Auditing challenges and cryptocurrency

Therefore, recording a transaction in a blockchain may or may not provide sufficient appropriate audit evidence related to the nature of the transaction. In other words, a transaction recorded in a blockchain may still be: Unauthorized, fraudulent, or illegal Linked to a side agreement that is "off-chain" Incorrectly classified in the financial statements Furthermore, many transactions recorded in the financial statements reflect estimated values that differ from historical cost.

Widespread blockchain adoption may enable central locations to obtain audit data, and CPA auditors may develop procedures to obtain audit evidence directly from blockchains. However, even for such transactions, the CPA auditor needs to consider the risk that the information is inaccurate due to error or fraud. This will present new challenges because a blockchain likely would not be controlled by the entity being audited.

The CPA auditor will need to extract the data from the blockchain and also consider whether it is reliable. This process may include considering general information technology controls GITCs related to the blockchain environment. It also may require the CPA auditor to understand and assess the reliability of the consensus protocol for the specific blockchain. This assessment may need to include consideration of whether the protocol could be manipulated. As more and more organizations explore the use of private or public blockchains, CPA auditors need to be aware of the potential impact this may have on their audits as a new source of information for the financial statements.

They will need to consider how to tailor audit procedures to take advantage of blockchain benefits as well as address incremental risks. Is the blockchain audit trail in our near future? There are still many unknowns with respect to how blockchain will impact the audit and assurance profession, including the speed with which it will do so. Blockchain is already impacting CPA auditors of those organizations using blockchain to record transactions and the rate of adoption is expected to continue to increase.

However, in the immediate future, blockchain technology will not replace financial reporting and financial statement auditing. Financial statements reflect management assertions, including estimates, many of which cannot be easily summarized or calculated in a blockchain. Furthermore, the process of an independent audit of financial statements enhances the trust that is crucial for the effective functioning of the capital markets system.

Users of financial statements expect CPA auditors to perform an independent audit of the financial statements using their professional skepticism. CPA auditors conclude whether they have obtained reasonable assurance that the financial statements of an entity, taken as a whole, are free from material misstatement, whether due to fraud or error. A blockchain is unlikely to replace these judgments by a financial statement auditor. CPA auditors will need to be conversant with the basics of blockchain technology and work with experts to audit the complex technical risks associated with blockchain.

In addition, CPA auditors should be aware of opportunities to leverage their clients' adoption of blockchain technology to improve data gathering during the audit. These reputational issues around cryptoassets have their basis in legitimate concerns, and auditors should approach these balances with caution.

So it will be necessary for auditors to make and maintain their own best practice in the field. Crypto is a rapidly evolving space, and so auditors will need to stay on top of developments and continue to consider the issues for their clients. Crypto Cryptocurrencies started with the original, Bitcoin, in However, since that first invention, many other competitors have entered the space. Cryptocurrencies and other cryptoassets typically use a blockchain system to track ownership, which removes the need for any central authority.

These systems often, but not always, mean that transactions are open — visible to anyone — but pseudonymous — not identifiable with a real-world actor. This makes tracing transactions simple, but proving ownership more challenging. Economic models vary, but most use calculation-intensive proof-of-stake algorithms to verify transactions and reward those that do the calculations — the so-called miners — with newly minted coins.

You will csinvesting wordpress help agree

The online nature of cryptocurrency leads many, especially regulators, to remain dubious of its legitimacy and suspicious that it is used primarily for nefarious purposes, such as money-laundering and drug trafficking, to name a few. From a regulatory standpoint, building trust around cryptocurrency involves not only setting policies and procedures pertaining to the vetting of customers and the handling of cryptocurrency transactions and trades, but also leveraging technology to document and communicate them to the appropriate parties.

Such records should detail which procedures for vetting customers were followed; when, by whom and in what jurisdiction the vetting took place; and what information was shared with customers at every step of their journey. On the customer side, records must document the terms of all transactions and the messages conveyed to customers throughout their journey. Records of what customers were told regarding how a company handles its cryptocurrency transactions and any measures it takes to ensure the legitimacy of activities connected with transactions should be maintained as well.

They will trust that companies are acting in good faith and will be easily able to differentiate good actors from bad actors, based on the transparency of records and the lack of opacity with regard to revealing information. The same will be true of customers, increasing their inclination to invest their funds in cryptocurrency rather than using their funds for other purposes.

Beyond Recordkeeping While meticulous recordkeeping and a lack of opacity will go a long way toward reducing some of the risk inherent in cryptocurrency dealings , compliance departments must also grapple with regulatory issues. Notably, money services businesses — among them, financial institutions — are required to comply with regulations and laws set forth in the Bank Secrecy Act of Thus, they are rather complex, involving not only the collection and analysis of basic identification data , but a search for known nefarious actors by name-matching against lists of known parties.

Not surprisingly, completing the steps needed to remain in compliance with AML requirements and KYC rules is a time-consuming endeavor. At best, the process spans two to three days, but it often takes a week before all the boxes can be checked off.

However, cryptocurrency is a volatile instrument whose price can change drastically from one day to another as compliance departments work through AML and KYC procedures. Within audit, the current technology inflection point may represent the biggest opportunity to date: the ability to harness big data to generate insights and drive audit quality.

Audit technologies can help reduce the length and complexity of audits. For example, robotic process automation can standardize and speed workflows, while AI and analytics help auditors visualize and understand entire populations of data and point to correlations, anomalies, and outliers, thereby improving risk identification and focusing on what matters most. It is also very likely that, in the next few years, more audits will be augmented by cognitive technologies , which confer many of the same benefits and may portend even greater potential than other technologies for the audit.

Back to top The power of blockchain Blockchain is a technology that promises to change the way business is done. The increasing impact of blockchain on industries and on internal controls over financial reporting also means that audit methodologies will need to evolve, since the technology will introduce new risks related to the reliability of the blockchain, automated controls, and related-party transactions.

Deloitte COINIA also assists with off-chain verification of private key ownership by using an innovative, custom-developed workflow to confirm the integrity of a signed message. The agile design of Deloitte COINIA also means it can be used today not only for crypto assets but also for a broader base of digital assets, and beyond, as they are supported by the business community in the future.

These can include supply chain tracking, digital rights management, real estate title transfer, and other forms of real-world asset digitalization. It combines advanced technology with business processes to generate meaningful and valuable insights in a repeatable and consistent fashion. Importantly, while technologies provide unparalleled benefits in the audit process, they do not stand alone in the transformation of the audit.

When audit technologies are at their most powerful, they work together as part of an effective audit methodology that incorporates the judgment and experience of auditors, all of which come together to provide very high-quality audits and generate insights that inform larger business risks and opportunities. The promise of this powerful combination is not just a game changer for the audit world, but also a benefit for organizations and a boost to investor confidence overall.