Presentation by Moore Stephens Cayman for the Cayman Islands Institute of Accountants on International Standards on Auditing for Cayman Funds & Cryptocurrency Funds

1. International Standards on
Auditing
for Cayman Funds &
Cryptocurrency Funds
CIIPA.ky/event-3357739
David Walker
Candice Czeremuszkin
10 July 2019
Helping you grow PRECISE. PROVEN. PERFORMANCE.
1

2. Disclaimer
The presenters disclaim any responsibility or liability
resulting from the use and application of this presentation
2

3. 1. Audit Planning Considerations
2. Internal Controls & Risk Assessment
Considerations
3. Auditing Specific Accounting Cycles
4. Audit Completion, New & Revised Auditor
Reporting Standards
5. Auditing Cryptocurrency Funds
Agenda
3

4. 1. Audit Planning Considerations
4

5. Audit Planning Considerations
5
Engagement
(Re-) Acceptance
Audit Planning
&
Documentation
Requirements
&
Deliverables

6. • Fraud/Non-Compliance Risk Assessments
• Accounting Cycles Risk Assessments
• Materiality
• Any Expected Modification of Opinion
6
Audit Planning Considerations

7. Audit Planning Considerations
• Prior year audit issues
• Changes in the Fund’s operations
• Estimated values and assumptions
• Errors and restatements
• Going concern assessment
• Communication with Those Charged with Governance
7

8. Audit Planning Considerations
Laws & Regulations (ISA 250)
RiskResponse
ReportingRiskAssessment
• Is material non-compliance disclosed/reported if required?
• Report to Those Charged with Governance
• Obtain management representations
• Identify any non-
compliance
• Discuss with management,
if appropriate
• Evaluate impact
• Legal & regulatory
framework for funds
• How entity is complying?
• Inquire about compliance
• Review regulatory
correspondence
8

9. Audit Planning Considerations
Laws & Regulations
• IAASB Handbook of International Quality Control…
• Companies Law
• Mutual Funds Law & Annual Returns Regulations
• Proceeds of Crime Law
• Anti-Money Laundering Regulations
• Confidential Information Disclosure Law
• CIMA.ky/investment-funds-regulatory-measures
• CIIPA.ky/page-18225 & CIIPA.ky/AML/CFT
9

10. Audit Planning Considerations
Related Parties
RiskResponse
ReportingRiskAssessment
• Has sufficient appropriate evidence been obtained?
• Does a material misstatement exist?
• Is financial statement disclosure adequate?
• Obtain management representations. Report on any
findings
Alert for undisclosed related parties
Obtain support for management’s
assertions about: nature, extent, and
purpose of transactions
Consider: significance, measurement,
and recognition of transactions, and
fraud risks
Identify related
parties
Understand nature,
extent, & purpose
of transactions
Consider potential
for fraud
10

11. Audit Planning Considerations
Working with other Auditors
Involves different Audit Practitioners at
different locations:
 Cayman “Principal Auditor” signs
audit report, where the Fund is
domiciled;
 “Other Auditor” in different
jurisdiction where management or
records based.
Cayman Practitioner:
 Sign the Engagement Letter
 Supervises Other Auditor
 Review Other Auditor’s work
Cayman auditor involvement in audit
planning, risk assessment and review:
 Which auditor is responsible for
communication to the Directors?
 Can the auditors effectively
collaborate to meet the client
deadline?
 Does the “Other auditor” have
adequate funds audit experience?
 Watch out for any Group Audit
considerations – e.g. consolidation of
audits by other auditors 11

12. 1. Audit Planning Considerations
Any Questions?
12

13. 2. Internal Controls &
Risk Assessment Considerations
13

14. Internal Control &
Risk Assessment
If placing reliance on an internal controls audit assurance report:
• What is the nature of the report?
• Consider the report’s findings
• Are the critical controls being relied upon by the auditor
sufficiently tested and are these free from findings?
• Document the audit risk assessment and resultant audit
approach
AND/OR: Perform controls reliance testing.
REMEMBER: Consider prior year audit adjustments and any other
significant deficiencies.
14

15. Internal Control &
Risk Assessment
Only rely on documented controls that are evidenced to work
• May we rely on
controls?
• Service
organisation
controls report?
• Risks of fraud?
• Risks of errors?
• Walkthroughs
• Tests of control
• Substantive
procedures
• Audit
Confirmations
• Proof-in-total
roll-forward
calculations
• Substantive
analytical review
procedures
• Substantive tests
of detail 15

16. Internal Control &
Risk Assessment
Management Override
Procedures to Address Management Override Risk
Examine:
Journal Entries
Estimates
Significant Transactions
Revenue Recognition
Management override and fraudulent revenue recognition
are presumed to be significant risks
16

17. 2. Internal Controls &
Risk Assessment Considerations
Any Questions?
17

18. 3. Auditing Specific
Accounting Cycles
18

19. Auditing Specific Accounting Cycles
Investments
Audit the valuation,
classification, levelling
and risk disclosures
Obtain sufficient and
appropriate audit
evidence for Level 3
investments especially
Consider additional
procedures for
significant related party
transactions
DOCUMENT
WHETHER
ADDITIONAL
WORK IS
REQUIRED
Review post-year end portfolio
Confirm observable prices
independently
Audit any valuation techniques
Confirm quantities with custodian
Review any breaches of
restrictions/policy/strategy
Query any unusual investments or
investment transactions
Assess any Management
Estimates for
reasonableness and
related FS disclosures
Perform analytical
review Investment roll
forward calculation
19

20. Auditing Specific Accounting Cycles
Investments
Auditing the Statement of Comprehensive Income:
• Other net changes in FV on financial assets/liabilities @FVTPL
• Interest & dividend income
• Other income, if any
Financial Statement Disclosures:
• Qualitative & quantitative risk disclosures
• Management’s methods to monitor & mitigate risk
• Offsetting disclosure requirements
20

21. Auditing Specific Accounting Cycles
Opening Balances
Agree Review Evaluate
21

22. Auditing Specific Accounting Cycles
Cash and Cash Equivalents
Due from/to Brokers
Recalculate cash flow
statement workings
Review post year end
statements and trade
settlements
Review any offsetting
disclosures for
validity and
transparency
DOCUMENT
WHETHER
ADDITIONAL
WORK IS
REQUIRED
Justify any reliance on controls
Reconcile balances to: TB; lead
schedules; confirmations; and
financial statements
Investigate reconciling or
unusual items
Verify credit facility limits
Are there any breaches
Look at renewal dates
Verify FX rates
Document an
understanding of
controls
22
Evidence any:
charges over assets;
restricted balances;
collateral, & review
financial statement
disclosures

23. Auditing Specific Accounting Cycles
Share Capital
Sample:
• Subs, Reds, Transfers
• Signed investor
instructions
• Transaction
authorisation
• Recalculate using
NAV/share at
transaction date
• Agree bank
receipt/payment/in-
kind transaction
• Verification of
investors?
DOCUMENT
WHETHER
ADDITIONAL
WORK IS
REQUIRED
Share capital roll-
forward recalculation:
• Agree opening to
prior year
• Agree movement and
closing amounts to
an audit
confirmation
• Agree FS disclosures
Recalculate where applicable:
• NAV/share at Y/E
• Analytical review of
NAV/share per class
• Financial highlights
Document & test allocation of income/expenses between share classes;
Only rely on documented controls that are evidenced to work;
Review any gates, suspensions, side letters, or investor lock-in agreements.
23

24. Auditing Specific Accounting Cycles
Expenses & Other Receivables/Payables
NAV-Based Fees
• Recalculate a sample or total based on the service-agreement or prospectus
• Fees payable at year-end might be verified to after date settlement
• Review breakdown of payments during the year and consider analytical techniques
Other Expenses
• Review any significant legal fee invoices
• Directors’ fees to be compared with FS disclosures, OM, directors’ service
agreements
• Consider whether any expenses are contrary to the offering document
Other Payables/Receivables
For significant balances, obtain adequate support, e.g.:
• Any post year end settlement
• Outstanding invoices
• Settlement terms and consider documenting reasons for any undue delay
Disclosure of Related Party Transactions 24

25. Auditing Specific Accounting Cycles
Going Concern – ISA 570 (Revised)
Going concern basis of accounting
The auditor report’s includes:
• Description of management’s responsibility and whether the use of the
going concern basis of accounting is appropriate
• The auditor’s responsibilities are to conclude on the appropriateness of
management’s use of the going concern basis of accounting, based on
the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern.
25

26. Auditing Specific Accounting Cycles
Going Concern
RiskResponse
ReportingRiskAssessment
Determine:
• Does a material uncertainty exists in relation to the identified issue?
• Is the going concern basis of accounting appropriate?
• Are the FS disclosures sufficient?
Obtain management representations
For any issues identified:
• Review management’s
assessment
• Remain alert for possible
conditions or events
Consider management’s
assessment of issues that may
cast doubt on the going
concern basis of accounting:
• Review management’s
assessment
• Remain alert for possible
conditions or events
26

27. Auditing Specific Accounting Cycles
Going Concern
Any events that
may cast
significant
doubt on entity's
ability to
continue
as a going
concern?
Ask management
for a preliminary
assessment of the
entity’s ability to
continue as a
going concern
Conclude: does a
material uncertainty
exist? Is the basis of
accounting is
inappropriate?
Remain alert for any
events/conditions
that may cast
significant doubt on
entity's ability to
continue as a going
concern
Discuss any
issues with
management
and obtain their
response
Evaluate
management’s plan
of action and
supporting
documentation
Identify any
events/conditions &
obtain
management’s
action plans in
response
ASK
NO
ASK
27

28. Auditing Specific Accounting Cycles
Going Concern
Use of Going Concern
Basis of Accounting
Inappropriate
Express a qualified or
adverse opinion, and
state material
uncertainty exists
Do financial
statements fully
describe events/
conditions and
disclose existence
of material
uncertainty?
Determine the impact of identified events/conditions on the audit report
and communicate the decision to management and those charged with
governance, where applicable
Use of Going Concern
Basis of Accounting
Appropriate but a
Material Uncertainty
Exists
• ?
Unmodified opinion
plus “Material
Uncertainty Related
to Going Concern”
Express an adverse
opinion
28
Yes
No

29. Auditing Specific Accounting Cycles
Subsequent Events – Overview
Risks:
• Erroneous disclosure or missing financial statement disclosures
• Incorrect valuations at year-end
Procedures to include:
• Document the date to which we have identified all material
subsequent events
• Review post year end activities
• Obtain Management confirmation of no undisclosed
subsequent events
29

30. Auditing Specific Accounting Cycles
Subsequent Events – Timeline
Date of
Financial
Statements
Timeline
Obtain evidence about subsequent
events
Respondtonewfacts that
becomeknown
Date of Management
Approval of
Financial Statements
Date of Auditor’s
Report on
Financial
Statements
Date Financial
Statements Are
Issued
30

31. Auditing Specific Accounting Cycles
Financial Statements Review Process
Document a review of the FS
Test material journal entries, including “top-side” journals
(ISA 330.20)
Perform a final analytical review
(ISA 520.6)
Address any additional risks identified
Discuss findings
31

32. 3. Auditing Specific
Accounting Cycles
Any Questions?
32

33. 4. Audit Completion &
Auditor Reporting Standards
33

34. Breaches of law,
regulation, investment
restriction or prospectus
Investor complaints
Contingent events and
or assets / liabilities
Significant deficiencies
identified
Internal control
weaknesses
Adjusted & unadjusted
audit differences
“Other Information” to
be appended to the FS
Audit Completion &
Auditor Reporting Standards
Responsibilities
Appropriate books &
records, minutes &
resolutions made
available
Material transactions
properly recorded
Responsibility for
establishing and
maintaining adequate
internal controls
Responsibility for
assessing fraud risk
FS presented fairly, in all
material respects, including
accounting policies & notes
Investments, other assets &
liabilities are value, owned,
and disclosed consistently,
completely and correctly in
accordance with IFRS and
the prospectus
Subsequent events are
disclosed / adjusted
Related parties and RP
transactions disclosed
34
Seek General
Representations of:
Seek FS
Representations that:
Seek Management
Representation of any:

35. Audit Completion &
Auditor Reporting Standards
• ISA 260 (Revised) Communication with Those Charged with Governance
• ISA 570 (Revised) Going Concern
• ISA 700 (Revised) Forming an Opinion and Reporting on Financial
Statements
• ISA 701 Communicating Key Audit Matters in the Independent Auditor’s
Report
• ISA 705 (Revised) Modifications to the Opinion in the Independent
Auditor’s Report
• ISA 706 (Revised) Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report
• ISA 720 (Revised) The Auditor’s Responsibilities Relating to Other
Information
• ISA 810 (Revised) Engagements to Report on Summary FS
• Conforming amendments to other ISA
ISA effective for periods ending on/after 15 December 2016
35

36. Auditor Reporting Standards
ISA 260 (Revised) Communication with
Those Charged With Governance
• The Auditor’s Responsibilities
• Overview of the planned scope, timing and significant risks
identified
• Qualitative Aspects of Accounting Practices
• Significant Difficulties Encountered
• Significant Matters Arising Relevant to Financial Reporting
• Written Representations
• Circumstances Affecting the Audit Report
• Key Audit Matters, if any
• Auditor Independence
36

37. Auditor Reporting Standards
ISA 700 (Revised) Forming an Opinion
and Reporting on Financial Statements
• Audit opinion is at the start of the report.
• More explicit statement on independence, other ethical responsibilities,
and which standards or code were followed by the auditor.
• Specific section in the audit report when a material uncertainty over going
concern exists, which refers to adequate disclosure in the FS.
• Specific section to cover the auditor’s work in relation to other
information in the annual report (ISA 720 (Revised))
• Going concern explanation wording clarified, referencing the going
concern “basis of accounting” concept.
• Enhanced description of the responsibilities of management and the
auditor (with an option to move text on certain responsibilities to an
appendix or website). 37

38. Applies to Listed Entities or Voluntary Adopters
• A section in the audit report to explain key audit matters (KAM).
• A succinct description of the matter being included as a KAM, and a
meaningful summary of the audit procedures undertaken to address the
matter.
KAM are those of most significance in the audit, which are a subset of matters
communicated to TCWG:
• With a higher risk of material misstatement
• Requiring significant judgement, including accounting estimates
• Where there was a significant event or transaction in the year
• Required for any reason to have modified the Opinion
• Replaces any Emphasis of Matter / Other Matter paragraph except the new
“Material Uncertainty Related to Going Concern” paragraph, if applicable
Wording must not imply discrete opinions on separate elements of the FS.
38
Auditor Reporting Standards
ISA 701 Communicating Key Audit Matters
in the Independent Auditor’s Report

39. QUALIFIED:
Material Misstatement
QUALIFIED:
Material Inability to Obtain
Audit Evidence
ADVERSE:
Material & Pervasive
Misstatement
DISCLAIMER:
Material & Pervasive
Inability to Obtain Audit
Evidence
TYPES OF
MODIFICATION
39
Auditor Reporting Standards
ISA 705 (Rev) Modifications to the Opinion
in the Independent Auditor’s Report

40. Auditor Reporting Standards
ISA 705 (Revised) & ISA 570 (Revised)
Qualified Opinion [Illustrative Extract]
We have audited the financial statements…
In our opinion, except for the effects of the matter described in the Basis for
Qualified Opinion section of our report, the accompanying financial statements
present fairly, in all material respects (or give a true and fair view of), the
financial position of the Company as at December 31, 2018, and (of) its
financial performance and its cash flows for the year then ended in accordance
with International Financial Reporting Standards (IFRS).
Basis for Qualified Opinion
As discussed in Note YY, the Company’s financing arrangements expire and the
amounts outstanding become payable on [future date]. The Company has been
unable to conclude re-negotiations or obtain replacement financing. This
situation indicates that a material uncertainty exists that may cast significant
doubt on the Company’s ability to continue as a going concern. The financial
statements do not adequately disclose this matter. 40

41. Auditor Reporting Standards
ISA 705 (Revised) & ISA 570 (Revised)
Adverse Opinion [Illustrative Extract]
We have audited the financial statements…
In our opinion, because of the omission of the information mentioned in the
Basis for Adverse Opinion section of our report, the accompanying financial
statements do not present fairly (or do not give a true and fair view of) the
financial position of the Company as at December 31, 2018, and of its financial
performance and its cash flows for the year then ended in accordance with
International Financial Reporting Standards (IFRSs).
Basis for Adverse Opinion
The Company’s financing arrangements expired and the amount outstanding
was payable on December 31, 2018. The Company has been unable to conclude
re-negotiations or obtain replacement financing and is considering filing for
bankruptcy. This situation indicates that a material uncertainty exists that may
cast significant doubt on the Company’s ability to continue as a going concern.
The financial statements do not adequately disclose this fact.
41

42. Auditor Reporting Standards
ISA 705 (Rev) Modifications to Opinion…
Disclaimer of Opinion [Illustrative Extract]
We were engaged to audit the financial statements of ABC Fund…
We do not express an opinion on the accompanying financial statements of the Fund.
Because of the significance of the matter described in the Basis for Disclaimer of
Opinion section of our report, we have not been able to obtain sufficient appropriate
audit evidence to provide a basis for an audit opinion on these financial statements.
Basis for Disclaimer of Opinion…
Responsibilities of Management and TCWG for the FS…
Auditor’s Responsibilities for the Audit of the Financial Statements
Our responsibility is to conduct an audit of the Fund’s financial statements in
accordance with International Standards on Auditing and to issue an auditor’s
report. However, because of the matter described in the Basis for Disclaimer of
Opinion section of our report, we were not able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion on these financial statements.
We are independent…
42

43. Audit Completion &
Auditor Reporting Standards
EoM can also be required by:
• ISA 210, Agreeing the Terms of Audit Engagements – paragraph 19(b)
• ISA 560, Subsequent Events – paragraph 12 (b) and 16
• ISA 800, Special Considerations – Audits of Financial Statements Prepared in
Accordance with Special Purpose Frameworks – paragraph 14
Other Matter paragraph can also be required by:
• ISA 560, Subsequent Events – paragraphs 12 (b) and 16
• ISA 710, Comparative Information – Corresponding Figures and Comparative
Financial Statements – paragraphs 13-14, 16-17 and 19
• ISA 720, The Auditor’s Responsibilities Related to Other Information in Documents
Containing Audited Financial Statements – paragraph 10 (a)
ISA 706 (Rev) Emphasis of Matter Paragraphs & Other Matter
Paragraphs…
43

44. Auditor Reporting Standards
ISA 250 (Rev) Consideration Laws, Regs…
• Updated to reflect IESBA’s Code of Ethics for Professional
Accountants addressing Non-Compliance with Laws and
Regulations (NOCLAR)
• Effective for audit periods beginning on/after 15 December
2017
• Pathway for auditors/professional accountants to disclose
potential non-compliance situations to appropriate public
authorities without constraints of the ethical duty of
confidentiality.
• Promoting compliance, preventing of non-compliance
44

45. 4. Audit Completion &
Auditor Reporting Standards
Any Questions?
45

46. 5. Auditing Cryptocurrency Funds
46

47. oIntroducing Cryptocurrency
oCryptocurrency – Introduction to Disruption
oDeveloping Trends in Digital Assets
oCryptocurrency Developments in the Caribbean
oAccounting for Cryptocurrency
oAuditing of Cryptocurrency
oAudit Issues
oSmart Contracts
oRegulation 47
Auditing Crypto Funds

48. Blockchains:
• Use a consensus to agree the accuracy of data
• Data is written into a ledger (blocks), linked with cryptography
• Financial messaging, clearance, settlement near simultaneous
• Creates verifiable, growing data / transaction log
Cryptocurrencies:
o Bitcoin BTC/XBT 2009 launch, after global financial crisis started
• Bitcoin has a 62% market dominance
o >2,300 different cryptocurrencies
o $328bn total crypto market capitalisation (peak: $836bn, 7 Jan ’18)
48
Auditing Crypto Funds
Introduction to Disruption

49. Cryptocurrencies – digital assets that function as currency
o Disintermediation – no 3rd party bank/broker/custodian
o Pseudo-Anonymous transactions are possible
o Fraud – could be concealed more easily, like cash
o Not Legal Tender – not backed by state
o Not Widely Accepted – not yet
o Processing Times – can be seconds or minutes
o Volatile – mainly
49
Auditing Crypto Funds
Introduction to Disruption

50. Other digital assets:
o Utility Tokens – tokens for specific use applications
o Security Tokens – passive investment opportunities
o Stablecoins – e.g.:
 Tether (not audited)
 Circle (support from Goldman Sachs, Coinbase) (audited)
 Gemini dollar (audited)
 Libra/Calibra (Facebook, Whatsapp, Instagram) (2021?)
o ICO, STO, IEO – like crowdfunding 50
Auditing Crypto Funds
Introduction to Disruption

51. o Blockchains have a ‘trilemma’ between optimising:
− Security
− Scalability
− Speed
o Blockchain security uses Private keys & Public keys
o Bitcoin requires energy intensive mining for security
(less expense than fiat banks)
51
Auditing Crypto Funds
Introduction to Disruption

52. Digital assets that are legally transferrable on a blockchain offer
many advantages over incumbent investment processes:
o More secure and private
o More transparent for users
o Faster
o Lower cost
o Innovative disruption is growing
o Disintermediation is predicted
52
Auditing Crypto Funds
Introduction to Disruption

53. o Cryptocurrencies need more scalability to reach mass adoption
How? e.g. Lightning Network
In the meantime:
o Apple Card – launching with Goldman Sachs & Mastercard
• Security feature: no numbers on the card
• Not real time settlement, no blockchain
o Nine debit cards allow spending from cryptocurrency a/c’s
o Western Union is working with Stellar protocol towards
transferring funds to recipients’ mobile wallets 53
Auditing Crypto Funds
Developing Trends in Digital Assets

54. Centralised Services
o Digital asset custodians that
hold users’ private keys
o “Not your key, not your
bitcoin”
o Honey pot for hackers – use
reputable third-party service
providers with verified controls
o Most cryptocurrency exchanges
are highly centralised, but
decentralised solutions are
growing
Decentralised Services
− No central authority
− Decentralised Autonomous
Organisation (“DAO”)
− Digital wallets where the user
holds their own private keys
− No trusted 3rd parties –
eliminates the risk of 3rd party
creditworthiness, illiquidity,
theft fraud, error
− More transparent, cost effective
and private for the user 54
Auditing Crypto Funds
Developing Trends in Digital Assets

55. o Blockchain use cases: 101blockchains.com/blockchain-usage
o “Platformised” financial servies
o Decentralised Finance (DeFi)
o Lending/borrowing with interest earned on crypto
loans, deposits and bonds
o Crypto-native derivatives are growing
o Insurance is becoming more popular with digital asset
custodians (often obligatory for fiat banks e.g. FDIC)
55
Auditing Crypto Funds
Developing Trends in Digital Assets

56. Source: en.wikipedia.org/wiki/Jean-Paul_Rodrigue
56
Auditing Crypto Funds
Developing Trends in Digital Assets

57. 1,189
1,102
255
103
Initial Exchange
Offerings
Venture Capital Security Token
Offerings
Initial Coin Offerings
Fundraising Models
for May 2019 $ million
57
Auditing Crypto Funds
Developing Trends in Digital Assets
Source: inwara.com

58. o Eastern Caribbean Central Bank
to trial central bank digital
currency: digital Eastern
Caribbean dollar
o 3 stablecoin projects in Cayman
and more elsewhere
o Cryptocurrency exchanges and
brokers in Cayman, BVI, St.
Vincent and the Grenadines
o No cryptocurrency ATMs in
Cayman thus far
o Cayman government has
proposed Sandbox legislation
Country
Initial Coin
Offerings
2018
Cayman $4.7bn 2 of top 15
BVI $2.2bn 2 of top 15
Bahamas $0.1bn 1 of top 15
World
Total
$20bn 1132
58
Auditing Crypto Funds
Cryptocurrencies in the Caribbean

59. Bitcoin’s fixed supply: consider purchasing power of BTC
over time
o Limit of 21m bitcoin to be issued (fixed supply)
o As adoption increases, >demand =>price (deflationary)
o If future price increases become an expectation, people start
holding bitcoin as an investment (and stop using it as a means
of payment?) – then it ceases to be available for transactions
o Will deflation reduce confidence in bitcoin as a means of
payment? Will this help stabilise prices?
o Bitcoin has 8 decimal places. Capacity for very small
transactions.
59
Auditing Crypto Funds
Accounting for Cryptocurrencies

60. o Varying approaches, no crypto guidance offered by IFRS
o Not a Cash Equivalent if significant risk of fluctuations in
value
o Not a Financial Asset (no contract, except crypto derivatives)
o Accounting for Intangible Assets
o At FVTPL for Investment Entities, if there is an Active
Market
o Otherwise Changes in FV go through OCI
o Clear Disclosures of accounting policies & nature of
transactions
o Pricing at midnight UTC (no physical close) 60
Auditing Crypto Funds
Accounting for Cryptocurrencies

61. • > 500 Crypto Funds exist already
• Tokens or Redeemable Shares – Review offering terms
• KYC/AML Checks for investor transactions & any in-kind transactions
• Source of Funds for transactions outside of regulated exchanges
• Systems and Controls Testing plus any Substantive Procedures over
any cold storage and brokers/custodians
• Digital Wallets - Test ownership and access controls
• Audit Confirmations from (independent?) custodians
• Review Pricing Methodology & price sources. Cut-off: midnight UTC.
• Continuous Real-Time Assurance Procedures
• Review of Investment Transactions 61
Auditing Crypto Funds
Accounting for Cryptocurrencies

62. Audit the
Valuation,
Classification,
Levelling and Risk
Disclosures
Obtain Sufficient
& Appropriate
Audit Evidence
for Level 3
Investments
Additional
Procedures:
Significant
Related Party
Transactions
Are
Additional
Audit
Procedures
Required?
Analytical Review
During & Post-Year End
Verify Portfolio Prices
Audit Valuation
Techniques
Confirm Quantities with
Custodians
Review any Breaches of
Investment Restrictions,
Policy, Strategy
Query Unusual
Investments or Transactions
Assess Management
Estimates for
Reasonableness and
Related FS Disclosures
Sample or
Substantively Test
Transactions
62
Auditing Crypto Funds
Auditing Crypto Funds: Investments

63. Auditing Crypto Funds
Additional audit procedures
• Is the fund issuing Tokens or Redeemable Shares? Review the offering.
• What are the KYC/AML checks for investor transactions (and in-kind
transactions) and who performs and reviews this?
• Consider source of funds for transactions outside of regulated
exchanges
• Can any privacy coin transactions be verified e.g. Dash, Grin, Monero,
Pivx, Zcash
• Review and consider testing controls and systems plus substantive
procedures over any digital wallet, cold storage, broker/custodian
• Test ownership and access controls over any corporate digital wallets
• Audit confirmations from (independent?) custodians
• Review pricing methodology, consider using the most active market
price, and look at the timing/cut-off of pricing on 24/7 markets
• Detailed review investment transactions during the year include a
comprehensive analytical review of trading performance in each
cryptocurrency 63

64. o Smart Contract – self-executing coded agreements existing across a
distributed ledger technology
o Not “Smart” and not a “Contract” that’s necessarily legally
enforceable
o Some countries have legislation making smart contracts enforceable
o Many digital assets can be transacted by smart contract, where legal:
 Investments and insurance contracts, including derivatives
 Loans and letters of credit
 Tokenized investment funds
 Preference shares and equity shares
 Real estate and other assets
o Manipulation of code underlying smart contracts presents a new risk
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Auditing Crypto Funds
Smart Contracts

65. EU’s 5th Anti-Money Laundering Directive “AMLD5” becomes effective
from 10 January 2020, or 2021 for new requirements:
o Virtual asset service providers must document due diligence for
incoming and outgoing financial transfers of value above a threshold
amount.
o By 11 January 2022, the EU Commission will examine and may draft
legislation for EU States to maintain central databases of
cryptocurrency users’ IDs and wallet addresses.
o New FAFT guidance should aid integration between traditional banks
and cryptocurrency markets.
Popular jurisdictions: US (beware SEC, CFTC, IRS, FINCEN), London
(FCA sandbox), China & Hong Kong, Switzerland (innovation),
Malta (Blockchain Island), Cayman (Crypto funds, tax neutral,
CEC/SEZC), Singapore, Estonia, Japan, Dubai, Denmark, South
Korea, Germany, France
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Auditing Crypto Funds
Regulation

66. Further Information
ACCOUNTING
− AICPA.org/content/dam/aicpa/research/exposuredrafts/accountingandauditing
/downloadabledocuments/20190620a/20190620a-ed-sas-audit-evidence.pdf
− IFRS.org/news-and-events/updates/ifric-updates/june-2019/#8
− ArmaninoLLP.com/industries/Cryptocurrency
− TrustExplorer.ArmaninoLLP.com/TrueUSD – continuous reporting
ACCOUNTING SOFTWARE
− Lukka.tech – accounting software for investment funds
− Acuity.co/verady-and-acuity – crypto accounting software
− Blox.io/all-articles/industry-news/the-current-state-of-crypto-accounting-2
RESOURCES
− Bitcoin.org; Bitnodes.Earn; Blockchain.com/Explorer
− Binance.org – decentralised cryptocurrency exchange
− BACI.ky – Blockchain Association of the Cayman Islands
− CoinMarketCap – cryptocurrencies and their values 66

67. 5. Auditing Crypto Funds
Any Questions?
67

68. The End
Thank you for listening!
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