 Scheduleofpensioncontributions 27SUPPLEMENTARYINFORMATION Supplementalschedulesofgrossprofitbygame 28–34 REPORTONOFINDEPENDENTAUDITORSINTERNALCONTROLOVERFINANCIALREPORTINGANDONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDITOFFINANCIALSTATEMENTSPERFORMEDINACCORDANCEWITHGOVERNMENTAUDITINGSTANDARDS 35–36 Scheduleoffindingsandresponses 37–38 Scheduleofprioryearauditfindings 39

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REPORTOFINDEPENDENTAUDITORS

TotheCommissionersofArizonaStateLotteryPhoenix,ArizonaReportontheFinancialStatementsWehaveaudited theaccompanying financial statementsof thebusiness‐typeactivitiesof theArizonaStateLottery(the“Lottery”,aproprietaryfundoftheStateofArizona)asofandfortheyearendedJune30, 2015 and the related notes to the financial statements, which collectively comprise the Lottery’sbasicfinancialstatementsaslistedinthetableofcontents.Management’sResponsibilityfortheFinancialStatementsManagement is responsible for the preparation and fair presentation of these financial statements inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica;thisincludesthe design, implementation, andmaintenance of internal control relevant to the preparation and fairpresentationoffinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.Auditor’sResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit. Weconductedouraudit in conformitywithauditing standardsgenerally accepted in theUnitedStatesofAmericaand thestandardsapplicable to financialauditscontained inGovernmentAuditingStandards,issued by the Comptroller General of the United States. Those standards require that we plan andperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreefrommaterialmisstatement.Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthe financial statements. The procedures selected depend on the auditor's judgment, including theassessmentof therisksofmaterialmisstatementof the financialstatements,whetherdue to fraudorerror. Inmakingthoseriskassessments, theauditorconsiders internalcontrolrelevantto theentity'spreparationand fairpresentationof the financial statements inorder todesignauditprocedures thatare appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectivenessof theLottery's internal control.Accordingly,weexpressno suchopinion.Anaudit alsoincludes evaluating the appropriateness of accounting policies used and the reasonableness ofsignificantaccountingestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationofthefinancialstatements.

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Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforourauditopinion.OpinionIn our opinion, the financial statements referred to above present fairly, in allmaterial respects, therespectivefinancialpositionoftheArizonaStateLottery,asofJune30,2015,andtherespectivechangesin financialposition,andcash flows for theyear thenended in conformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.EmphasisofMatterIn the year ended June 30, 2015, the Lottery adopted new accounting guidance, GovernmentalAccounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions, asamended by Governmental Accounting Standards Board Statement No. 71, Pension Transition forContributions Made Subsequent to the Measurement Date, which modified the presentation of thefinancial statements by establishing standards for measuring and recognizing net pension liabilities,deferredoutflowsofresources,deferredinflowsofresources,andexpensesrelatedtopensionbenefitsprovided through defined benefit pension plans. In addition, Statement 68 requires disclosure ofinformation related to pension benefits. As discussed inNote 1 to the basic financial statements, theadoption of GASB Statements 68 and 71 resulted in the restatement of beginning net position. Ouropinionisnotmodifiedwithrespecttothismatter.OtherMattersRequiredSupplementaryInformationAccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequirethatthemanagement’sdiscussionandanalysisonpages4 through8, thescheduleofproportionate shareof thenetpensionliabilityonpage26,andthescheduleofpensioncontributionsonpage27bepresentedtosupplementthebasicfinancialstatements.Suchinformation,althoughnotapartofthebasicfinancialstatements,isrequiredbytheGovernmentalAccountingStandardsBoardwhoconsidersittobeanessentialpartoffinancialreportingforplacingthebasicfinancialstatementsinanappropriateoperational,economic,orhistorical context. We have applied certain limited procedures to the required supplementaryinformationinconformitywithauditingstandardsgenerallyaccepted intheUnitedStatesofAmerica,which consisted of inquiries of management about the methods of preparing the information andcomparing the information for consistency withmanagement's responses to our inquiries, the basicfinancial statements, and other knowledge we obtained during our audit of the basic financialstatements.We do not express an opinion or provide any assurance on the information because thelimited procedures do not provide us with sufficient evidence to express an opinion or provide anyassurance.

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OtherSupplementaryInformationOur audit was conducted for the purpose of forming an opinion on the financial statements of theArizonaStateLottery.Thesupplementalschedulesofgrossprofitbygameonpages28through34arepresented for purposes of additional analysis and are not a required part of the basic financialstatements. The schedules of gross profit by game are the responsibility of management and werederived from and relate directly to the underlying accounting and other records used to prepare thebasic financial statements.Such informationhasbeensubjected to theauditingproceduresapplied intheauditofthebasicfinancialstatementsandcertainadditionalprocedures, includingcomparingandreconciling such informationdirectly to theunderlyingaccountingandother recordsused topreparethe basic financial statements or to the basic financial statements themselves, and other additionalproceduresinconformitywithauditingstandardsgeneralacceptedintheUnitedStatesofAmerica.Inouropinion,thesupplementalschedulesofgrossprofitbygamearefairlystatedinallmaterialrespectsinrelationtothebasicfinancialstatementsasawhole.OtherReportingRequiredbyGovernmentAuditingStandardsIn accordancewithGovernmentAuditing Standards, we also have issued our report dated November9,2015onourconsiderationoftheLottery’sinternalcontroloverfinancialreportingandonourtestsofitscompliancewithcertainprovisionsof laws,regulations,contracts,andgrantagreementsandothermatters. The purpose of that report is to describe the scope of our testing of internal control overfinancial reporting and compliance and the results of that testing, and not to provide an opinion oninternal control over financial reportingor on compliance.That report is an integral part of an auditperformed in accordance with Government Auditing Standards in considering the Lottery’s internalcontroloverfinancialreportingandcompliance.

Scottsdale,ArizonaNovember9,2015

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ARIZONASTATELOTTERYAPROPRIETARYFUNDOFTHESTATEOFARIZONAMANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)

Thisdiscussionandanalysisof theLottery's financialstatements isarequiredcomponentof financialreporting under Governmental Accounting Standards and was prepared by Arizona LotteryManagement.ItprovidesanoverviewoffinancialactivitiesasofandfortheyearendedJune30,2015,and should be read in conjunctionwith the Lottery's financial statements and notes to the financialstatements.Thisannualreportconsistsofthreetypesoffinancialstatementsandaccompanyingnotesthatprovideexplanationsanddetailsof accountingpolicies, accountbalancesandactivities.Accountbalancesandactivities are shown as of and for the years ended June 30, 2015 and 2014. The statement of netposition;thestatementofrevenues,expenses,andchangesinnetposition;andthenotesarepresentedusing theaccrualmethodofaccounting.Under thismethod, financial transactionsare recordedwhenearned or incurred regardless of when cash is received or disbursed. The statement of cash flowsreflectscashreceiptsanddisbursementsduringthesame12‐monthperiod.The statement of net position provides information about the assets, deferred outflows of resources,liabilities, deferred inflows of resources, and net position of the Lottery. Assets consist of cash,substantially all held by the State Treasurer, amounts owed to the Lottery from licensed LotteryretailersandotherStateagencies,ticketinventory,andproperty.LiabilitiesrepresentamountsowedbytheLotterytovendors,toemployeesforwagesandbenefits,toprizewinners,andtootherStatefunds.FundnetpositionrepresentstheportionoftheLottery'sassetsthatarenotencumberedbyliabilities.ItservesasanindicatorofthenetworthoftheLottery.Asummaryofthefinancialresultsofoperationsforthe12‐monthperiodispresentedinthestatementofrevenues,expenses,andchangesinnetposition.OperatingrevenuesincludesalesofLotterytickets,retailer licensing fees, and commissions earned on the sales of Lottery tickets at Lottery offices, andspecialevents.Directcostsandadministrativeexpensescomprisetheoperatingexpensessectionofthisstatement. Direct costs are variable expenses that fluctuate with the level of sales. Marketing andoverheadcostsareincludedintheadministrativeexpensescategory.Nonoperating revenues consist of interest earned on prize fund cash investments from the StateTreasurer,interestcreditedtotheLottery'sMultistateLotteryAssociation(MUSL)unreservedaccountforinterestearnedonprizereservesatMUSLandincomerecognizedfromcommonstock.Thetransfer’scategoryincludestransferstootherstatefundsasrequiredbyLotterystatutes.The statement of cash flows includes cash receipts and disbursements from operating, noncapitalfinancing, and investment earnings.This statement also includes a reconciliationof operating incomepresentedontheaccrualbasisofaccountingtonetcashprovidedbyoperatingactivities.Thenotestothe financial statements present information on accounting policies, transfers and statutoryrequirements,commitments,contingencies,andretirementbenefits.Thesenotesareanintegralpartofthefinancialstatements.

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ARIZONASTATELOTTERYAPROPRIETARYFUNDOFTHESTATEOFARIZONAMANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)SalesActivitiesRevenues from the saleofLotteryproducts for the fiscal year ended June30,2015werehigher thanFiscalYear2014andalsoaLotteryrecordhigh.Asshowninthe financialstatements,sales increased3.59%fromtheprioryear,from$723.9millioninFiscalYear2014to$749.9millioninthecurrentyear.SalesofScratchersSM,Fantasy5,Pick3,InstantTabs,andAON,allshowedincreaseswhilePowerball®,ThePowerball,MegaMillions,Pick,WeeklyWinnings,and2By2salesdecreased.ThefollowingtablecomparesLotteryproductsalesbetweenfiscalyears.Salesarepresentedinmillionsofdollars.

ProductSales FY2014 FY2015 Changes PercentageScratchers(includingeconomic

development) 483.9$ 542.0$ 58.1$ 12.01%Powerball 113.0 93.6 (19.4) ‐17.17%MegaMillions 56.3 46.8 (9.5) ‐16.87%ThePick 30.4 25.8 (4.6) ‐15.13%Fantasy5 16.4 17.1 0.7 4.27%Pick3 9.2 9.7 0.5 5.43%WeeklyWinnings 5.7 3.6 (2.1) ‐36.84%InstantTabs 4.4 5.1 0.7 15.91%2By2 2.9 ‐ (2.9) ‐100.00%AON 1.7 6.2 4.5 100.00%

Total 723.9$ 749.9$ 26.0$ 3.59%

TotalRevenuesOtheroperatingrevenuesfortheyearendedJune30,2015,were$938,833comparedto$340,246forthe year ended June 30, 2014. Other operating revenue is comprised of license fees and othermiscellaneousrevenue.Totaloperatingrevenueswere$750.9millionfortheyearendedJune30,2015,ascomparedto$724.3millionfortheyearendedJune30,2014.Asmentionedabove,theincreasewasduetoanincreaseinsalesrevenues.NonoperatingrevenuesfortheyearendedJune30,2015,were$67,236ascomparedto$104,669fortheyearendedJune30,2014.NonoperatingrevenueiscomprisedofinterestearnedoninvestedcashandperiodicrecognitionofcommissionsearnedbytheLottery.

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MajorExpenses$557.3 million of the Lottery's total operating expenses of $579.9 million for the year endedJune30,2015 were incurred in direct support of the sales of Lottery games. $525.5 million of theLottery'stotaloperatingexpensesof$548.8millionfortheyearendedJune30,2014wereincurredindirectsupportofthesalesofLotterygames.Theseexpensesincludeprizeexpense,retailercommissionsand incentives, purchases of Scratchers tickets, compensation to the vendor for Scratchers ticketdistribution,andcompensationtothevendorwhomaintainsandsupportstheon‐linegamingsystem.The following table compares the game related expenses between fiscal years. All expenses arepresentedinmillionsofdollars.

GameRelatedExpenses FY2014 FY2015 Differences Percentage

Prizeexpense 456.4$ 486.7$ 30.3$ 6.6%Retailercommissions 49.2 51.0 1.8 3.7%On‐linesystemexpenses 8.7 7.5 (1.2) ‐13.8%Scratcherssystemand

distributionexpenses 4.9 5.5 0.6 12.2%Ticketspurchased 6.3 6.6 0.3 4.8%

Total 525.5$ 557.3$ 31.8$ 6.1%

Theincreaseingamerelatedexpensesisreflectiveoftheincreaseinproductsales.Seetheproductsalesscheduleabove.Of the $22.6 million in Fiscal Year 2015 in other operating expenses, $13.8 million was used foradvertisingandpromotionand$5.9millionwasusedtocompensateLotteryemployees.Incomparison,of the $23.3 million in Fiscal Year 2014 in other operating expenses, $15.1 million was used foradvertisingandpromotionand$5.9millionwasusedtocompensateLotteryemployees.TransferstoOtherStateFundsNote3tothefinancialstatementsdetailstheamountstransferredtootherStateFunds. InFiscalYear2015theLotterytransferred$176.0milliontootherStateFunds.Incomparison,inFiscalYear2014theLotterytransferred$175.6milliontootherStateFunds.

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ARIZONASTATELOTTERYAPROPRIETARYFUNDOFTHESTATEOFARIZONAMANAGEMENT’SDISCUSSIONANDANALYSIS(UNAUDITED)OtherFinancialInformation

StatementofNetPosition FY2014 FY2015

Currentassets 58.5$ 55.9$Capitalassets 3.70 3.40Otherassets‐deposits 9.90 9.90

Totalassets 72.10 69.20

Deferredoutflowsofresources ‐ 0.70

Totalassetsanddeferredoutflowsofresources 72.10 69.90

Currentliabilities 61.50 63.60Netpensionliability ‐ 6.30

Totalliabilities 61.50 69.90

Deferredinflowsofresources ‐ 1.30

Netposition 10.60 (1.30)

Totalliabilitiesandnetposition 72.1$ 69.9$

TheLottery'stotalassetsatJune30,2015were$69.9million.Assetsconsistedofcashheldsubstantiallyby the State Treasurer of $42.5million, net receivables from Lottery retailers for the sale of Lotteryproducts of $8.6 million, Scratchers ticket and pull tab inventory of $4.8 million, net investment incapitalassetsof$3.4million,andadepositwithMUSLof$9.9million.ComparablefiguresatJune30,2014were$72.1million.AssetsconsistedofcashheldsubstantiallybytheStateTreasurerof$45.0million,receivablesfromLotteryretailersforthesaleofLotteryproductsof$7.6million,Scratchersticketandpulltabinventoryof$5.9million,netinvestmentincapitalassetsof$3.7million,andadepositwithMUSLof$9.9million.TotalliabilitiesatJune30,2015,were$69.9million,consistingof$2.8millioninaccountspayableandaccruedexpenses,prizeliabilitiesof$12.6million,amountsduetootherfundsof$20.8millionamountsduetootherStateFundsof$27.4million,and$6.3millionofnetpensionliability.$63.6millionoftheLottery'sliabilitieswerecurrentliabilities.TheLottery’stotalliabilitiesatJune30,2014,were$61.5million,consistingof$3.8millioninaccountspayable and accrued expenses, prize liabilities of $9.2 million amounts due to other fund of $19.4million, and amounts due to other State Funds of $29.1 million. All of the Lottery's liabilities werecurrentliabilities.

Seeaccompanyingnotes. 8


At June30,2015, theLotteryrecordedadeferredoutflowof resourcesof$0.7millionandadeferredinflowofresourcesof$1.3millionrelatingtopensions.Totalnetpositiondecreasedfrom$10.6millionatJune30,2014toanegative$1.3millionatJune30,2015.In the sixth special session of the State Legislature in 2010, amendments weremade to the Lotterystatutes allowing the State to issue Lottery RevenueBonds. These bonds provide additionalworkingcapitaltopayappropriatedexpendituresoftheState'sGeneralFund.Thebondsarepayablesolelyfromand secured by pledged revenues consisting of, until July 1, 2012, amounts distributable to the StateGeneral Fund from the Lottery pursuant to Lottery law, and from and after July 1, 2012 all LotteryrevenuesdepositedtotheLottery fundnetofLotteryoperatingexpenses. (SeeNote3to the financialstatements.)BUDGETARYHIGHLIGHTSTheLottery'sbudgetissetbythelegislativeappropriationsprocessonabiennialbasis.ThebudgetsforFiscalYears2014and2015weresetintheregularlegislativesessionof2013.TheLottery'sFiscalYear2015budgetwas amended in the regular legislative session of 2014. The Lottery's appropriation forsales‐related expenditures is basedonapprovedpercentagesofprojected revenues and is allowed toincrease for these items without a supplemental appropriations request if actual revenues exceedprojectedrevenues.TheappropriationdoesnotincludeanamountforprizesbecauseLotterystatutesset this amount at "not less than50%of the total annual revenues accruing from the sale of Lotteryticketsorshares."The Lottery's appropriation was $104 million at the beginning of the year and decreased to $102million,asactualrevenueswerelessthanbudgetedprojections.CONTACTINGTHELOTTERY'SFINANCIALMANAGEMENTThismanagement's discussion and analysis (MD&A) is designed to provide Arizona citizens, Arizonagovernment officials, our players, retailers, and other interested parties with an overview of theLottery'sfinancialactivityforFiscalYear2015andtodemonstratetheLottery'saccountabilityforthemoneyitreceivedfromthesaleofLotteryproducts.If you have questions about theMD&A or need additional information, contact the Arizona Lottery'sDirectorofAuditandAccounting,4740EastUniversity,Phoenix,Arizona85034.

9 Seeaccompanyingnotes.

ARIZONASTATELOTTERYAPROPRIETARYFUNDOFTHESTATEOFARIZONASTATEMENTOFNETPOSITION

ASSETSANDDEFERREDOUTFLOWSOFRESOURCESJune30,2015

CURRENTASSETSCashandinvestments,substantiallyallheldbytheStateTreasurer 42,547,395$Accountsreceivable,netofallowancefordoubtful

accountsof$145,000 8,558,392Scratchticketinventory 4,604,303Pulltabinventory 179,912

Totalcurrentassets 55,890,002

CAPITALASSETS Landandlandimprovements 1,268,695 Buildings 4,036,728 Furniture,fixtures,andequipment 2,667,721

Intangibleassets 599,324Lessaccumulateddepreciationandamortization (5,120,811)

Totalcapitalassets 3,451,657

OTHERASSETSDeposit‐MUSL 9,858,752

Totalassets 69,200,411

DEFERREDOUTFLOWSOFRESOURCESDeferredoutflowsrelatedtopensions 740,387

Totalassetsanddeferredoutflowsofresources 69,940,798$

LIABILITIES,DEFERREDINFLOWSOFRESOURCES,ANDNETPOSITION

CURRENTLIABILITIESAccountspayable 2,526,208$Accruedexpenses 290,978Prizeliability 12,556,307Duetootherfunds 20,823,756Duetootherstatefunds 27,447,975

Totalcurrentliabilities 63,645,224

NETPENSIONLIABILITY 6,279,956

Totalliabilities 69,925,180

DEFERREDINFLOWSOFRESOURCESDeferredinflowsrelatedtopensions 1,306,989

Totalliabilitiesanddeferredinflowsofresources 71,232,169

NETPOSITION Netinvestmentincapitalassets 3,451,657

Unrestricted(deficit) (4,743,028)

Totalnetposition (1,291,371)$

Seeaccompanyingnotes. 10

ARIZONASTATELOTTERYAPROPRIETARYFUNDOFTHESTATEOFARIZONA

STATEMENTOFREVENUES,EXPENSES,ANDCHANGESINNETPOSITION

YearEndedJune30,2015

OPERATINGREVENUESTicketsales

Scratchers 542,030,289$Powerball 93,638,449MegaMillions 46,817,853ThePick 25,811,030Fantasy5 17,051,734Pick3 9,734,915WeeklyWinnings 3,551,208InstantTab 5,140,614AON 6,198,248

Totalticketsales 749,974,340

Otheroperatingrevenues 938,833

Totaloperatingrevenues 750,913,173

OTHEREXPENSESDirectcosts

Prizeexpense 486,637,923Retailercommissionsandincentives 51,005,466Onlinesystemexpense 7,499,727Scratchersystemanddistributionexpenses 5,558,249Ticketspurchased 6,615,030

Totaldirectcosts 557,316,395

Advertisingandpromotion 13,844,376Wagesandrelatedexpenses 5,859,884Contractservices 541,245Depreciation 284,719Administrativeexpenses 2,076,114

Totaloperatingexpenses 579,922,733

OPERATINGINCOME 170,990,440

NONOPERATINGREVENUES‐Investmentincomeandother 67,236

INCOMEBEFORETRANSFERS 171,057,676

TRANSFERSTOOTHERSTATEFUNDS 176,022,030

(4,964,354)

NETPOSITION,beginningofyear,asoriginallyreported 10,618,300

Restatementforpensioncosts,Note1 (6,945,317)

NETPOSITION,beginningofyear,asrestated 3,672,983

NETPOSITION,endofyear (1,291,371)$

CHANGEINNETPOSITION

11 Seeaccompanyingnotes.

ARIZONASTATELOTTERYAPROPRIETARYFUNDOFTHESTATEOFARIZONASTATEMENTOFCASHFLOWS

YearEndedJune30,2015

CASHFLOWSFROMOPERATINGACTIVITIESCashreceivedfromretailers‐netofvalidations,commissions,

andincentives 313,891,396$CashreceivedfromMUSL 129,500,759Cashpaymentsforprizesandrelatedtaxes (97,758,269)Cashpaymentsforprizes‐MUSL (128,686,326)Cashpaymentstosuppliersofgoodsorservices (35,749,444)Cashpaymentstoemployees (6,012,984)

Netcashprovidedbyoperatingactivities 175,185,132

CASHFLOWSUSEDBYNONCAPITALFINANCINGACTIVITIESPaymentstobeneficiariesperArizonaStatutes (177,638,976)

CASHFLOWSUSEDBYCAPITALFINANCINGACTIVITIESPaymentsforacquisitionofcapitalassets (37,554)

CASHFLOWSFROMINVESTINGACTIVITIESReceiptsofinterest 59,319

Netdecreaseincash (2,432,079)

CASHATBEGINNINGOFYEAR 44,979,474

CASHATENDOFYEAR 42,547,395$

RECONCILIATIONOFOPERATINGINCOMETONETCASHPROVIDEDBYOPERATINGACTIVITIESOperatingincome 170,990,440$

Adjustmentstoreconcileoperatingincometonetcashprovidedbyoperatingactivities

Depreciation 284,719Pensionexpense 322,462Employerpensioncontribution (421,221)Changesinoperatingassetsandliabilities

Accountsreceivable (935,798)Ticketandpulltabinventory 1,172,397Deposit‐MUSL 3,395Accountspayableandaccruedexpenses (932,880)Prizespayableandduetootherfunds 4,701,618

Netcashprovidedbyoperatingactivities 175,185,132$


NOTESTOBASICFINANCIALSTATEMENTS

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Note1–NatureofOperationsandSummaryofSignificantAccountingPoliciesTheArizonaStateLottery(the"Lottery")wascreatedbyenactmentofTitle5,Chapter5totheArizonaRevisedStatutes(ARS),whichwasaninitiativemeasureapprovedbythevotersoftheStateofArizona(the "State") in 1980. The Lottery commenced operations in 1981. The accompanying financialstatementspresentinformationastothetransactionsoftheLottery.FortheperiodJuly1,2014throughJune30,2015,theLotteryheld121instantgames(games819,832,842,850,851,853,854,856,857,859,860‐862,864‐866,868,870‐885,888‐912,914‐923,925‐950,952‐959,961‐974,979‐982,and1018);ofwhich53gamesexpiredduringthefiscalyear.During2015,the Lottery continued the "The Pick," "Fantasy 5," "Pick 3," "Powerball," "Mega Millions," “WeeklyWinnings,”"AllOrNothing",and"MonopolyMillionairesClub"on‐linegames.Asrequired, theLotteryhasdepositswith"Powerball,"and"MegaMillions,"multistateon‐linelotterygames,of$9.9millionatJune30,2015.TheLotteryalsosoldinstanttablotteryticketstonon‐profitorganizations.ThesegamesareprintedandsoldbytheLottery,thoughareadministeredandpaidoutbythepurchasingnon‐profitorganizations. The Lotteryprepares its financial statements in accordancewith accountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.StateLotteryFund– The State Lottery Fund (the "Fund"),which is a proprietary fund of the State,accountsforrevenuesreceivedfromthesaleoflotteryticketsandthereceiptoflicensefees.TheFundisoperated inamanner similar toaprivatebusinessenterprisewhere thegoverningbodyhasdecidedthatperiodicdeterminationofrevenuesearned,expenses incurred,andnet income isappropriate forcapitalmaintenance,managementcontrol,accountability,orotherpurposes.ActivitiesaccountedforintheproprietaryfundfollowsallapplicableGovernmentalAccountingStandardsBoardpronouncements.The Fund accounts for prize payments, operational expenses (including consulting), promotional,advertisingexpenses,and transfersofmonies tootherState funds.Receipts fromeach typeof lotterygameareallocatedasfollows: Not less than 50% of the total annual revenue from Lottery ticket sales is apportioned for the

paymentofprizestotheholdersofwinningticketsfortheperiodJuly1,2014toJune30,2015. Notmorethan18.5%isapportionedforpaymentofLotteryoperatingexpendituresasdefinedby

ArizonaRevisedStatute5‐555.Legislationenactedin2008setthislimitandalsoremoveda4%caponadvertisingexpenditures.

Cashand investments–Substantiallyall theLottery'scash isheldby theStateTreasurer forpooledinvestmentpurposes.StatutesrequiretheStateTreasurertoinvestthesepooledfundsinobligationsoftheU.S.governmentandarerecordedatfairvalue.Accountsreceivable–Retailersarebilledweeklyforticketssold.Paymentsfromretailersaremainlyreceivedthroughelectronicwithdrawalsfromretaileraccountsoneweekaftertheamountsarebilled.Accounts receivable representsamounts thathavebeenbilledbutnotyet collected.Anallowance fordoubtfulaccountsisrecordedintheamountofanybalancesthatarenotpaidbyretailers,generallyoneweekafteramountsarebilled.

ARIZONASTATELOTTERYAPROPRIETARYFUNDOFTHESTATEOFARIZONANOTESTOBASICFINANCIALSTATEMENTS

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Note1–NatureofOperationsandSummaryofSignificantAccountingPolicies(continued)Ticket inventory – Ticket inventory is stated at cost, which represents the amount incurred by theLotteryforpurchasingthetickets locatedintheLottery'swarehousesorheldbyretailers.Thecostofticketsischargedtooperationsupontherecognitionofrevenueundertheproceduresdescribedabove.Capital assets – Capital assets of the Fund, which consists principally of buildings, land, landimprovements, and office furniture and equipment are stated at historical cost. The Lottery definescapitalassetsasassetswithan individualcostofmorethan$5,000.Thecostsofnormalmaintenanceandrepairsthatdonotaddtothevalueoftheassetormateriallyextendassets'livesarenotcapitalized.Expenditures for normal repairs and maintenance are charged to operations as incurred, whereasexpenditures for major renewals, replacements, and betterments are capitalized and depreciated.Depreciationiscomputedusingthestraight‐linemethod.Capitalassetsaredepreciatedonthefollowingbasis:

Buildings 40years Improvements 40years Fixturesandequipment 3–10years Intangibleassets 6years

Investmentsandinvestmentincome–Investmentsarereportedatfairvalueonthestatementofnetposition as determined by quoted market prices with any realized or unrealized gains and lossesreportedinthestatementofrevenues,expenses,andchangesinnetposition.Investmentincomefromall investments is recognized by the Lottery in the period it is earned and gains and losses arerecognizedasrevenueintheperiodinwhichtheyoccur.Investmentincomealsoincludesearningsoninvested cashheldby the StateTreasurer and investedprize, reservesheld by theMultistateLotteryAssociation(MUSL).Salesandrevenuerecognition–Revenueisrecognizedandtherelateddirectexpensesofticketsales,includingprizeexpense,areaccruedbasedupontheknownrelationshipoftheamountofticketsalestotheamountofprizesforeachgame.Thismethodofmeasuringrevenueisnecessaryinordertoproperlymatch revenues and expenses. The Lottery’s operating revenues result from exchange transactionsassociatedwith the principle activity of the fund. Non‐operating revenues result from non‐exchangetransactionsorfromancillaryactivitiesofthefund.



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Note1–NatureofOperationsandSummaryofSignificantAccountingPolicies(continued)Prize expense andprize liability – Instant ticket prize expense is estimated and recognizedwhenticketpacksaresettledandisbasedonthedesignofthegame.Gamedesignsincludecertainguaranteedprizesineachpackofticketsandprizesplacedrandomlybythegamingvendor.Whenvalidationsforthegamehaveended,differencesbetweenestimatedandactualprizesawardedfortherandomlyplacedticketsareadjustedtoprizeexpenseandprizeliability.Prizeexpensefordrawgamesisrecognizedasdrawings are held, based on the estimated or known cost of the prize payments. Prize expense isadjustedasprizesareclaimedandtheactualcostoftheprize isknown.Prize liabilities forprizesarerecordedwhentheprizeexpenseisrecognized.Theprizeliabilityrepresentsaliabilityforprizeswhichareunclaimedforgamesinprogress.Prizesunclaimedfor180daysafterthedrawingdateareforfeitedbytheticketholder.TheLotteryretains70%ofallforfeitedunclaimedprizes,underStatestatue,foruseas additional prizes in future games. State statute also requires that 30% of all forfeited unclaimedprizesbetransferredtotheCourtAppointedSpecialAdvocateAccount,afundwithintheState'sGeneralFund.InApril2015,SenateBill(SB)1477wassignedbytheGovernorofArizonawhichrequiresthat15%ofallforfeitedunclaimedprizesbetransferredtothetribalcollegedualenrollmentprogramfundbutnottoexceed$160,000inanyfiscalyear.SB1477adjustedthe70%retainedforadditionalprizesinfuturegamesto55%.Allremainingforfeitedunclaimedprizesoffsetprizeexpense.SB1477iseffectivestartingFY16.Compensatedabsences–Vacationleavevestswiththeemployeeasitisearned.Employeesmaycarryforwardonlytheamountofvacationbenefitsequaltothemaximumallowableaccumulatedcreditsforthepreceding calendar year. Accordingly, at June30, 2015, the Fund's accounts payable and accruedexpensesbalanceincludesanaccrualofvacationpayandrelatedbenefitsof$290,978.Uponterminationorretirement,anemployeewillbecompensatedforaccumulatedleaveuptoamaximumof240hours,dependentuponaccumulatedtimeandtheindividual'sbenefitsassociatedwiththeirrankasdefinedbyStatepersonnelrule#R2‐5‐403.Paymentwillbebasedontheindividual'srateofpayatterminationorretirement.Upondeath,thesamebenefitsshallbepaidtotheemployee'sbeneficiary.Pensions – For purposes ofmeasuring the net pension liability, deferred outflows of resources anddeferredinflowsofresourcesrelatedtopensions,andpensionexpense,informationaboutthepensionplan’s fiduciary net position and additions to/deductions from the plan’s fiduciary net position havebeendeterminedonthesamebasisastheyarereportedbytheplan.Forthispurpose,benefitpayments(includingrefundsofemployeecontributions)arerecognizedwhendueandpayableinaccordancewiththebenefitterms.Investmentsarereportedatfairvalue.Deferredoutflowsandinflowsofresources–Thestatementofnetpositionandbalancesheetincludeseparate sections for deferred outflows of resources and deferred inflows of resources. Deferredoutflowsofresourcesrepresentaconsumptionofnetpositionthatappliestofutureperiodsthatwillberecognizedasanexpenseorexpenditureinfutureperiods.Deferredinflowsofresourcesrepresentanacquisition of net position or fundbalance that applies to futureperiods andwill be recognized as arevenueinfutureperiods.


15

Note1–NatureofOperationsandSummaryofSignificantAccountingPolicies(continued)Commissions –Retailersreceiveacommissionof6.5%ongrossticketsales.Advertisingcosts–Advertisingcostsareexpensedasincurred.Income taxes – The Lottery is exempt from Federal and Arizona income taxes. Accordingly, noprovisionforincometaxeshasbeenmade.Netposition–NetpositionoftheLotteryareclassifiedanddisplayedastwocomponents:

a. Net investment incapitalassets–Consistsofcapitalassets, includingrestrictedcapitalassets,net of accumulated depreciation and reduced by the outstanding balances of any bonds,mortgages,notes,orotherborrowingsthatareattributabletotheacquisition,construction,orimprovementofthoseassets.

b. Unrestrictednetposition–Allothernetfundsthatdonotmeetthedefinitionof"netinvestmentincapitalassets"or"restricted".

Useofestimates –Thepreparationof financial statements in accordancewith accountingprinciplesgenerally accepted in the United States of America requires management to make estimates andassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.Change in accountingprinciple – For the year ended June 30, 2015, the Lottery implemented theprovisionsofGASBStatementNo.68,AccountingandFinancialReporting forPensions,asamendedbyGASBStatementNo.71,PensionTransitionforContributionsMadeSubsequenttotheMeasurementDate.GASBStatementNos.68and71establishstandardsformeasuringandrecognizingnetpension(assetsand) liabilities, deferred outflows of resources, deferred inflows of resources, andexpenses/expendituresrelatedtopensionbenefitsprovidedthroughdefinedbenefitpensionplans. Inaddition,StatementNo.68requiresdisclosureofinformationrelatedtopensionbenefits.



16

Note1–NatureofOperationsandSummaryofSignificantAccountingPolicies(continued)NetpositionasofJuly1,2014,hasbeenrestatedasfollowsfortheimplementationofGASBStatementNo.68,AccountingandFinancialReportingforPensions,asamendedbyGASBStatementNo.71,PensionTransitionforContributionsMadeSubsequenttotheMeasurementDate.NetpositionaspreviouslyreportedatJune30,2014 10,618,300$

Priorperiodadjustment‐ImplementationofGASB68:Netpensionliability(measurementdateasofJune30,2013) (6,945,317)

Netposition,asrestated,July1,2014 3,672,983$

Note2–CashandInvestmentsHeldbytheStateTreasurerAllcashisdepositedorinvestedwiththeArizonaStateTreasurer(Treasurer).TheTreasurerispartoftheState'sfinancialreportingentityandissuesaseparatelypublishedAnnualFinancialReport.AcopyoftheTreasurer'sAnnualFinancialReportcanbeobtainedfromitsWebsiteatwww.aztreasury.govorbycontactingtheTreasurer'sOfficeat1700WestWashingtonSt.,151Floor,Phoenix,AZ,85007‐2812.A.R.S. requires state agencies'monies to bedepositedwith theTreasurer, and further requires thosedepositstobeinvestedinvariouspooledfunds.CashandinvestmentsheldbytheTreasurerrepresentthe Board's portion of those monies. The Treasurer invests idle monies of the state agencies in aninternalinvestmentpool(Pool3)anddistributesinteresttotheparticipants.Interestearnedfromtheseinvestedmoniesisallocatedmonthlybasedontheaveragedailybalance.Participantsharesinthepoolarepurchasedandsoldbasedonthenetassetvalueoftheshares,andaparticipant'sportionofthepoolis not identified with specific investments. Accordingly, the Board's portion of these deposits andinvestmentsapproximatestheBoard'svalueofpoolshares.TheTreasurer'sinternalinvestmentPool3isnot required tobe registered (and isnot registered)with theSecuritiesandExchangeCommissionunder the Investment Company Act of 1940. In accordance with A.R.S. §35‐311, the State Board ofInvestmentsreviewstheactivitiesandperformanceofthepoolmonthly.AtJune30,2015,theLottery'sdepositswiththeTreasurerwereasfollows:

Cash 24,045,835$Investment‐Pool3 18,501,560

TotalcashandinvestmentsheldbyStateTreasurer 42,547,395$


17

Note2–CashandInvestmentsHeldbytheStateTreasurer(continued)Custodialcreditrisk–Forcashandinvestments,custodialcreditriskistheriskthat,intheeventofthefailure of the counterparty to a transaction, the Lottery will not be able to recover the value of itsinvestmentsorcollateralsecuritiesthatareinthepossessionofanoutsideparty.AsofJune30,2015,alloftheLottery'ssecuritiesareheldbytheStateofArizonaintheLottery'sname.TheLotterymanagescustodialcreditriskinaccordancewithArizonaRevisedStatutesanditsinvestmentpolicy.TheArizonaRevised Statutes require collateral for deposits at 102 percent of all deposits that federal depositoryinsurancedoesnotcover.Concentrationofcreditrisk–Statutes donot include any requirements for concentration of creditrisk.Interest rate risk – Statutes require that public monies invested in securities and deposits have amaximummaturityof5years.Themaximummaturityforinvestmentsinrepurchaseagreementsis180days.Note3–TransfersandStatutoryRequirementsAsrequiredbyARSSection5‐505,theLotteryrecordedtransfersduringtheyearendedJune30,2015,asfollows:

GeneralFund 103,390,726$UniversityBondFund 22,273,207HealthyArizona 20,199,500MassTransit(LTAF) 11,444,400HeritageFund 10,000,000CommerceAuthorityArizonaCompetesFund 3,500,000Court‐appointedSpecialAdvocateFund 2,914,197EconomicSecurityHomelessServices 1,000,000InternetCrimesAgainstChildren/Victim'sRightsEnforcement 1,000,000DepartmentofGaming 300,000

TotaltransferstootherStatefunds 176,022,030$

ThesetransactionsmettheminimumpercentagerequirementsimposedupontheLotterybystatute.



18

Note3–TransfersandStatutoryRequirements(continued)Of the transfer balances above, the following was included in Due to Other State Funds as ofJune30,2015:

Universitycapitaldebtservicesfund 22,273,207$Stategeneralfund 3,750,725Arizonacommerceauthorityfund 985,100Courtappointedspecialadvocatesfund 438,943

Totalduetootherstatefunds 27,447,975$

Note4–CapitalAssetsCapitalassetactivityfortheyearendedJune30,2015isasfollows:

Beginning EndingBalance Increases Decreases Transfers Balance

Capitalassets,notbeingdepreciated:Land 937,830$ ‐$ ‐$ ‐$ 937,830$Constructioninprogress 12,897 ‐ ‐ (12,897) ‐

Capitalassets,beingdepreciated:Landimprovements 330,865 ‐ ‐ ‐ 330,865Buildings 4,010,086 13,745 ‐ 12,897 4,036,728Furniture,fixtures,and

equipment 2,643,912 23,809 ‐ ‐ 2,667,721Intangibleassets 599,324 ‐ ‐ ‐ 599,324

Totalcapitalassets 8,534,914 37,554 ‐ ‐ 8,572,468

Lessaccumulateddepreciationfor:Landimprovements (330,865) ‐ ‐ ‐ (330,865)Buildings (2,064,308) (107,810) ‐ ‐ (2,172,118)Furniture,fixtures,and

equipment (2,341,032) (77,023) ‐ ‐ (2,418,055)Intangibleassets (99,887) (99,886) ‐ ‐ (199,773)

Totalaccumulateddepreciation (4,836,092) (284,719) ‐ ‐ (5,120,811)

Totalcapitalassets,net 3,698,822$ (247,165)$ ‐$ ‐$ 3,451,657$


19

Note5–PledgedRevenuesTheLotteryhaspledgedportionsofitsgrossrevenuestowardsthepaymentofdebtserviceontheStateLottery Revenue Bonds Series 2010A issued by the State. These bonds provide additional workingcapitaltotheStatetopayappropriatedexpendituresoftheState'sGeneralFund.Thebondsarepayablesolelyfromandsecuredbypledgedrevenuesconsistingof,untilJuly1,2012,amountsdistributabletotheStateGeneralFund from theLotterypursuant toLottery law,and fromandafter July1,2012,allLottery revenues deposited to the Fund net of operating expenses of the Lottery. At June30,2015,pledged revenues totaled approximately $172,107,800, of which $37,499,000 was required to betransferred to cover debt service. Future pledged revenues required to be transferred to pay allremaining debt service for the bonds through final maturity of July1, 2029 is approximately$525,015,250.Note6–CommitmentsThe Lottery enters into various contracts for goods and services during the normal course of itsbusiness.AllcontactsandpurchasingactivityaresubjecttotheArizonaStateProcurementCodeandtherulesoftheArizonaStateProcurementOffice.Allcontractshaveincorporatedintothemthe"StandardTermsandConditions"asrequiredbytheArizonaStateProcurementOffice.Thesetermsandconditionsinallthecontractsallowforcancellationforlackoffundinginthecurrentfiscalyearornextfiscalyear.ThecontractmayalsobeterminatedfortheLottery'sconvenienceatanytimewithnopenaltywhenitisinthebestinterestoftheState.TheLotteryenteredintoafive‐yearcontractwithG‐TechServices,Inc.forcomputerprocessingservicesatabasecontractrateof3.7%ofon‐linesalesinSeptember2009.The Lottery entered a commercial rental agreement effective December 1, 2014 to lease a facility inTucson, Arizona for approximately $5,947 per month, and payment of certain additional expensesrelatingtotheleasedpremisestoNovember30,2019.Rentexpenseforthefacilitieswasapproximately$65,343fortheyearendedJune30,2015.

Futureminimumrentalpaymentsdueundertheleaseareasfollow:

YearendingJune30,2016 71,364$2017 71,3642018 71,3642019 71,3642020 29,735Total 214,092$



20

Note7–LossContingenciesAnnuities are purchased for all prizes over $400,000 for which winners will receive the jackpot inannual installments forThePickon‐linegame.Theannuitiesarepurchased fromqualifying insurancecompanies,whichhavethehighestratingsfromamongA.M.BestCompany,Standard&Poor's,Moody's,Duff&Phelps,orWeiss.Purchasesofannuitiestransferliabilitiesforprizestotheinsurancecompany.However,theLotterymayincurliabilitiesforprizesintheeventofadefaultofaninsurancecompany.Aggregatefuturepaymentstoprizewinnersonexistingannuitiestotaled$46,234,253atJune30,2015.Approximately$43,828,400ofthetotalaggregatefuturepaymentsatJune30,2015,relatetoannuitiespurchasedfromfiveseparateinsurancecompanies,ofwhich$19,946,800relatestoasingleinsurancecompany.Tort claims against the Lottery, its agents, officers, and employees who are acting in the scope andcourse of their employment with the Lottery are covered pursuant to the State Risk Managementstatute,ARS§41‐621.Thereisnolimittothatcoverage.Therefore,astoanyclaimsbasedontort,thereis no contingent liability to the budget of the Lottery. The Lottery is involved in various legalproceedings,whicharoseinthenormalcourseofbusiness.ManagementoftheLotterydoesnotbelievethattheultimateresolutionofthesematterswillhaveamaterialeffectonthefinancialposition,resultsofoperations,orcashflowsoftheLottery.Note8–PensionsandOtherPostemploymentBenefitsThe Lottery contributes to the Arizona State Retirement Plan (the "Plan"), a retirement planadministeredbytheArizonaStateRetirementSystem(ASRS).ThePlanisacomponentoftheStateofArizona.TheLotteryreported$322,462ofpensionexpenditurerelatedtothepensionplantowhichitcontributes.ArizonaStateRetirementPlanPlan description – The ASRS administers a cost‐sharing multiple‐employer defined benefit pensionplan,acost‐sharingmultiple‐employerdefinedbenefithealthinsurancepremiumbenefit(OPEB)plan,and a cost‐sharing multiple‐employer defined benefit long‐term disability (OPEB) plan. The ArizonaState Retirement System Board governs the ASRS according to the provisions of A.R.S. Title 38,Chapter5, Articles 2 and 2.1. The ASRS issues a publicly available financial report that includes itsfinancialstatementsandrequiredsupplementaryinformation.ThereportisavailableonitsWebsiteatwww.azasrs.gov.


21

Note8–PensionsandOtherPostemploymentBenefits(continued)Benefitsprovided–TheASRSprovidesretirement,healthinsurancepremiumsupplement,long‐termdisability, and survivor benefits. State statute establishes benefits terms. Retirement benefits arecalculatedonthebasisofage,averagemonthlycompensation,andservicecreditasfollows:

BeforeJuly1,2011 OnorAfterJuly1,2011Yearsofservice Sumofyearsandageequals80 30years,age55

andagerequired 10years,age62 25years,age60toachievebenefit 5years,age50+ 10years,age62

anyyears,age65+ 5years,age50*anyyears,age65+

Finalaverage Highest36months Highest60monthssalaryisbasedon oflast120months oflast120months

Benefitpercent 2.1%to2.3% 2.1%to2.3%peryearofservice

*withactuariallyreducedbenefits

RetirementInitialmembershipdate:

Retirement benefits for members who joined the ASRS prior to September 13, 2013, are subject toautomaticcost‐of‐livingadjustmentsbasedonexcessinvestmentearning.MemberswithamembershipdateonorafterSeptember13,2013,arenoteligibleforcost‐of‐livingadjustments.Survivorbenefitsarepayable upon a member's death. For retired members, the survivor benefit is determined by theretirement benefit option chosen. For all othermembers, the beneficiary is entitled to themember'saccountbalance that includes themember's contributionsandemployer's contributions,plus interestearned.



22

Note8–PensionsandOtherPostemploymentBenefits(continued)

Contributions – In accordance with State statutes, annual actuarial valuations determine activemember and employer contribution requirements. The combined active member and employercontributionratesareexpectedtofinancethecostsofbenefitsemployeesearnduringtheyear,withanadditionalamount to financeanyunfundedaccrued liability.For theyearended June30,2015,activeASRS members were required by statute to contribute at the actuarially determined rate of 11.48percent(11.36percentforretirementand0.12percentforlong‐termdisability)ofthemembers'annualcoveredpayroll,andtheLotterywasrequiredbystatutetocontributeattheactuariallydeterminedrateof11.48percent(10.77percentforretirement,0.59percentforhealthinsurancepremiumbenefit,and0.12percent for long‐termdisability) of the activemembers' annual coveredpayroll. In addition, theLotterywasrequiredbystatute tocontributeat theactuariallydeterminedrateof9.57percent(9.51percent for retirementand0.06percent for long‐termdisability)of annual coveredpayroll of retiredmemberswhoworked for theLottery inpositions thatwould typicallybe filledbyanemployeewhocontributes to the ASRS. The Lottery's contributions to the pension plan for the year endedJune30,2015, were $421,221. The Lottery's contributions for the current and 2 preceding years forOPEB,allofwhichwereequaltotherequiredcontributions,wereasfollows:

HealthBenefit Long‐TermYearsendedJune30, SupplementFund DisabilityFund

2015 22,821$ 4,641$2014 22,565 9,178

Pensionliability–AtJune30,2015,theLotteryreportedaliabilityof$6,279,956foritsproportionateshareoftheASRS'netpensionliability.ThenetpensionliabilitywasmeasuredasofJune30,2014.Thetotal pension liability used to calculate the net pension liability was determined using updateprocedurestorollforwardthetotalpensionliabilityfromanactuarialvaluationasofJune30,2013,tothemeasurementdateofJune30,2014.TheLottery'sreportedliabilityatJune30,2015,decreasedby$1,074,726fromtheLottery'sprioryearliability of $7,354,682 because of changes in the ASRS' net pension liability and the Lottery'sproportionateshareofthatliability.TheASRS'publiclyavailablefinancialreportprovidesdetailsonthechangeinthenetpensionliability.TheLottery'sproportionof thenetpension liabilitywasbasedon fiscalyearemployer contributions.TheLottery'sproportionmeasuredasofJune30,2014,was0.042442percent,whichwasadecreaseof0.001798percentfromitsproportionmeasuredasofJune30,2013.


23

Note8–PensionsandOtherPostemploymentBenefits(continued)PensionExpenseandDeferredOutflows/InflowsofResources–FortheyearendedJune30,2015,theLottery recognized pension expense for ASRS of $322,462, At June 30, 2015, the Lottery reporteddeferredoutflowsofresourcesanddeferredinflowsofresourcesrelatedtopensionsfromthefollowingsources:

Deferred DeferredOutflowsof InflowsofResources Resources

Differencebetweenexpectedandactualexperience 319,166$ ‐$

Changesofassumptionsorotherinputs ‐ ‐

Netdifferencebetweenprojectedandactualearningsonpensionplaninvestments ‐ 1,098,170

ChangesinproportionanddifferencesbetweenLotterycontributionsandproportionateshareofcontributions ‐ 208,819

Lotterycontributionssubsequenttothemeasurementdate 421,221 ‐

Total 740,387$ 1,306,989$

The $421,221 reported as deferred outflows of resources related to ASRS pensions resulting fromLotterycontributionssubsequenttothemeasurementdatewillberecognizedasareductionofthenetpension liability in the year ended June 30, 2016. Other amounts reported as deferred outflows ofresources and deferred inflows of resources related to ASRS pensionswill be recognized in pensionexpenseasfollows:

YearendedJune30,2016 226,566$2017 260,1502018 274,541



24

Note8–PensionsandOtherPostemploymentBenefits(continued)

Actuarialassumptions‐Thesignificantactuarialassumptionsusedtomeasurethetotalpensionliabilityareasfollow:

Actuarialvaluationdate June30,2013Actuarialrollforwarddate June30,2014Actuarialcostmethod EntryagenormalAmortizationmethod:

Planamendments ImmediateInvestmentgain/loss 5yearsAssumptiongain/loss AveragefutureservicelivesExperiencegain/loss Averagefutureservicelives

Assetvaluation FairValueDiscountrate 8.00%Projectsalaryincreases 3.00‐6.57%Inflation 3.00%Permanentbenefitincreases IncludedMortalityrates 1994GAMScaleBB

Actuarial assumptionsused in the June30, 2013, valuationwerebasedon the results of an actuarialexperiencestudyforthe5‐yearperiodendedJune30,2012.The long‐termexpected rateof returnonASRSpensionplan investmentswasdetermined tobe8.79percent using a building‐blockmethod inwhichbest‐estimate ranges of expected future real rates ofreturn(expectedreturns,netofpensionplaninvestmentexpenseandinflation)aredevelopedforeachmajor asset class. These ranges are combined to produce the long‐term expected rate of return byweighting the expected future real rates of return by the target asset allocation percentage and byaddingexpectedinflation.Thetargetallocationandbestestimatesofarithmeticrealratesofreturnforeachmajorassetclassaresummarizedinthefollowingtable:

Long‐TermTarget ExpectedReal

Allocation RateofReturnAssetClassEquity 63% 7.03%FixedIncome 25% 3.20%RealEstate 8% 4.50%Commodities 4% 4.75%Total 100%


25

Note8–PensionsandOtherPostemploymentBenefits(continued)Discountrate–ThediscountrateusedtomeasuretheASRStotalpensionliabilitywas8percent,whichislessthanthelong‐termexpectedrateofreturnof8.79percent.Theprojectionofcashflowsusedtodetermine the discount rate assumed that contributions from participating employers will be madebasedontheactuariallydeterminedratesbasedontheASRSBoard'sfundingpolicy,whichestablishesthecontractuallyrequiredrateunderArizonastatute.Basedonthoseassumptions, thepensionplan'sfiduciary net positionwas projected to be available tomake all projected future benefit payments ofcurrentplanmembers.Therefore, the long‐termexpected rateof returnonpensionplan investmentswasappliedtoallperiodsofprojectedbenefitpaymentstodeterminethetotalpensionliability.SensitivityoftheLottery'sproportionateshareoftheASRSnetpensionliabilitytochangesinthediscount rate – The following table presents the Lottery's proportionate share of the net pensionliabilitycalculatedusingthediscountrateof8percent,aswellaswhattheLottery'sproportionateshareofthenetpensionliabilitywouldbeifitwerecalculatedusingadiscountratethatis1percentagepointlower(7percent)or1percentagepointhigher(9percent)thanthecurrentrate:

1%Decrease Current 1%Increase(7%DiscountRate) (8%DiscountRate) (9%DiscountRate)

Lottery'sproportionateshareofthenetpensionliability 7,937,543$ 6,279,956$ 5,380,633$

Pension plan fiduciarynet position – Detailed information about the pension plan's fiduciary netpositionisavailableintheseparatelyissuedASRSfinancialreport.

Pensionliability–AtJune30,2015,theLotteryreportedaliabilityof$6,279,956foritsproportionateshareoftheASRS'netpensionliability.Note9–MajorVendorsThe Lottery has 3 vendors that represent approximately 84% of its purchases for the years endedJune30,2015,respectively.Note10–RiskManagementTheLotteryisexposedtovariousrisksoflossrelatedtotorts;theftof,damageto,andthedestructionofassets; errors and omissions; injuries to employees; and natural disasters. The Lottery purchasescommercialinsurancetocovertheserisks.Theamountofcoveragehasnotbeenexceededbyclaimsinthelastthreeyears.

REQUIREDSUPPLEMENTARYINFORMATION

ARIZONASTATELOTTERYSCHEDULEOFPROPORTIONATESHAREOFTHENETPENSIONLIABILITY

26

20142015 through(2014) 2016

Lottery'sproportionofthenetpensionliability 0.042442% InformationLottery'sproportionateshareofthenetpensionliability 6,279,956$ notavailableLottery'scovered‐employeepayroll 3,962,274$Lottery'sproportionateshareofthenetpensionliability

asapercentageofitscoveredemployeespayroll 158.49%Planfiduciarynetpositionasapercentageofthetotal

pensionliability 69.49%

FiscalYear

ARIZONASTATELOTTERYSCHEDULEOFPENSIONCONTRIBUTIONS

27

2013through

2015 2014 2016

Statutorilyrequiredcontribution 444,044$ 432,185$ InformationLottery'scontributionsinrelationtothe notavailable

statutorilyrequiredcontribution 444,044 432,185

Lottery'scontributiondeficiency(excess) ‐$ ‐$

Lottery'scovered‐employeepayroll 3,962,274$ 3,860,355$

Lottery'scontributionasapercentageofcovered‐employeepayroll 11.21% 11.20%

FiscalYear

SUPPLEMENTARYINFORMATION

ARIZONASTATELOTTERYAPROPRIETARYFUNDOFTHESTATEOFARIZONASUPPLEMENTALSCHEDULESOFGROSSPROFITBYGAME

FORGAMESEXPIRINGDURINGTHEYEARYEARENDEDJUNE30,2015

28

LuckyLoot Jewel's7 MillionDollarCashBonanzaGame819 Game832 Game842

TicketSales 4,934,860$ 100% 12,436,765$ 100% 67,558,160$ 100%

DirectExpenses:Commissions 320,767 6.50% 808,391 6.50% 4,391,280 6.50%

Prizes‐lowtier 1,788,889 36.25% 5,596,544 45.00% 23,827,763 35.27%Prizes‐hightier 1,649,665 33.43% 2,956,150 23.77% 23,024,741 34.08%

Totalprizes 3,438,554 69.68% 8,552,694 68.77% 46,852,504 69.35%

Ticketpurchases 61,805 0.00% 184,218 1.48% 365,040 0.54%

Advertising ‐ ‐ 483,666 0.72%

Totaldirectexpenses 3,821,126 77.43% 9,545,303 76.75% 52,092,490 77.11%

Grossprofitbygame 1,113,734$ 22.57% 2,891,462$ 23.25% 15,465,670$ 22.89%

Bingo Crossword CasinoKingsGame850 Game851 Game853

TicketSales 20,623,286$ 100% 30,268,444$ 100% 1,474,525$ 100%

DirectExpenses:Commissions 1,340,514 6.50% 1,967,449 6.50% 95,847 6.50%

Prizes‐lowtier 11,033,458 53.50% 15,134,222 50.00% 729,893 49.50%Prizes‐hightier 2,132,750 10.34% 4,458,000 14.73% 158,600 10.76%

Totalprizes 13,166,208 63.84% 19,592,222 64.73% 888,493 60.26%


Advertising ‐ 0.00% ‐ 0.00% ‐ 0.00%


Grossprofitbygame 5,797,670$ 28.11% 8,242,204$ 27.23% 456,598$ 30.97%

MadMoney CashMachine CashStormGame854 Fame856 Game857

TicketSales 1,290,043$ 100% 4,560,605$ 100% 1,792,732$ 100%

DirectExpenses:Commissions 83,855 6.50% 296,441 6.50% 116,528 6.50%

Prizes‐lowtier 703,076 54.50% 1,938,262 42.50% 856,033 47.75%Prizes‐hightier 68,760 5.33% 1,191,250 26.12% 303,520 16.93%

Totalprizes 771,836 59.83% 3,129,512 68.62% 1,159,553 64.68%


Advertising ‐ 0.00% ‐ 0.00% ‐ 0.00%

Totaldirectexpenses 893,449 69.26% 3,475,315 76.20% 1,314,980 73.35%

Grossprofitbygame 396,594$ 30.74% 1,085,290$ 23.80% 477,752$ 26.65%

ARIZONASTATELOTTERYAPROPRIETARYFUNDOFTHESTATEOFARIZONASUPPLEMENTALSCHEDULESOFGROSSPROFITBYGAMEFORGAMESEXPIRINGDURINGTHEYEARYEARENDEDJUNE30,2015

29

TicTacToe MustacheCash MoneyMultiplierBonusGame859 Game860 Game861

TicketSales 1,128,030$ 100% 1,908,672$ 100% 5,877,515$ 100%


Prizes‐lowtier 558,378 49.50% 935,249 49.00% 2,497,947 42.50%Prizes‐hightier 111,300 9.87% 308,650 16.17% 1,613,540 27.45%

Totalprizes 669,678 59.37% 1,243,899 65.17% 4,111,487 69.95%


Advertising ‐ 0.00% ‐ 0.00% ‐ 0.00%


Grossprofitbygame 343,178$ 30.42% 491,824$ 25.77% 1,327,109$ 22.58%

RightOnTheMoney Joker'sJackpot CashInASnapGame862 Game864 Game865

TicketSales 10,368,660$ 100% 5,815,605$ 100% 1,144,226$ 100%



Totalprizes 7,677,102 74.04% 4,065,872 69.91% 680,320 59.46%


Advertising ‐ 0.00% ‐ 0.00% ‐ 0.00%

Totaldirectexpenses 8,416,109 81.17% 4,505,694 77.48% 786,684 68.75%


GoldenTicket DiamondDazzlerBingo Neon1SGame866 Game868 Game870

TicketSales 23,951,380$ 100% 14,168,515$ 100% 1,357,265$ 100%

DirectExpenses:Commissions 1,556,840 6.50% 920,955 6.50% 88,225 6.50%


Totalprizes 18,241,165 76.16% 9,793,110 69.12% 813,227 59.92%


Advertising ‐ 0.00% ‐ 0.00% 42,267 3.11%

Totaldirectexpenses 19,876,899 82.99% 10,998,926 77.63% 987,201 72.73%




30

Neon2S Neon5S Neon7SGame871 Game872 Game873

TicketSales 2,312,284$ 100% 5,177,045$ 100% 6,706,030$ 100%


Prizes‐lowtier 1,121,458 48.50% 2,200,251 42.50% 2,179,470 32.50%Prizes‐hightier 381,150 16.48% 1,398,150 27.01% 2,843,870 42.41%

Totalprizes 1,502,608 64.98% 3,598,401 69.51% 5,023,340 74.91%


Advertising 42,268 1.83% 300 0.01% 42,268 0.63%


Grossprofitbygame 560,491$ 24.24% 1,167,203$ 22.55% 1,128,924$ 16.83%

ArizonaBlackjack SuperMatch3 21TriplerGame874 Game875 Game876

TicketSales 1,545,188$ 100% 1,223,599$ 100% 1,759,312$ 100%


Prizes‐lowtier 811,226 52.50% 624,035 51.00% 738,911 42.00%Prizes‐hightier 109,400 7.08% 104,650 8.55% 398,900 22.67%

Totalprizes 920,626 59.58% 728,685 59.55% 1,137,811 64.67%


Advertising 41,993 2.72% ‐ 0.00% ‐ 0.00%

Totaldirectexpenses 1,106,831 71.63% 847,806 69.29% 1,300,983 73.95%

Grossprofitbygame 438,357$ 28.37% 375,793$ 30.71% 458,329$ 26.05%

Ghostbusters CoffeeBreakCrossword JumboBucksGame878 Game879 Game880

TicketSales 1,974,334$ 100% 21,755,980$ 100% 10,977,150$ 100%

DirectExpenses:Commissions 128,332 6.50% 1,414,143 6.50% 713,514 6.50%

Prizes‐lowtier 967,424 49.00% 8,702,392 40.00% 4,116,439 37.50%Prizes‐hightier 314,980 15.95% 6,599,050 30.33% 4,102,000 37.37%

Totalprizes 1,282,404 64.95% 15,301,442 70.33% 8,218,439 74.87%


Advertising ‐ 0.00% ‐ 0.00% ‐ 0.00%



ARIZONASTATELOTTERYAPROPRIETARYFUNDOFTHESTATEOFARIZONASUPPLEMENTALSCHEDULESOFGROSSPROFITBYGAMEFORGAMESEXPIRINGDURINGTHEYEARYEARENDEDJUNE30,2015

31

TripleRed7S Aces&8S FrostyFunGame882 Game883 Game884

TicketSales 9,626,140$ 100% 2,532,896$ 100% 2,060,495$ 100%


Prizes‐lowtier 3,729,819 38.75% 1,228,455 48.50% 1,030,248 40.67%Prizes‐hightier 3,507,460 36.44% 411,400 16.24% 202,040 7.98%

Totalprizes 7,237,279 75.18% 1,639,855 64.74% 1,232,288 48.65%

Ticketpurchases 55,227 0.57% 48,889 1.93% ‐ 0.00%

Advertising ‐ 0.00% ‐ 0.00% ‐ 0.00%


Grossprofitbygame 1,707,935$ 17.74% 679,514$ 26.83% 694,272$ 27.41%

StockingStuffers RedHot7S CherryTriplerGame885 Game889 Game890

TicketSales 2,592,624$ 100% 10,139,282$ 100% 2,788,610$ 100%


Prizes‐lowtier 1,348,164 52.00% 5,576,605 55.00% 1,415,222 50.75%Prizes‐hightier 346,380 13.36% 980,315 9.67% 393,220 14.10%

Totalprizes 1,694,544 65.36% 6,556,920 64.67% 1,808,442 64.85%


Advertising 60,564 2.34% ‐ 0.00% ‐ 0.00%


Grossprofitbygame 610,878$ 23.56% 2,793,787$ 27.55% 750,038$ 26.90%

Pigs&Pearls SlingoTrio KingSizeCrosswordGame891 Game892 Game893

TicketSales 1,477,966$ 100% 9,855,305$ 100% 17,383,980$ 100%



Totalprizes 877,656 59.38% 6,841,217 69.42% 12,584,674 0.00%


Advertising ‐ 0.00% ‐ 0.00% ‐





32

GoldDustDoubler 7‐11‐21 BonusWordCrosswordGame894 Game895 Game896

TicketSales 1,523,193$ 100% 1,415,141$ 100% 11,180,847$ 100%



Totalprizes 909,412 59.70% 856,771 60.54% 7,176,057 64.18%


Advertising ‐ 0.00% ‐ 0.00% ‐ 0.00%



MonopolyJackpot FastCashPoker ClassicCashGame901 Game903 Game904

TicketSales 7,418,750$ 100% 5,434,320$ 100% 24,506,720$ 100%


Prizes‐lowtier 3,152,970 42.50% 2,309,589 42.50% 7,067,738 28.84%Prizes‐hightier 1,851,149 24.95% 1,445,275 26.60% 9,898,620 40.39%

Totalprizes 5,004,119 67.45% 3,754,864 69.10% 16,966,358 69.23%


Advertising ‐ 0.00% ‐ 0.00% ‐ 0.00%



MoneyOnTheSpot Fantastic5'S CasinoSlotsGame905 Game907 Game908

TicketSales 5,544,640$ 100% 1,406,401$ 100% 5,677,910$ 100%


Prizes‐lowtier 2,356,476 42.50% 703,201 50.00% 2,626,040 46.25%Prizes‐hightier 1,530,350 27.60% 138,940 9.88% 1,281,430 22.57%

Totalprizes 3,886,826 70.10% 842,141 59.88% 3,907,470 68.82%


Advertising ‐ 0.00% ‐ 0.00% ‐ 0.00%


Grossprofitbygame 1,235,649$ 22.29% 438,774$ 31.20% 1,345,100$ 23.69%

THEARIZONASTATELOTTERYAPROPRIETARYFUNDOFTHESTATEOFARIZONASUPPLEMENTALSCHEDULEOFGROSSPROFITBYGAMEFORGAMESEXPIRINGDURINGTHEYEARYEARENDEDJUNE30,2015

33

SkyHigh7'S CrazyWild10'sGame909 Game915

TicketSales 1,453,055$ 100% 9,253,810$ 100% 8,943,150$ 100%



Totalprizes 866,160 59.61% 6,339,914 68.51% 6,770,344 75.70%


Advertising ‐ 0.00% ‐ 0.00% ‐ 0.00%



DinnerAndAMovie DuckDynasty CrazyCashCrosswordGame916 Game918 Game925

TicketSales 1,406,848$ 100% 1,895,714$ 100% 16,675,750$ 100%



Totalprizes 999,276 71.03% 1,238,700 65.34% 12,389,562 74.30%


Advertising ‐ 0.00% ‐ 0.00% ‐ 0.00%



Blackjack WildCashGame933 Game944

TicketSales 5,677,430$ 100% 5,076,780$ 100%

DirectExpenses:Commissions 369,036 6.50% 329,994 6.50%

Prizes‐lowtier 2,413,108 42.50% 2,157,635 42.50%Prizes‐hightier 1,562,450 27.52% 1,424,250 28.05%

Totalprizes 3,975,558 70.02% 3,581,885 70.55%

Ticketpurchases 61,805 1.09% 48,772 0.96%

Advertising ‐ 0.00% ‐ 0.00%

Totaldirectexpenses 4,406,399 77.61% 3,960,651 78.02%

Grossprofitbygame 1,271,031$ 22.39% 1,116,129$ 21.98%

BingoBoltGame911


SUPPLEMENTALSCHEDULEOFGROSSPROFITBYGAMEFORGAMESEXPIRINGDURINGTHEYEAR

YEARENDEDJUNE30,2015

34

Fantasy5/Fantasy5ThePick/ThePickExtraDrawings ExtraDrawings PowerballDrawings

January1,2014to January1,2014to January1,2014toDecember31,2014 December31,2014 December31,2014

TicketSales 27,397,821$ 100% 15,648,653$ 100% 88,599,418$ 100%

DirectExpenses:Commissions 1,780,849 6.50% 1,017,154 6.50% 5,758,955 6.50%Totalprizes 13,939,654 50.88% 8,083,078 51.65% 44,299,709 50.00%Onlinesystemexpenses 1,017,349 3.71% 576,944 3.69% 3,265,458 3.69%Advertising 16,246 0.06% ‐ 0.00% 1,392,872 1.57%



Pick3Drawings MegaMillions WeeklyWinningsJanuary1,2014to January1,2014to January1,2014toDecember31,2014 December31,2014 December31,2014

TicketSales 9,328,306$ 100% 46,907,070$ 100% 4,409,528$ 100%

DirectExpenses:Commissions 606,338 6.50% 3,048,953 6.50% 286,619 6.50%Totalprizes 4,664,153 50.00% 23,599,641 50.31% 2,204,764 50.00%Onlinesystemexpenses 337,726 3.62% 1,732,053 3.69% 105,594 2.39%Advertising 6,127 0.07% 1,200,941 2.56% ‐ 0.00%

0.00%Totaldirectexpenses 5,614,344 60.19% 29,581,588 63.06% 2,596,977 58.89%

0.00%Grossprofitbygame 3,713,962$ 39.81% 17,325,482$ 36.94% 1,812,551$ 41.11%

2By2 AllOrNothing MonopolyMillionairesClubJanuary1,2014to January1,2014to January1,2014toDecember31,2014 December31,2014 December31,2014

TicketSales 1,299,480$ 100% 5,452,082$ 100% 871,720$ 100%

DirectExpenses:Commissions 84,466 6.50% 354,385 6.50% 56,655 6.50%Totalprizes 673,130 51.80% 2,944,124 54.00% 435,860 50.00%Onlinesystemexpenses 58,602 4.51% 200,019 3.67% 32,254 3.70%Advertising ‐ 0.00% 1,549,396 28.42% 916,099 105.09%


Grossprofitbygame 483,282$ 37.19% 404,158$ 7.41% (569,148)$ ‐65.29%

NOTE:Aftertheannouncedcompletionofticketsalesforeachgame,customershavea180‐dayperiodinwhichtheycanredeemtheirwinning tickets. Theabovegross profit information includes games inwhich the180‐daygraceperiodexpiredduring the fiscal yearendedJune30,2015.EconomicDevelopmentgamesaredenotedwith(*)

35

REPORTOFINDEPENDENTAUDITORSONINTERNALCONTROLOVERFINANCIALREPORTINGANDONCOMPLIANCEANDOTHERMATTERSBASEDONANAUDIT

OFFINANCIALSTATEMENTSPERFORMEDINACCORDANCEWITHGOVERNMENTAUDITINGSTANDARDS

TotheCommissionersofArizonaStateLotteryPhoenix,ArizonaWehaveaudited, inconformitywiththeauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica and the standards applicable to financial audits contained inGovernmentAuditingStandardsissued by the Comptroller General of theUnited States, the financial statements of the business‐typeactivitiesoftheArizonaStateLottery(the“Lottery”)asofandfortheyearendedJune30,2015,andtherelated notes to the financial statements, which collectively comprise the Lottery’s basic financialstatements,andhaveissuedourreportthereondatedNovember9,2015.InternalControlOverFinancialReportingInplanningandperformingourauditof thefinancialstatements,weconsideredtheLottery’s internalcontrol over financial reporting (internal control) to determine the audit procedures that areappropriateinthecircumstancesforthepurposeofexpressingouropiniononthefinancialstatements,butnot forthepurposeofexpressinganopinionontheeffectivenessoftheLottery’s internalcontrol.Accordingly,wedonotexpressanopinionontheeffectivenessoftheLottery’sinternalcontrol.A deficiency in internal control exists when the design or operation of a control does not allowmanagementoremployees,inthenormalcourseofperformingtheirassignedfunctions,toprevent,ordetect and correct, misstatements on a timely basis. A material weakness is a deficiency, or acombinationofdeficiencies,ininternalcontrolsuchthatthereisareasonablepossibilitythatamaterialmisstatementoftheentity'sfinancialstatementswillnotbeprevented,ordetectedandcorrectedonatimelybasis.Asignificantdeficiency isadeficiency,oracombinationofdeficiencies,ininternalcontrolthatislessseverethanamaterialweakness,yetimportantenoughtomeritattentionbythosechargedwithgovernance.

36

Ourconsiderationofinternalcontrolwasforthelimitedpurposedescribedinthefirstparagraphofthissection and was not designed to identify all deficiencies in internal control that might be materialweaknessesorsignificantdeficiencies.Giventheselimitations,duringourauditwedidnotidentifyanydeficiencies in internal control that we consider to be material weaknesses. However, materialweaknesses may exist that have not been identified. We did identify certain deficiencies in internalcontrol,describedintheaccompanyingScheduleofFindingsandResponsesasitems2015‐001and2015‐002thatweconsidertobesignificantdeficiencies.ComplianceandOtherMattersAspartofobtainingreasonableassuranceaboutwhethertheLottery’sfinancialstatementsarefreeofmaterial misstatement, we performed tests of its compliance with certain provisions of laws,regulations, contracts, and grant agreements, noncompliance with which could have a direct andmaterialeffectonthedeterminationoffinancialstatementamounts.However,providinganopiniononcompliancewiththoseprovisionswasnotanobjectiveofouraudit,andaccordingly,wedonotexpresssuchanopinion.TheresultsofourtestsdisclosednoinstancesofnoncomplianceorothermattersthatarerequiredtobereportedunderGovernmentAuditingStandards.Lottery’sResponsestoFindingsThe Arizona Lottery’s responses to the findings identified in our audit are described in theaccompanyingScheduleofFindingsandResponses.TheArizonaLottery’sresponsewasnotsubjectedtotheauditingproceduresappliedintheauditofthefinancialstatementsand,accordingly,weexpressnoopiniononit.PurposeofthisReportThisreportisintendedsolelyfortheinformationanduseofmanagement,CommissionersoftheArizonaStateLottery,andotherswithintheentityandisnotintendedtobe,andshouldnotbe,usedbyanyoneotherthanthesespecifiedparties.

Scottsdale,ArizonaNovember9,2015


SCHEDULEOFFINDINGSANDRESPONSESYEARENDEDJUNE30,2015

37

2015‐001–AccountingandReportingComponentsofNetPosition(SignificantDeficiency)Criteria:Webelieve thatparagraph12.123of theAmerican Instituteof CertifiedPublicAccountants,(AICPA) State and Local Government Audit and Accounting Guide provides the relevant accountingguidance for liabilities for prizes and forfeitures of unclaimedprizes. Forfeitures of unclaimedprizesshouldberecognizedasagain(netagainstprizeexpense)asofthedatetheclaimisforfeitedaccordingto the provisions of a State’s stated regulations. Many States have regulations with regard to howforfeited unclaimed prizesmust be utilized. For example some States require all forfeited unclaimedprizes to be transferred to another State fund or agency having a differentmission. Arizona RevisedStatutes5‐568statesthefollowing:

DispositionofunclaimedprizemoneyUnclaimedprizemoneyfortheprizeonawinningticketorshareshallberetainedforthepersonentitledtotheprizeforonehundredeightydaysafterthedrawinginwhichtheprizewaswoninthecaseofadrawingprizeandforonehundredeightydaysaftertheannouncedendofthegameinquestioninthecaseofaprizedeterminedinanymannerotherthanbymeansofadrawing.Ifaclaim isnotmadeforthemoneywithintheapplicableperiod,seventypercentoftheprizemoneyshallbeheld inthestate lotteryprize fund foruseasadditionalprizes in futuregamesand thirtypercent shallbe transferredmonthly to thecourtappointed specialadvocate fundestablishedbysection8‐524.

WebelievetheState’sstatueplacesarestrictionontheuseof forfeitedprizes.Restrictednetpositionshouldbereportedwhenconstraintsplacedonnetpositionareeitherexternallyimposedbygrantors,creditors,contributors,orby lawsorenabling legislation.Therestrictiontouseunclaimedprizesthatare forfeited represents a specific purpose, does not represent a liability in our view, rather it is theunderlying transaction exchange transaction resulting from the sale of lottery tickets for games inprogress that creates a liability, defined by GASB’s Concept Statement No. 4, Elements of FinancialStatements,asthepresentobligationtosacrificeresources.Condition: The previously balance reported as liabilities for prizes was comprised of severalcomponents of the Lottery’s Prize Fund. These components consisted of unclaimed forfeited prizes,accumulated prize fund balance, accumulated investment earnings of the prize fund and flowsof theprize fund.Certainof these componentsdonot appear related toapresent obligation forprizes.TheArizonaLotteryretainsandreportsunclaimedprizesasaliability.Context:Management’sestimateofliabilityattributabletootherfundsisapproximately$20.8million.Aportionofthisestimateisattributabletoforfeitedprizesisapproximately$5.7million.Effect:Webelieve the liability forprizeshasbeenoverstatedandthatcomponentsofnetpositionareunderstatedorotherliabilitiesexist.


SCHEDULEOFFINDINGSANDRESPONSES(CONTINUED)YEARENDEDJUNE30,2015

38

Cause: We do not believe management had fully considered the applicable accounting and financialreportingguidanceforprizesorcomponentsofnetposition. Recommendation:Werecommendthatmanagementreviewtheunderlyingnatureandagreementsforeach significant reported balance and assess reporting restricted components of net position andreview/revise itsaccountingpolicieswithregard toactivitiesof thePrizeFund.ThosepoliciesshouldreflecttheuseofresourcesinconformitywithStatestatuewhilealsoconsideringthefinancialconditionoftheLottery.Viewsof responsibleofficialsandplanned correctiveactions:Managementwill review accountingpoliciesforactivitiesinthePrizeFund.TheLotteryhasbeenconsistentinitsreportingofprizeliabilitysincetheLottery’sinceptionandthatreportingissimilartoreportingusedbyotherstatelotteries.Weagreedwith the auditor to revise thepresentation of prize liability this year andwill seek to find anappropriatepresentationinfutureyears.2015‐002–RegularlyReviewThird‐PartyServiceReports(SignificantDeficiency)Criteria: Third party service organizations are entities that provide outsourcing activities that arerelevanttothecontrolenvironmentsatuserorganizations.ATypeIISSAE16reportisanindependentreportonthedesignandoperatingeffectivenessofkeycontrolsataserviceorganization.ATypeIISSAE16providesassurancetouserorganizationsthatthecontrolobjectivesrelatingtotheservicesprovidedbytheirserviceorganizationaresuitablydesignedandoperatingeffectivelythroughouttheexaminationperiod.Condition and Context: The Lottery utilizes reports and systems of GTECH, a service organization;howeverGTECHdoesnotcurrentlyprovideaTypeIISSAE16reporttotheLottery.Effect:Errors, ifany,inthereportsprovidedtotheLotterybyGTECHmaynotbedetectedinatimelymanner.Cause:GTECHdoesnotappeartohaveaTypeIISSAE16reportavailablefortheLottery.Recommendation:WerecommendedthatmanagementobtainandreviewSSAE16/SAS70annuallytoensure service providers have sufficient controls in place and are operating effectively given thesignificanceoftheinformationprovidedbyGTECHtotheLottery.Viewsofresponsibleofficialsandplannedcorrectiveactions:WehaveformallyrequestedIGT(formallyGTech)tocompleteaSOCReport,typeIIforperiodofninemonths07/01/15through03/31/16toremedythisfinding.


SCHEDULEOFPRIORYEARAUDITFINDINGSYEARENDEDJUNE30,2015

39

2014‐001–AccountingandReportingComponentsofNetPosition(SignificantDeficiency)StatusatJune30,2015–Thisfindingwasrepeatedinthecurrentyearasfinding2015‐001.2014‐002–RegularlyReviewThird‐PartyServiceReports(SignificantDeficiency)StatusatJune30,2015–Thisfindingwasrepeatedinthecurrentyearasfinding2015‐002.

Documents

Arizona State Lottery - Report of Independent …the Lottery to vendors, to employees for wages and benefits, to prize winners, and to other State funds. Fund net position represents