Circuit City 2005 Annual Report Download - page 31

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Our independent registered public accounting firm has issued a material weakness letter to the Company which
addresses these material weaknesses. These matters have been discussed among management, the audit committee and
our independent registered public accountants. We are in the process of addressing the remediation of these issues.
As a result of this determination and as part of the work undertaken in connection with this report, we have
applied compensating procedures and processes as necessary to ensure the reliability of our financial reporting.
Accordingly, management believes, based on its knowledge, that (i) this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which they were made, not misleading with respect to the period covered by this report and (ii) the financial
statements, and other financial information included in this report, fairly reflect the form and substance of transactions
and fairly present in all material respects our financial condition, results of operations and cash flows as at, and for, the
periods presented in this report.
Material Weaknesses Reported for the Years Ended December 31, 2004 and December 31, 2003
As reported in our amended Annual Reports on Form 10-K/A for the years ended December 31, 2004 and
December 31, 2003, management was unable to conclude that the Company’s internal controls over financial reporting
were then effective, as a result of material weaknesses resulting from the ineffectiveness of internal controls over
inventory in our United Kingdom and Tiger Direct subsidiaries. We are continuing to evaluate and test the steps taken
to improve the effectiveness of our internal controls over financial reporting and we implemented the following
changes to further address our material weaknesses:
During 2005, we implemented a number of remediation measures to address the material weakness related to
inventory at our United Kingdom subsidiary. These measures included:
During 2005, we also implemented remediation measures to address the material weakness related to inventory at
our Tiger Direct subsidiary. These measures included:
the Company’s corporate headquarters with the requisite knowledge and financial reporting expertise to
execute a timely financial closing process, address non-routine accounting issues that arise in the normal
course of the Company’s operations and ensure the timely and accurate preparation of interim and annual
financial statements.
• We have insufficient processes to effectively prepare timely account reconciliations and analyses with
thorough documentation and substantiation of certain general ledger accounts resulting in a number of audit
adjustments required to be recorded after being identified by our independent registered public accountants.
•
We have inadequately designed processes to properly estimate certain liability accounts related to inventory
purchases at our Tiger Direct subsidiary. The processes lack sufficient internal controls to accurately
record, reconcile and review such transactions.
• Modification of our internal procedures to more accurately identify the types of inventory transactions
processed
• Implementation of additional system reporting to provide more details to enhance the inventory
reconciliation process
•
Addition of management
-
level reviews to support the reconciliation process
•
Implementation of additional review procedures to test cut
-
off accuracy.
• Modification of our internal information technology control procedures to help ensure the accurate
compilation of inventory at the end of each financial period
• Conducting of more frequent physical inventory counts (at least once per quarter) during the last three
quarters of fiscal 2005
• Preparation and analysis of detailed monthly inventory reconciliations, which is supported by additional
management review
•
Implementation of additional review procedures to test cut
-
off accuracy
• Hiring of a new person to fill a senior managerial position overseeing the subsidiary’s accounting staff and
also increasing the subsidiary
’
s accounting staff.