Answer To: The Impact of Blockchain & Cryptocurrency upon Auditing and Assurance I. Introduction A. Definition...
Rochak answered on Apr 23 2022
1. Introduction
1.1 Definition
The blockchain technology (Appelbaum, 2018) which became popular after the invention of “Bitcoin” which was the first cryptocurrency, is a technology structure that stores all the transaction records in the way of a block of various public databases, this connection of the database is known as chain, and therefore the technology is called as blockchain. On the other hand, bitcoin is a digital currency which is created using blockchain technology.
1.2 Characteristics
The characteristics of blockchain technology are:
· Immutable
· Decentralised
· Distributed Ledgers
· Consensus
· Fast
· Enhanced Security
1.3 Benefits
The blockchain has made the transactions more secure and open through the decentralised nature it has, the benefits of blockchain technology are:
· Decentralised Structure: The decentralised structure of blockchain assures that there is no middleman present in the transaction
· Security: The blockchain technology has an advanced level of security because it runs on various algorithms which are hard to crack and therefore blockchain gives that additional security
· Reduced Cost: With the invention of blockchain the cost for many things has reduced because of the improved efficiency that the blockchain technology provides, also the currencies which have been developed using this technology have no hidden cost of sending or receiving from across the world
· Immutable: One of the greatest benefits of blockchain technology is that it is immutable, which means that the transaction or any activity which takes place on the technology cannot be changed or deleted, this gives assured that no transaction details will ever be lost
· Other Benefits are speed, traceability, innovation, tokenization
1.4 Application and affected industries
Blockchain has been in use in every industry be it financial, manufacturing or services, with the broad array of benefits that blockchain technology provides it is bound to happen that every industry will get impacted by it, and this is the same thing which is visible right now as well when we see innovation coming in each industry using the blockchain technology
1.5 New Skills required
From the skill set perspective, the CPAs will now need to broaden their skills to learn about technology as well to fill in the gap which the blockchain will bring in the traditional and the future auditing.
2. Potential Impact of Blockchain Technology on Auditing
Blockchain technology will have a huge impact on auditing because of the various new methods of doing business.
2.1 Financial Statement Audit
The conventional financial statement audit is the evaluation of the financial statement based on the transaction which has been recorded in the books of the seller and the buyer, this has been the form of the audit, where the auditor used to evaluate the books of accounts and see if there are any fraudulent activities or not, and based on the evaluation the opinion was given by the auditor.
2.2 Evolvement of Audit and Assurance with blockchain technology
With the increase in the blockchain technology, the audit and assurance will evolve and will get to a completely new shape where the auditors will not have to go through each of the accounts or records (i.e., account reconciliation, trial balance, journal entries, etc.), rather they can directly get the trail through the blockchain technology where all the transaction is stored, and from that, the auditor can perform the audit and identify if any fraudulent activity is happening or not, this will mean that the audit time which used to be huge will come down significantly with the use of blockchain technology.
2.3 Implication of blockchain on auditors
The role of auditors will change with the implementation of blockchain, where the auditor will have to learn about the new technology and continuously keep a track of the innovation which is happening in the blockchain world to audit the companies. Also, this implementation of blockchain will have a positive impact on the auditors because now auditors can deploy more automation and analytics which can be used to continuously perform audits and identify unusual transactions on a real-time basis. The whole implication of blockchain will be that the financial reporting and auditing that we see currently will be improved
2.4 Possible Roles of Auditors
In the paper prepared by CPA Canada and AICPA, they have listed some of the potential new roles for a CPA can be the following:
· Service Auditor of Consortium Blockchain
· Administrator and Arbitration Function
· Auditor for smart contracts
2.5 The cryptocurrency hack
Recently there was an incidence of Axie Infinity where there was a hack on the cryptocurrency which lead to a loss of $600+ million, but this will not impact the audits, as losses concerning hacks is not a new thing, companies previously were part of hacks too where they had to pay huge ransoms which lead to the losses, so the same way this loss will also be recorded in the income statement of the company, which can, later on, be verified by the auditors based on the transaction trails which is easily available in terms of cryptocurrency.
2.5.1 Affects the audit because of the circumstances
The events like this can affect the audit in terms...