LeapFrog 2004 Annual Report Download - page 65

Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our
principal executive and principal financial officers, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of our company.
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our management and
directors.
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of our assets that could have a material effect on our financial statements.
Management assessed our internal control over financial reporting as of December 31, 2004, the end of our
fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Management’s
assessment included evaluation of such elements as the design and operating effectiveness of key financial
reporting controls, process documentation, accounting policies, and our overall control environment.
An internal control material weakness is a deficiency, or combination of 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.
Based on management’s assessment of our internal control over financial reporting as of December 31,
2004, we have identified the following material weaknesses in our internal control over financial reporting.
In the area of revenue and accounts receivable, we identified the following insufficient controls which we
believe constitute a material weakness in the aggregate.
• Lack of segregation of duties between our accounts receivable and order entry staff and possession by
those persons of broad access to our revenue and accounts receivable information technology systems,
including access to system areas controlling revenue recordation, cash application, credit memo
issuance, credit authorization, invoice pricing and collections.
• Lack of effective controls over our receivables credit memo review and approval process to monitor
compliance with existing policies and procedures related to authorization of credit memos to our
customers.
• Lack of consistent and timely reconciliation and review processes related to sales discounts and
allowances, shipment and invoicing, and cash receipts.
• Inadequate staffing to determine that internal controls over reconciliations, review of account balances
and closing procedures are performed consistently and on a timely basis.
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