Critical Audit Matters
This post contains nothing, but a collection of Critical Audit Matters identified in the filings of public Bitcoin Miners in 2023.
Mawson Infrastracture Group, Inc.
“Bitcoin Revenue Recognition
Description of the Matter:
One of the Company’s revenue-generating activities is to provide bitcoin transaction verification services to the transaction requester and to the bitcoin (i.e. mining) through operating Company-owned mining hardware, and to participate in third-party operated mining pools. The principal consideration for our determination that bitcoin revenue recognition is a critical audit matter relates to the complexity of verifying the occurrence of the transactions, determining whether the transaction was with a customer, and ensuring that revenue from mining pool operators was complete.
How We Addressed the Matter in Our Audit:
We performed the following procedures:
● Site visits at the Company’s facilities where the mining hardware is located;
● Independently traced certain financial and performance data directly to the blockchain to test the occurrence and accuracy of mining revenue of the operator;
● Certain reasonableness tests of mining pool revenue; and
● Used specialized software to verify the complete population of the Company’s on-chain transactions.
“Evaluation of the Recognition and Disclosure of Digital Currency Mining Revenue
As disclosed in Note 2 to the financial statements, the Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company provides computing power to bitcoin mining pools in exchange for the award of non-cash consideration in the form of bitcoin, which the Company measures at fair value on the date awarded.
We identified the recognition, measurement and disclosure of bitcoin mining revenue as a critical audit matter because of the complexity of auditing this revenue. This is because mining digital assets is an emerging industry with unique technological aspects that raise a number of auditing challenges and significant audit effort is required, and that there is currently no specific definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting for mining of digital currencies.
The Company has exercised significant judgement in determining appropriate accounting treatment for the recognition, measurement and disclosure of revenue from bitcoin mining operations. During the year ended December 31, 2022, the Company recognized digital currency mining revenue of approximately $43.1 million.
The primary procedures we performed to address this critical audit matter included the following:
Evaluated the design and effectiveness of the IT general controls over the Company’s IT environment and key financially relevant systems
Evaluated the design and effectiveness of certain financial controls pertaining to the Company’s processes for identifying and recognizing revenue from Bitcoin Mining
Independently confirmed certain data and records of digital currency rewarded directly with mining pools;
Independently confirmed certain data and records of digital currency disposed of directly with digital currency exchanges;
Compared the Company’s records of digital currency rewarded from mining activities to publicly available blockchain records;
Evaluated management’s rationale for the application of ASC 606 to account for digital currency awards earned;
Evaluated and tested management’s rationale and documentation associated with the valuation of Bitcoin awards earned; and
Evaluated management’s disclosures of its digital currency activities in the financial statements and footnotes.”
“Realization of Long-lived Assets Including Impairment
Description of the Matter:
The Company holds a material amount of mining equipment and determined that events or changes in circumstances indicated that their carrying value at December 31, 2023 may not be recoverable. As a result, the Company performed an impairment analysis on its mining equipment which included an estimate of future cash flows from that equipment. The principal considerations for our determination that impairment of long-lived assets was a critical audit matter include the subjectivity of various estimates included in the cash flow forecast and the complexity involved in certain of those estimates
How We Addressed the Matter in Our Audit:
We performed the following procedures:
Performed sensitivity analyses on key components of the estimate;
Reviewed independent information sources to assess the reasonableness of the estimate;
Recomputed the mathematical accuracy of key calculations within the impairment analysis;
Evaluated the logic of the calculations included in the impairment analysis; and
Considered information obtained subsequent to year-end.”
Ault Alliance, Inc.
“Evaluation of the Accounting for and Disclosure of Bitcoin Mining Revenue
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:
relate to accounts or disclosures that are material to the financial statements and
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. As disclosed in Note 3, the Company participates in a digital asset mining pool by providing hash calculation services to the mining pool operator. During the years ended December 31, 2023 and 2022, the Company recognized revenue from bitcoin mining of approximately $33.1 million and $16.7 million, respectively.
We identified the auditing of revenue recognized from bitcoin mining as a critical audit matter due to the nature and extent of audit effort required to perform audit procedures over the completeness and occurrence of bitcoin mining revenue recognized by the Company. The primary procedures we performed to address this critical audit matter included the following:
We performed site visits of the facilities where the Company’s mining hardware is located, which included observations of the physical controls and mining equipment observation procedures.
On a sample basis, we tested the hash calculation services contributed by the Company’s mining hardware.
We performed certain substantive analytical procedures developing an expectation for the amount to be recorded using hash calculation services data, the calculation prescribed in the contract with the mining pool operator and electricity consumption data and comparing our expectation to the amount recorded by the Company.
We evaluated and tested management’s valuation of bitcoin earned by obtaining independent bitcoin prices and comparing those to the prices used by the Company.
We obtained and evaluated the contract with the third-party mining pool operator and independently confirmed with the third-party mining pool operator the significant contractual terms utilized in the determination of mining revenue, total mining rewards earned, and the digital asset wallet addresses in which the rewards are deposited.
We independently obtained evidence from the Bitcoin blockchain to test the occurrence and accuracy of mining revenue”
3D Sphere
“Evaluation of the Accounting for and Disclosure of Bitcoin Mining Revenue Recognized
As disclosed in Note 2 to the financial statements, the Company recognizes revenue in accordance with Topic 606, Revenue from Contracts with Customers. The Company provides computing power to its mining pools and in exchange for providing such computing power, the Company is entitled to a fractional share of the fixed bitcoin award earned, plus a fractional share of the transaction fees, less net digital asset fees due to the mining pool operator over the measurement period. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. During the year ended December 31, 2023, the Company recognized net bitcoin mining revenue of approximately $19.7 million. The Company’s management has exercised significant judgment in their determination of how existing GAAP should be applied to the accounting for and disclosure of bitcoin mining revenue recognized.
The primary procedures we performed to address this critical audit matter included the following:
Evaluated management’s rationale for the application of Topic 606 to account for bitcoin awards earned;
Evaluated management’s disclosures of its bitcoin activities in the financial statement footnotes;
Evaluated and tested management’s rationale and supporting documentation associated with the valuation of bitcoin awards earned;
Independently confirmed certain financial data and wallet records directly with the mining pools;
Compared the Company’s wallet records of bitcoin mining revenue received to publicly available blockchain records; and
Undertook an analytical review of total bitcoin mining revenue expected to be recognized by the Company by assessing the total hash power contributed onto the by the Company against total block rewards and transaction fees issued over the year.”
BTCS
“Evaluation of audit evidence pertaining to the existence and control of the digital assets
As discussed in Notes 3 to the consolidated financial statements, the Company accounts for its digital assets as indefinite-lived intangible assets measured at fair value pursuant to ASU No. 2023-08. The digital assets are recorded at fair value. As of December 31, 2023, the fair value of the Company’s digital assets was $25.2 million.
We identified the evaluation of audit evidence pertaining to the existence of the digital assets and whether the Company controls the digital assets as a critical audit matter. Especially subjective auditor judgment was involved in determining the nature and extent of evidence required to assess the existence of the digital assets and whether the Company controls the digital assets, as control over the digital assets is provided through stored private cryptographic keys. In addition, information technology (IT) professional with specialized skills and knowledge in IT controls was needed to assist in the evaluation of the sufficiency of certain controls over digital assets.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal controls over the digital assets process, including a control over the comparison of the Company’s records of digital assets held to the information on the representative blockchain via blockchain explorers. This included assessing the controls to prevent unauthorized users from access to the private keys and to prevent the misuse or misappropriation of crypto assets. We involved IT professional with specialized skills and knowledge in IT controls, who assisted in evaluating certain internal controls over the digital assets process, related specifically to the control of the private cryptographic keys, the storing of these keys, and the reconciliation of digital assets per the Company’s ledgers to the public blockchain. We also compared on test basis of the Company’s record of digital asset transactions to the records on the public blockchain using at least two different blockchain explorers. We performed procedures to establish that the Company has controls over the crypto assets. We evaluated the reasonableness of the prices utilized by the Company to value digital assets by obtaining independent digital asset prices and comparing those to the prices selected by the Company.
We applied auditor judgment in determining the nature and extent of audit evidence required, especially related to assessing the existence of the digital assets and whether the Company controls the digital assets. We evaluated the sufficiency and appropriateness of audit evidence obtained by assessing the results of procedures performed over the digital assets.”
TeraWulf, Inc.
“Evaluation of Indicators of Impairment of Long-Lived Assets
As discussed in Note 2 to the consolidated financial statements, the Company reviews its long-lived assets, including property, plant and equipment, for impairment when indicators of impairment are present that indicate the carrying amount of an asset group may not be recoverable.
The Company has long-lived assets which include property, plant and equipment, net of $205.3 million and operating lease right-of-use assets of $10.9 million as of December 31, 2023. We identified the evaluation of indicators of impairment of long-lived assets as a critical audit matter given the significant judgments management utilizes in identifying whether events or changes in circumstances indicate that long-lived asset carrying amounts may not be recoverable, such as the determination of the break-even point of bitcoin prices on the Company’s operating model. Auditing management’s judgments required a high degree of auditor judgment and an increased extent of effort.
Our audit procedures related to management’s identification of impairment indicators of long-lived assets included the following, among others:
We evaluated management’s determination of indicators of impairment by inspecting the Company’s impairment analysis and performed an independent assessment of potential indicators of impairment to determine if contrary evidence existed as to the completeness of the population of identified indicators of impairment.
We evaluated management’s assessment of whether indicators of impairment were present during the reporting period by evaluating the significant assumptions used by management relating to their break-even analysis, and corroborating other industry and macroeconomic factors, such as bitcoin prices, utilized in the Company’s analysis for evaluating indicators of impairment”
Soluna Holdings, Inc.
“Impairment Analysis of Intangible Assets
Description of the Matter
As discussed in Note 6 to the financial statements, the Company has strategic pipeline contracts related to the Company’s business. These contracts relate to the potential renewable energy data centers that the Company is in the process of completing. As of December 31, 2023, the book value of the strategic pipeline contracts totaled $26.6 million, net of accumulated amortization of $20.3 million.
We identified the impairment analysis of the strategic pipeline contract intangible assets triggered by the impairment indicators as a critical audit matter because the analysis includes significant estimates, assumptions and judgments. Specifically, the determination of the fair value of the strategic pipeline contracts was based on the status of the projects, undiscounted cash flows and the probability of realization of the benefit. The determination of the intangible fair value required management to make significant judgments, including the appropriateness of the valuation model and the reasonableness of estimates and assumptions included in the model. Changes in these estimates and assumptions could have a significant impact on the fair value of the intangible assets. Auditing these elements involved especially challenging auditor judgment due to the subjectivity and the nature and extent of audit effort required to address the matter, including the extent of specialized skills or knowledge needed.”
How We Addressed the Matter in Our Audit
We gained an understanding of certain internal controls over the Company’s process to analyze the intangible asset for impairment, including controls related to the Company’s valuation. For example, we gained an understanding of controls over the estimation process supporting the impairment analysis of the strategic pipeline contracts intangible asset, which included controls over management’s review of assumptions used in its impairment analysis.
To test the impairment analysis of the strategic pipeline contracts, we performed audit procedures that included, among others, evaluating the methodology used by the Company’s valuation specialist, and evaluating the reasonableness of the key assumptions used to determine the estimated undiscounted cash flow. We utilized our firm’s valuation specialists to assist with the evaluation of the methodology used by management and significant assumptions included in the impairment analysis, including testing the likelihood of various scenarios. For example, we compared the Company’s budgets and forecasts and reviewed the status of the projects used as part of the determination of the likelihood of the various scenarios. We performed a sensitivity analysis over key assumptions used in the analysis. We also evaluated the adequacy of the Company’s disclosures included in Note 2 and Note 6 in relation to this valuation.”
Marathon Digital Holdings, Inc.
“Revenue Recognition
As disclosed in Note 3 to the financial statements, the Company’s ongoing major or central operation is to provide bitcoin transaction verification services to the transaction requestor, in addition to the bitcoin through a Company-operated mining pool as the operator, and to provide a service of performing hash calculations to third-party pool operators alongside collectives of third-party bitcoin miners as a participant. The principal consideration for our determination that performing procedures related to revenue recognition is a critical audit matter is due to the nature and extent of audit effort required to perform audit procedures over the completeness, and occurrence of revenue recognized. Addressing this matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others:
We performed site visits at the Company’s facilities where the mining hardware is located, which included observations of the physical controls and mining equipment inventory.
We independently traced certain financial and performance data directly to the blockchain to test the occurrence and accuracy of mining revenue as the operator.
We independently confirmed with the third-party mining pool operator the significant contractual terms utilized in the determination of mining revenue, total mining rewards earned, and the digital asset wallet addresses in which the rewards are deposited to test the occurrence and accuracy of mining revenue as the participant.
We performed certain analytical procedures over the completeness and accuracy of revenue recognized by the Company.
We confirmed the year-end digital asset balances directly with the custodians of the Company’s wallets.”
Riot Platforms, Inc.
“Bitcoin Mining Revenue – Refer to Notes 2 and 4 to the financial statements
Critical Audit Matter Description
The Company participates in a digital asset mining pool ("the mining pool”) by providing computing power to the mining pool operator. The Company recognizes revenue as they fulfill their performance obligation over time by providing computing power in exchange for bitcoin. Once the computing power is transferred to the mining pool operator, the mining pool operator will compensate the Company for the computing power provided with a payout in bitcoin. For the years ended December 31, 2023, and 2022, Bitcoin Mining Revenue was $189.0 million, and $156.9 million, respectively.
We identified the auditing of bitcoin mining revenue as a critical audit matter due to the extent of audit effort required to perform audit procedures over the Company’s computing power provided to the mining pool operator, the associated contractual payouts including the blockchain contractual inputs, the Company’s valuation of bitcoin received from the mining pool operator, and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s process for recording bitcoin mining revenue included the following, among others:
With the assistance of our Information Technology (IT) specialists, we identified the significant systems used to monitor computing power and tested the general IT controls over each of these systems.
We tested the effectiveness of controls over the Company’s mining revenue calculation.
We tested the amount of the mining revenue recorded by developing an expectation for the amount recorded based on the computing power provided to the mining pool operator per the calculation prescribed in the contract with the mining pool operator and comparing our expectation to the amount recorded by the Company.
We confirmed with the mining pool operator the significant contractual terms utilized in the determination of mining revenue, total mining rewards earned, and the digital asset wallet addressesin which the rewards are deposited.
We utilized our proprietary audit tool to independently obtain evidence from the Bitcoin blockchain to test the occurrence and accuracy of mining revenue.
With the assistance of our fair value specialists, we evaluated the reasonableness of the prices utilized by the Company to value bitcoin by obtaining independent bitcoin prices and comparing those to the prices selected by the Company.”
Hut 8
“Existence and rights and obligations of digital assets
As described further in Note 6 to the financial statements, digital assets are either held in custody or held in a segregated custody account under the Company’s ownership and pledged as collateral under a borrowing arrangement.
The principal considerations for our determination that digital assets are a critical audit matter are due to the complexities involved in auditing existence and rights and obligations of the digital assets recognized. Given these considerations, the related audit effort in evaluating management’s judgments was extensive and required a high degree of auditor judgment.
Our audit procedures related to the Company’s existence and rights and obligations of digital assets included the following, among others:
We assigned professionals with specialized skills in blockchain, digital assets and cryptography;
We tested the design and operating effectiveness of internal controls related to the existence and rights and obligations of digital assets, including customer key management by obtaining and evaluating the report attesting that those controls at the service organizations (custodians) are operating effectively;
We obtained confirmation on digital assets with third parties.”
“Business combination – refer to Notes 1 and 3 to the financial statements
On November 30, 2023, the transaction between USBTC and Hut 8 Mining Corp. related to a business combination agreement was completed for a total consideration of approximately $431 million. The transaction was accounted for under the acquisition method with USBTC identified as the accounting acquirer for financial statement reporting purposes. Under this method, the purchase price was allocated to the assets acquired and the liabilities assumed based on their respective fair value, including digital assets, property, plant and equipment, intangible assets and resulting goodwill.
Significant estimates and assumptions were made by management in the determination of the acquire and with regards to the fair values of assets and liabilities recorded upon the acquisition. This matter required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s projections of future cash flows, as well as the selection of discount rates, including the need to involve our valuation experts.
Our audit procedures related to business combination included the following, among others:
We evaluated, with the assistance of our valuation experts, the reasonableness of management’s:
projections of future cash flows by comparing the projections to historical results and long-term economic growth forecasts;
valuation methodologies and discount rates by testing information used to determine the discount rates, performing sensitivity analysis using a range of independent estimates for the discount rates and comparing those to the discount rates applied by management;
forecasted customer attrition rates by comparing to historical attrition rates;
We tested the fair values of the assets and liabilities included upon the acquisition which were not subject to cash flow projection valuation methods;
We tested the mathematical accuracy of calculations;
We assessed the consistency of the assumptions used with other accounting estimates;
We tested the existence of assets and liabilities included in the purchase price allocation.”
“Digital assets mining revenue
As described further in Note 2 to the financial statements, the Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. The digital assets mining revenue is derived from the service of performing hash computations for mining pools. The Company has entered into arrangements with mining pool operators to perform hash computations for the mining pools. In exchange for providing hash computation services, the Company is entitled to noncash consideration in the form of digital assets calculated under payout models determined by the mining pool operators. During the six months ended December 31, 2023, the Company recognized digital assets mining revenue of approximately $41.5 million.
The principal considerations for our determination that the digital assets mining revenue is a critical audit matter are due to the significant judgment in the determination of how existing accounting principles generally accepted in the United States of America should be applied in the accounting for and disclosure of digital assets mining revenue and complexities involved in auditing completeness, occurrence and accuracy of the revenue recognized. Given these considerations, the related audit effort in evaluating management’s judgments was extensive and required a high degree of auditor judgment.
Our audit procedures related to digital assets mining revenue included the following, among others:
We evaluated management’s rationale for the application of ASC Topic 606 to account for its digital assets received, which included evaluating the provisions of the contract between the Company and the mining pools;
We assessed the adequacy of the Company’s disclosures in the financial statements about digital assets mining revenue;
We conducted substantive analytical procedures, with high degree of precision, which include tests of the accuracy and completeness of the underlying data, such as confirmation of certain data with third parties;
We tested digital assets received directly to the blockchain using our own node and the corresponding cash settlement using the third-party exchange data and the Company’s bank statements.”
CleanSpark
“Evaluation of the Accounting for and Disclosure of Bitcoin Held
As disclosed in Note 2 to the consolidated financial statements, bitcoin held by the Company as of September 30, 2023, are accounted for as indefinite-lived intangible assets and have been included in current assets on the consolidated balance sheets. The Company’s bitcoin as of September 30, 2023 amounted to approximately $56.2 million. The Company’s management has exercised significant judgment in their determination of how existing GAAP should be applied to the accounting for bitcoin held, the associated financial statement presentation and accompanying footnote disclosures.
The primary procedures we performed to address this critical audit matter included the following:
Evaluated management’s rationale for the application of Accounting Standards Codification (“ASC”) 350 to account for bitcoin held and examined management’s processes for determining the amount of impairment expense recognized;
Evaluated management’s rationale for the inclusion of bitcoin as a current asset on the consolidated balance sheets;
Independently and directly confirmed the balance and ownership of bitcoin that is in the custody of a third party;
Evaluated management’s disclosures of its bitcoin activities in the financial statement footnotes; and
Examined supporting sale and cash receipt evidence for bitcoin sales, including management’s processes for calculating any gains or losses on sales of its bitcoin.”
“Evaluation of the Accounting for and Disclosure of Bitcoin Mining Revenue Recognized
As disclosed in Note 2, the Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company provides computing power to its mining pool and in exchange for providing such computing power, the Company is entitled to a pro-rata share of the fixed bitcoin awards earned over the measurement period, plus a pro-rata fractional share of the global transaction fee rewards for the respective measurement period, less net digital asset fees due to the mining pool operator over the measurement period. The Company’s pro-rata share is based on the proportion of computing power the Company contributed to the mining pool operator as compared to the bitcoin’s algorithmic difficulty. During the year ended September 30, 2023, the Company recognized net bitcoin mining revenue of approximately $168.1 million. The Company’s management has exercised significant judgment in their determination of how existing GAAP should be applied to the accounting for and disclosure of bitcoin mining revenue recognized.
The primary procedures we performed to address this critical audit matter included the following:
Evaluated management’s rationale for the application of ASC 606 to account for bitcoin awards earned;
Evaluated management’s disclosures of its bitcoin activities in the financial statement footnotes;
Evaluated and tested management’s rationale and supporting documentation associated with the valuation of bitcoin awards earned;
Independently confirmed certain financial data and wallet records directly with the mining pool;
Compared the Company’s wallet records of bitcoin mining revenue received to publicly available blockchain records; and
Undertook an analytical review of total bitcoin mining revenue expected to be recognized by the Company by assessing the total hash power contributed onto the by the Company against total block rewards and transaction fees issued over the year.”