Polcomz Limited1 (PL) commenced business as a radio communications company in 1998 in the garage of its founder, Meg Aherts. Ever since graduating from the University of Canterbury with a degree in electrical engineering, Meg has had a fascination with radio technology applications. In the last ten years, her company has expanded rapidly and now develops voice and data radio technologies primarily for use by police and emergency services around the world. Since 2008, all research, design and production has taken place at PL's modern purpose-built headquarters in the Christchurch suburb of Burnside. PL has a broad product range consisting of both cutting-edge digital and conventional analogue radio systems. PL currently exports around 95% of its products and has sales offices in 8 countries. Overall, it employs 120 staff. Its products can become technologically obsolete very quickly, so it is important that PL is highly attuned to the marketplace and actively involved in product research. PL's balance date is 31 January 2021. PL's unaudited net profit before tax is NZD$1.8 million, while its turnover is $15 million. Both of these figures represent a 5% growth over the previous year. PL has significant investment in property, plant and equipment, much of which is made up of its highly automated and technologically advanced Burnside facility. PL is highly reliant on bank loans to fund its investment in technology. The unaudited book value of its total assets is $45 million, while net assets is $10 million at balance date. Meg is the majority shareholder but there are a further 10 shareholders who hold small parcels of shares. To satisfy its bankers, PL elects to report using tier 1 for-profit reporting requirements, i.e., full NZ IFRS. PL employs a small but dedicated accounting team, which undertakes day-to-day and periodic accounting and tax compliance work in addition to managing the treasury function (which is overseen by Jill Shady, CA). You are an audit senior in a medium-sized accounting firm based in Christchurch. Your firm has been PL's auditor for the past two years. You will be the auditor-in-charge of PL and will work closely with Aba Kus, the engagement partner. Aba has just had a client meeting (with Meg and Jill) to gather the necessary information to be able to make the client continuance decision and start preliminary planning for the forthcoming audit. At this meeting, Meg told Aba that to accommodate customer interest in paying for products in cryptocurrency, PL began accepting bitcoins as a form of payment from the start of the financial year (1 February 2020). As it turned out not many customers elected this method, although Meg said that one of her larger US companies (an electric car manufacturer, called Edison) used it to pay an invoice amounting to USD$600,000 on 17 March 2020 (when 1 bitcoin = USD$4,944). PL has decided to hold the entire amount of bitcoin received as a speculative investment and had not realised it at balance date. At balance date, 1 bitcoin = USD$34,622. Jill mentioned that she intends to recognise any unrealised gain as income in the statement of profit and loss and that the bitcoin balance will be lumped in with cash in the balance sheet. Aba was curious as to where the bitcoins were stored. Meg said that the bitcoins received from Edison were stored in the company's wallet on the Coinbase cryptocurrency exchange. When asked about security, Jill said that Coinbase stores PL's private key for the wallet so that PL just needs to worry about controlling access to the account. Jill indicated that only she had access to the account. After some prompting from Aba, Jill acknowledged that another PL customer had paid a USD$10,000 invoice using bitcoins and that PL has kept that in a digital wallet on her office computer. Jill also acknowledged that she could not remember the private key necessary to access the wallet but that she is confident she will have remembered it by the time PL needs to access the bitcoins. After the client meeting, Aba requests your assistance. Aba acknowledges that he only has a high level understanding cryptocurrency and that none of his clients currently transact in them. He is concerned that PL's foray into bitcoins may present audit risks for the upcoming audit. Accordingly, he would like you to write him a briefing memo in which you bring him up to speed with cryptocurrencies (bitcoin, in particular) and highlight the specific audit implications for the forthcoming audit.

This 'briefing memo' should contain the following details:

(1)

Identification and discussion of any ethical and other issues that may need to be considered

before Aba decides whether to accept the client as a continuing engagement.*

(2)

A critical evaluation of PL's proposed accounting treatment of the bitcoins received from

Edison and the impact that your conclusions will have on the audit plan (where applicable refer

to specific audit assertions affected).*

(3

A critical evaluation of PL's security and control over cryptocurrency transactions and

balances, and the impact your conclusions will have on the audit plan (where applicable refer

to specific audit assertions affected).* (refer to specific New Zealand accounting standards (including other sources of authoritative support), and auditing and professional engagement standards; and that your answers are relevant to the specific audit client, i.e., PL.)

(4)

Explanation and discussion of one actual computer tool (application) used by audit firms, such

as the Big 4, in the audit of clients' cryptocurrency transactions and/or balances.