LeapFrog 2004 Annual Report Download - page 69

Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of LeapFrog Enterprises, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting, that LeapFrog Enterprises, Inc. did not maintain effective internal
control over financial reporting as of December 31, 2004, because of the effect of the three material weaknesses
identified in management’s assessment and described below, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). LeapFrog Enterprises, Inc. management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of
the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
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. The following three material weaknesses have been identified and included in
management’s assessment:
1. In the area of revenue and accounts receivable, the following insufficient controls were identified which
management believes constitute a material weakness in the aggregate:
• Lack of segregation of duties between accounts receivable and order entry staff and possession by those
persons of broad access to 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 receivables credit memo review and approval process to monitor
compliance with existing policies and procedures related to authorization of credit memos to customers.
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