LeapFrog 2013 Annual Report Download - page 81
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Please find page 81 of the 2013 LeapFrog annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or
interim financial statements will not be prevented or detected on a timely basis. The following material
weakness in our internal control over financial reporting existed as of December 31, 2013:
We did not maintain effective controls over our process for establishing reserves for customer-related
discounts and promotional allowances. Specifically, controls were not adequately designed to ensure the
completeness and accuracy of data entered into the accounting system and used to determine customer-related
discounts and promotional allowances. As a result, it was necessary for us to make a post-closing adjustment
to increase our reserve for customer-related discounts and promotional allowances. Additionally, this control
deficiency could result in misstatements of the aforementioned accounts and disclosures that would result in a
material misstatement of the consolidated financial statements that would not be prevented or detected.
Because of the material weakness, management concluded that the Company did not maintain effective
internal control over financial reporting as of December 31, 2013.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 has
been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in
their report which appears herein.
Completed and Planned Remediation Actions to Address Internal Control Weaknesses
We have developed certain remediation steps to address the material weakness discussed above and to
improve our internal control over financial reporting. If not remediated, this control deficiency could, in the
future, result in material misstatements in our financial statements. The Company and its board of directors
take the control and integrity of the Company’s financial statements seriously and believe that the remediation
steps described below are essential to maintaining a strong internal control environment.
The following remediation steps are among the measures that will be implemented by the Company as soon
as practicable:
• Modify the period-end close processes to capture and analyze a complete list of customer-related
discounts and promotional allowances for financial statement impact as of period-end.
• Modify the data entry process associated with customer-related discounts and promotional
allowances to ensure classification of promotional programs is subject to independent review.
Inherent Limitations on Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Accordingly, our disclosure controls and
procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure
system are met. 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.
Changes in Internal Control over Financial Reporting
As described below, there have been changes in our internal control over financial reporting during the year
ended December 31, 2013 that have materially affected or are reasonably likely to materially affect, our
internal control over financial reporting.
During our 2013 assessment of internal control over financial reporting, management reviewed the design of
internal controls over journal entries and determined that although journal entries were manually prepared and
approved by different individuals, under the then existing control structure, it would have been possible for
certain finance personnel to create and post unauthorized journal entries in the system, thereby circumventing
the manual journal entry approval process. Management concluded that the segregation of duties was
inadequate, and therefore, a material weakness existed in our internal control over financial reporting.
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