Circuit City 2004 Annual Report Download - page 31

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Subsequent to the quarter ended December 31, 2004, we began implementing remedial measures to address the
identified material weakness described above in connection with the preparation of our financial statements included in
our Amendment No. 1 to Form 10-K for the year ended December 31, 2003 and in this Amendment No. 1 to Form 10-
K for the year ended December 31, 2004. We have modified our internal procedures to more accurately identify the
types of inventory transactions processed. This has been combined with additional system reporting to provide more
details to enhance the inventory reconciliation process. This reconciliation process is also supported by additional
management review. Additional review procedures have been implemented to test cut-off accuracy. We are continuing
to monitor these processes to further improve our procedures as may be necessary.
Our independent registered public accounting firm has issued a material weakness letter to the Company which
addresses the weaknesses identified above at the Company's United Kingdom subsidiary and, as well, addresses
inadequate oversight and control activities on the part of senior management of the Company over its remote
subsidiaries. These matters have been discussed in detail among management, the audit committee and our independent
registered public accountants. We are in the process of addressing the latter of the items identified on an immediate and
longer-term basis.
On May 11, 2005 we announced that we would be restating our previously filed consolidated financial
statements for the year ended December 31, 2004 to correct errors in accounting for inventory at our Tiger Direct, Inc.
subsidiary as described in Note 2 to the Consolidated Financial Statements. Management has concluded that the
internal control deficiencies that made the restatement necessary indicate the existence of another material weakness in
internal control over financial reporting.
As a result of a review of the subsidiary's inventory activities for the years ended December 31, 2003 and 2004,
the Company determined that the errors requiring this restatement resulted from an error in the compilation of the
subsidiary's year-end inventory value and an inaccurate recording of period end cut-offs. These errors were undetected
or unrecognized as a result of the following weaknesses and deficiencies in the subsidiary's controls:
Subsequent to the identification of these weaknesses, during the second quarter of 2005 we began implementing
remedial measures to address the material weakness described above in connection with the preparation of our financial
statements included in this Amendment No. 1 to Form 10-K for the year ended December 31, 2004. We have modified
our internal information technology control procedures to help ensure the accurate compilation of inventory at the end
of each financial period. We have also scheduled more frequent physical inventory counts (at least once per quarter)
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Deficiencies in the subsidiary's month
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end closing process
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Insufficient formalized procedures to ensure that all relevant transactions were accounted for
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Breakdown in communication between accounting and operations personnel
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Insufficient staffing of the accounting function at the subsidiary
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Inadequate information technology general controls with respect to inventory movements
• Deficiencies in the monthly closing process which affect the timeliness and accuracy of recording
transactions, including the preparation of numerous manual journal entries and a control environment
heavily reliant on manual review procedures and adjustments
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Deficiencies related to subsidiary ledger postings and account reconciliation processes
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Insufficient staffing of the accounting function at the subsidiary
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Inadequate information technology general controls with respect to inventory