Hi,

I've got a question regarding auditing cryptocurrencies, specifically Bitcoin. What are the unique risks associated with accepting Bitcoin payments and Bitcoin ownership that could lead to a material misstatement? What are the relevant financial statement assertions related to the identified risks?

Below you can find the context of the question:

Notes from meeting with Johnstone Suppliers:

-Johnstone accepts cryptocurrency Bitcoin as payments from customers

-They hired a full-time employee who specializes in implementing processes related to Bitcoin

-Digital wallet Coinbase is used

-Bitcoins are stored in 1 wallet

-Private key is digitally stored on Coinbase

-Only one person (Annelies) has access to Coinbase and the private key. Reasoning behind this: if the person responsible for the wallet changes, they would simply need to change the password to the Coinbase account rather than having to generate a new wallet.

-450 million in annual sales, 20 million of which in Bitcoin

-Johnstone does not undertake in mining

-None of their suppliers are currently accepting Bitcoin

-A portion of the Bitcoin is held as a speculative investment, the remainder is sold immediately through the Coinbase exchange

-10 million in Bitcoin as of December 31, 2017

-Board of Directors has approved Johnstone to hold 25% of Bitcoin receipts for investment. 5 million of the 20 million in Bitcoin were held. With the price increasing, holdings were substantially higher year-end over 14 million in the middle of December

-Price volatility: value of Bitcoin fluctuates. How does Johnstone deal with backlogs? What if someone at Johnstone forgets to exchange the bitcoin for cash immediately?

-According to Annelies, Bitcoin price fluctuations have evened out so far.

-Forgetting to exchange the Bitcoins rest on just one person, namely, Annelies. She closely monitors the wallet and is quick to exchange the bitcoins they receive for cash

-Revenue recognition of Bitcoin: listed sales price in Euros. At the time of the sale, Johnstone calculates how many bitcoins the customer must send to meet the dollar value of the sales price

Notes from meeting with engagement manager of the audit firm:

-Planning materiality has been set at 1 million, which was 5% of net income before taxes, and performance materiality is 500,000

-Johnstone had 20 million in Bitcoin and retained 5 million for investment purposes. It had a market value of 10 million at year-end

-It is material to their financial statements. Gain better understanding of what Bitcoin ownership consists of and how this is going to impact the risk assessment.