Critical Audit Matters - Part II
Simple collection of critical audit matters (Part II) identified in the filings of companies engaged in crypto mining business. Enjoy.
Company: BIT Mining Limited
Auditor: MaloneBailey, LLP
Auditor Deficiency Rate: 86%
“Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:
(1) relate to accounts or disclosures that are material to the financial statements and
(2) involved our especially challenging, subjective, or complex judgments.
The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of the Existence and Control of Cryptocurrencies Held
As discussed in Note 2 to the consolidated financial statements, the Company accounts for its cryptocurrencies as indefinite-lived intangible assets, which have been included in current assets on the consolidated balance sheets. The cryptocurrencies are recorded at cost, net of any impairment losses incurred since acquisition. The Company’s cryptocurrencies as of December 31, 2023 amounted to approximately $7.6 million. We identified the evaluation of the existence and control of the cryptocurrencies held as a critical audit matter due to the subjective auditor judgment involved in determining the nature and extent of audit evidence required to address the risks of material misstatement related to the existence and rights and obligations of the cryptocurrencies as the cryptocurrency holdings are stored using the custodial service provided by third parties. Control over cryptocurrencies is provided through private cryptographic keys stored using third-party custodial services.
The primary procedures we performed to address this critical audit matter included the following:
● Obtained an understanding of certain internal controls over the Company’s cryptocurrency assets process, including a reconciliation control over the comparison of the Company’s records of cryptocurrencies held to the custodial records, and reviewed the relevant Service Organization Control (SOC) 1 and SOC 2 reports for the custodial service provided by a third party;
● Independently and directly confirmed the balance of the Company’s cryptocurrencies in the custody of third parties, evaluated the reliability and relevance of the information obtained from third party custodians, and compared the balance confirmed to the Company’s record of cryptocurrency holdings;
● Tested certain transactions by obtaining and inspecting source documents including agreements;
● Independently obtained evidence from public blockchains, to the extent applicable, to test the existence of cryptocurrency transactions and balances and evaluated the relevance and reliability of audit evidence obtained from public blockchains;
● Reviewed and evaluated the custodian contracts, and observed the Company accessing its wallets under custody to conduct transactions and verified the transactions on public blockchains independently to the extent applicable; and
● Evaluated the sufficiency and appropriateness of audit evidence obtained by assessing the results of procedures performed over the cryptocurrencies.
Evaluation of Accounting for and Disclosure of Cryptocurrency Mining Revenue Recognized
As discussed in Note 2 to the consolidated financial statements, the Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. For cryptocurrency mining revenue, the Company provides computing power services to the mining pools and in exchange for providing such computing power, the Company is entitled to considerations in the form of cryptocurrencies from the mining pools, which is calculated based on a predetermined formula agreed by the Company and the mining pool operator as a part of the contracts. The Company’s management has exercised significant judgments in their determination of how existing accounting guidance should be applied to the accounting for and disclosure of cryptocurrency mining revenue recognized.
We identified the accounting for and disclosure of cryptocurrency mining revenue recognized as a critical audit matter due to the nature and extent of audit effort required to address the matter, which includes significant involvement of more experienced engagement team members. Subjective auditor judgment was required in determining the nature and extent of audit procedures to test the occurrence of the revenues recognized by the Company. The primary procedures we performed to address this critical audit matter included the following:
● Evaluated the design and operating effectiveness of controls over the Company’s information technology (“IT”) environment and the key system that are relevant to the cryptocurrency mining revenue with the assistance of our IT professionals;
● Performed site visit of the facility where the Company’s mining machines were located, which included an observation of the physical and environmental controls and mining machines observation procedures;
● Evaluated management’s rationale for the application of ASC 606 to account for its cryptocurrency mining revenue, which included evaluating the contracts between the Company and the mining pool operators;
● Evaluated and tested management’s rationale and supporting documentation associated with the valuation of cryptocurrency awards earned;
● Validated that the computing power has been provided by the Company’s mining machines;
● Compared the Company’s wallet records of cryptocurrency mining revenue received to publicly available blockchain records and evaluated the relevance and reliability of audit evidence obtained from public blockchains;
● Performed certain substantive analytical procedures to determine completeness and existence of cryptocurrency assets earned by the Company as consideration for services rendered; and
● Evaluated management’s disclosures of its cryptocurrency mining revenue in the financial statement footnotes.”
Company: InvestView, Inc.
Auditor: M&K CPAS, PLLC
Auditor Deficiency Rate: 71%
“Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition
The Company generates revenues from the mining of Bitcoin that requires significant judgements with regard to how the revenues are recognized. As discussed in the notes to the financial statements, management’s estimate of the consideration received and recognized from its cryptocurrency mining activities is considered variable.
Given the intricate technological considerations and complexities inherent in cryptocurrency transactions, the assessment of mining revenues requires a nuanced understanding of cryptocurrency technology, transaction processes, verification procedures, and valuation methodologies. As such, Auditing management’s evaluation of the accounting for mining revenues recognized involved significant judgement and subjectivity due to technological considerations and complexity of cryptocurrency transactions.
We evaluated the appropriateness and accuracy of management’s assessment in relation to our understanding of cryptocurrency technology, evaluation of transaction processes, verification of transactions, and assessment of valuation methods.”
Company: Gryphon Digital Mining, Inc. (formerly known as Akerna Corp.)
Auditor: Marcum LLP
Auditor Deficiency Rate: 56%
“Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:
(1) relate to accounts or disclosures that are material to the financial statements and
(2) involved our especially challenging, subjective, or complex judgments.
We determined that there are no critical audit matters.”
Company: Bit Digital, Inc.
Auditor: Audit Alliance LLP
Auditor Deficiency Rate: Unknown
“Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of the Accounting for and Disclosure of Digital Assets Held in Fund
As disclosed in Note 2 to the consolidated financial statements, the Company made of investment of 2,701 Ethereum, with a fair value of $4.7 million, into Bit Digital Innovation Master Fund SPC Ltd. (the “Fund”). The Company performed a Variable Interest Entity (“VIE”) analysis for the entities in the organizational structure and concluded Bit Digital Innovation Master Fund SPC Ltd. is a VIE. The Fund was consolidated based on the Company's financial control interest. As a result, the assets held in the Fund are included in current assets in the Consolidated Balance Sheets under the caption digital assets held in Fund.
We identified the consolidation analysis as a critical audit matter because the consolidation analysis involved an interpretation of especially complex accounting principles generally accepted in the United States of America. The evaluation of management’s determination of control required an increased extent of effort.
The procedures we performed to address this critical audit matter included the following:
●Evaluated management’s rationale for the inclusion of Digital Assets Held in Fund as a current asset on the balance sheets.
●We read agreements, traced and agreed the facts included in the management’s accounting treatment memo to the agreements, and evaluated the assumptions used to arrive at the determined conclusion.
●We examined supporting evidence for Digital Assets Held in Fund transactions, including managements processes for calculating the fair value of the fund.”
Company: Integrated Ventures, Inc.
Auditor: M&K CPAS, PLLC
Auditor Deficiency Rate: 71%
“Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Digital Currencies
As discussed in the notes to the financial statements, the Company has mining revenues and assets associated with the mining of digital currencies that requires significant judgements with regard to how the revenues are recognized and the assets are capitalized.
Auditing management’s evaluation of the accounting for mining revenues recognized and the capitalized digital assets involved significant judgement and subjectivity due to lack of formal GAAP and PCAOB guidance in the United States.
To evaluate the appropriateness and accuracy of the assessment by management, we evaluated management’s assessment in relationship to the relevant revenues. We also evaluated several different third-party sites and sources to verify the information provided by management.”