Audiovox 2004 Annual Report Download - page 109

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Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management evaluated the effectiveness of the Company's internal control over
financial reporting using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in internal control−Integrated
Framework. Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
the Company conducted an evaluation of the effectiveness of its internal control
over financial reporting as of November 30, 2004. Based on that evaluation,
management concluded that the Company's internal control over financial
reporting was not effective as of November 30, 2004, because of the effect of
material weaknesses identified and more fully described below.
The Company divested its Wireless business and substantially all of the assets
and liabilities of Audiovox Communication Corporation ("ACC") on November 1,
2004. Accordingly, the Company excluded ACC from its assessment of internal
control over financial reporting, as it no longer represents a significant part
of the Company's internal control environment as of November 30, 2004. For the
year ended November 30, 2004, the operating results of ACC are classified as
discontinued operations in the Company's consolidated financial statements.
Subsequent to the divestiture of the Wireless business on November 1, 2004, ACC
had no significant operating results. ACC had total assets of approximately $17
million at November 30, 2004, which are classified as assets of the discontinued
operations. These assets, which represented trade accounts receivable, were
collected and converted to cash subsequent to November 30, 2004.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management's assessment identified the following material
weaknesses in the Company's internal control over financial reporting:
1. Deficiencies in the general controls over information technology security
and user access, including segregation of duties (automated controls to
ensure authorization, execution, monitoring and review by independent
individuals) and unrestricted access to data and business applications
existed. Accordingly, management concluded that these matters represent a
material weakness as controls over information security and access to data
and applications are necessary to have an effective control environment;
2. As a result of the divestiture of the Wireless business and the
classification of ACC as a discontinued operation, there was a lack of
appropriate review of significant transactions and the lack of documented
controls over the year−end financial closing process at ACC resulting in a
number of audit adjustments recorded by management prior to the issuance of
the financial statements. Accordingly, management concluded that this
matter represents a material weakness at November 30, 2004, even though ACC
will no longer be a significant component of the Company's control
environment or continuing operating activities as substantially all the
assets and liabilities of ACC have been sold on November 1, 2004;
3. A deficiency in the controls related to the Company's sales cut−off
procedures resulted in an audit adjustment recorded by management prior to
the issuance of the fiscal 2004 fourth quarter financial statements. The
impact of this audit adjustment resulted in a reduction of net sales and
accounts receivable of approximately $1,134 and a reduction to income from
continuing operations before income taxes of $64 ($37 on an after tax
basis) for the fiscal year ended November 30, 2004. This adjustment
occurred at one of the Company's public
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