New audit and assurance challenges and opportunities
While traditional audit and assurance services will continue to be important, blockchain business applications and new accounting technology are likely to have a substantial impact on how auditors conduct their work.
Many accounting firms have undertaken blockchain projects to better grasp the ramifications of this vital and adaptable technology, as more companies explore blockchain business opportunities—including the blockchain audit trail. Professionals in audit and assurance should keep up with the latest advances and learn more about blockchain business applications, blockchain in accounting, and blockchain audit technologies.
According to some reports, blockchain technology may eventually eliminate the requirement for a CPA auditor to audit financial statements. What is left for a CPA auditor to audit if all transactions are stored in an immutable blockchain?
While confirming the occurrence of a transaction is an important part of a financial statement audit, it is only one of many. An audit entails determining whether or not recorded transactions are backed by relevant, reliable, objective, accurate, and verifiable data.
Acceptance of a transaction into a trustworthy blockchain may be adequate audit evidence for some financial statement statements, such as the transaction’s occurrence (e.g., that an asset recorded on the blockchain has transferred from a seller to a buyer). The transfer of bitcoin in a bitcoin transaction for a product, for example, is recorded on the blockchain. However, based purely on information on the Bitcoin blockchain, the auditor may or may not be able to determine the goods that was delivered. As a result, registering a transaction in a blockchain may or may not offer adequate audit evidence depending on the transaction’s nature. To put it another way, a blockchain transaction might still be:
- Unauthorized, deceptive or unlawful
- Executed between parties who are linked
- It’s linked to an “off-chain” side deal.
- The financial statements were incorrectly categorized.
Furthermore, many financial transactions reflect estimated values that differ from past costs. Even if the underlying transactions are recorded on a blockchain, auditors will need to analyze and undertake audit processes on management’s estimates.
Widespread blockchain use may make it possible to acquire audit data from central locations, and CPA auditors may create processes to obtain audit evidence straight from blockchains.
Even in such cases, the CPA auditor must evaluate the possibility that the information is erroneous owing to human mistake or fraud. Because a blockchain is unlikely to be controlled by the business being audited, this will offer additional issues. The CPA auditor will need to extract data from the blockchain and determine its reliability. Consideration of general information technology controls (GITCs) relevant to the blockchain ecosystem may be part of this procedure. It may also be necessary for the CPA auditor to comprehend and evaluate.
The consensus protocol’s dependability for the specific blockchain This evaluation may need to take into account if the protocol can be manipulated. As more companies investigate the use of private or public blockchains, CPA auditors should be mindful of the possible impact on their audits as a new source of financial statement information. They’ll also have to look at management’s accounting procedures for digital assets and liabilities, which aren’t covered by international financial reporting standards or US GAAP.
They’ll have to think about how to customize audit procedures to take advantage of blockchain’s benefits while also addressing new concerns.
How Could Blockchain Change Audit and Assurance?
Despite these challenges, blockchain technology has the potential to simplify financial reporting and auditing. Account reconciliations, trial balances, journal entries, sub-ledger extracts, and accompanying spreadsheet files are now available in a variety of electronic and manual formats to a CPA auditor. Each audit starts with unique data and schedules, requiring a CPA auditor to devote substantial effort to organising the audit.
The CPA auditor could have near real-time data access via read-only nodes on blockchains in a blockchain environment. This may make it possible for an auditor to acquire information for an audit in a consistent, repeatable format.
Accessing information in the blockchain will likely become more efficient as more entities and activities migrate to blockchain solutions. For example, if a major class of transactions for industry is recorded in a blockchain, a CPA auditor may be able to design software to audit firms using the blockchain on a continual basis. This
Many manual data extractions and audit preparation tasks might be eliminated.
are time-consuming and labor-intensive for an entity’s management and staff.
One of the biggest critiques of financial reporting is the latency between transaction and verification dates. Increasing audit preparatory efforts could assist shorten this lag. Reducing lag time could be beneficial.
provide the chance to improve financial reporting efficiency and effectiveness
By allowing management and auditors to focus on riskier and more complicated transactions while completing routine auditing in near real-time, auditing becomes more efficient.
Auditors might use blockchain-enabled digitalization to deploy more automation, analytics, and machine-learning capabilities, such as alerting appropriate parties about anomalous transactions in near real-time. Contracts, agreements, purchase orders, and invoices, for example, could be encrypted and securely kept or linked to a blockchain. The speed of financial reporting and auditing could be increased by providing CPA auditors with unalterable audit evidence.
While the audit process may become more continuous, auditors will still be required to use professional judgement when reviewing accounting estimates and other management judgements in the production of financial statements. They will also need to review and test internal controls over the data integrity of all sources of important financial information in sectors that become automated.
Management will be responsible for creating controls to evaluate if the smart-contract source code is consistent with the intended business logic in the context of a financial statement audit. Management’s controls over the smart contract code are likely to be considered by an independent CPA auditing an entity with smart contracts/blockchain. Many businesses, on the other hand, may opt to utilize smart contracts created by other blockchain users.
Future auditing standards and guidelines may need to take into account this technology, clarifying the function of the CPA auditor in those situations.
Read also:What Are The 3 Main Pillars of Blockchain Technology?