Cryptocu
ency and its Impact on Auditing 8
CRYPTOCURRENCY AND ITS IMPACT ON AUDITING
Table of Contents
Introduction 3
Analysis 4
Conclusion 8
References 9
Introduction
Cryptocu
ency is a digital form of cu
ency which is transacted virtually. Since the cu
ency is secured by cryptography, it becomes difficult for anyone to forge and does not let the users to double spend. Most of the cryptocu
ency technologies uses decentralized network which are based on blockchain technology. It is a form of technology where a distributed ledger is used based on an incongruent network of technologies. Further, one of the features of cryptocu
ency is that it is not issued by the central government of any country. Cryptocu
encies help to transfer money at faster and cheaper rates. The cryptocu
encies can be mined from the cryptocu
ency exchanges. But all ecommerce websites do not allow purchases through cryptocu
ency. The popular forms of cryptocu
ency are Bitcoin. But its due to the sky rocketing value of the cryptocu
ency which have made it a popular trading instrument (Frankenfield, XXXXXXXXXXCryptocu
ency was invented by a group of programmers under the penname Satoshi Nakamoto in the year 2009 (Reiff, XXXXXXXXXXFurther, it’s the blockchain technologies and cryptocu
ency which poses high risk for the finance and law industries. Also, due to price volatility, use in te
orist transactions and consumption in high energy sectors such as mining industries, cryptocu
encies are at a disadvantage. Hence ,it is due to these risks associated with the cryptocu
ency transactions which must be considered during client acceptance and retention as well as audit planning procedures. Moreover, there are various emerging issues which are related to the cryptocu
ency transaction and poses a major challenge for the auditors. Further, it’s the Public Company Accounting Oversight Board (PCAOB) which enforces auditing as a key area of focus on digital asset (PCAOB, XXXXXXXXXXHence, it is essential to analyze the impact of cryptocu
ency on auditing.
Analysis
American Institute of Certified Public Accountants (AICPA) reports states that the jurisdictions such as New York, Tennessee and Arizona have implemented legislation with respect to blockchain and cryptocu
encies. These records are with respect to record keeping, electronic signatures, smart agreements and authenticity with respect to blockchain transaction. Further, there are states like Vermont, New Jersey and Hawaii which have issued legislation which supports the usage of cryptocu
encies. Further, it the AICPA which have launched the Blockchain training and learning program for enabling the practitioners for better understanding of this sophisticated virtual technology as well as determine the practical applications and its uses in the business. Further, it’s the Big Four auditing firms such as PWC, E&Y, Deloitte and KPMG in adherence to the AICPA policies with respect to blockchain and cryptocu
encies are researching on the latest technology and investing in the resources. The Big Four are also designing various solutions which are beneficial for the accounting industries and may be beneficial for conception of distributed ledger consortium (Kokina et al., XXXXXXXXXXThere are several risks which are associated with cryptocu
ency transaction which must be considered by the auditors for acquisition of new clients and the retention of the existing ones. There must be a well-defined cryptocu
ency framework which should be used for audit planning and for gathering of audit evidence which can be used for supporting the management assertions with respect to the financial statements. PWC is providing consultancy services to Cred which is an Indian financial technology company and provides reward-based credit card payment services to the customers with respect to the US dollar fixed cryptocu
ency. PWC is also providing high class services and also partnering with Northern Trust which is a global asset management company which is headquartered in Chicago and delivers business consultancy services to various individuals for enabling real-estate audits based on blockchain technology. This is a process which ensures transparency with respect to all the transactions conducted in Northern Trust. PWC has also invested in a start-up company dealing in cryptocu
ency along with delivering web-based services, supply chain management and anti-counterfeiting activities known as VeChain. Further, there is a cryptocu
ency auditing solution which was developed by PWC for meeting the needs of the company. Its E&Y which release the Blockchain Analyzer are able to capture the entire transaction data from various blockchain ledgers. Further, a more updated version of analyzer helps in the process of auditing, taxation and monitoring of transactions. Further, it was crypto-assets accounting tax which was a software launched by E&Y for assisting the US companies in reporting the crypto asset transaction during filing of the tax returns. Hence, the big four firms are developing various software for directed towards providing financial services by exploiting the full potential of blockchain (La Quercia, 2018).
Thus, the digital tokens known as cryptocu
encies are developed based on blockchain technology and derives the value depending on the demand and supply. Yet as per accounting and auditing guidelines issued by IFRS, there are no specific policies for accounting of cryptocu
encies. Further, there are no rules and regulations with respect to accounting of cryptocu
encies which could fall into a variety of standards. If the cryptocu
ency is held for own account there are only a few standards with respect to accounting of cryptocu
encies held by the entities. But there are no explicit definitions issued by IFRS with respect to cash or cu
ency. As per IAS 32, it’s the Financial Instruments – Presentation which makes a link between the cash and the cu
ency. Further for IAS 21, it’s the effects of changes with respect to the foreign exchange rates which makes a link between the cash, cu
ency and monetary items. Further, cryptocu
encies do not have any properties which are common to cash or cu
ency. Hence, cryptocu
encies are not at all legal agreements and are not issued by the federal government of any countries. These cu
encies are unable to directly set any prices for goods and services. Cryptocu
encies may be accepted by few sites for settling of transactions but are not directly used for setting the prices of goods and services of an economy. Further, cryptocu
ency cannot be considered as tangible assets and does not fall under the scope of IAS16 also. Cryptocu
encies does not give the holder of the instrument any contractual right with respect to receiving cash or financial assets and neither it comes into existence as a result of contractual relationship. Hence, cryptocu
encies cannot be considered as financial assets. IAS2 does not necessitates the inventories to be in physical form yet it must be of assets which are held for sale in the ordinary course of business. Now, if the companies hold cryptocu
encies for the purpose of investment, then it would not meet the definition of inventory. But as per IAS38 which is Intangible assets it can be stated that cryptocu
ency is a resource which is controlled by an entity, is identifiable, is not a cash and there is no physical form. Hence, cryptocu
ency can be apprehended to be an Intangible asset (PWC, 2019).
An auditing helps to determine is a company is providing true and fair view with respect to the financial performance and position which the organization wants to achieve on their own (Hadfield, XXXXXXXXXXFurther, it provides a report of comfort with respect to the management accounts as well as reveals the systematic e
ors which occurs frequently and is critical for the purpose of decision making. In case of cryptocu
encies the transactions are recorded automatically, they are being encrypted and immutable by the system. Hence, they are considered to be a single source of truth (Appelbaum & Smith, XXXXXXXXXXFurther, it’s the occu
ence of transaction is one of the many assertions which the auditors can demonstrate. Further, the audit will necessitate evidence which should be reliable, accurate and can be verified easily. Further, the occu
ence of transaction may be confirmed once it is accepted in the blockchain network but the evidence of the same are no longer available due to the nature of such transactions. It’s the issues such as illegal transactions between two parties which is linked to side agreement can be inco
ectly classified in the financial statement. The financial statement of the company are management’s estimates and hence the auditors need to audit procedures to identify any discrepancies in such estimates. Hence, the auditor’s role is not restricted to checking the accuracy and verification but extend to critical analysis in the form of systematic evaluation, fraud detection, assessment of risk. The results of the cryptocu
encies must have increased efficiencies while conducting the audit and increased level of auditability with respect to the information. It is due to the fact that the cryptocu
ency transactions are always recorded and a history of the related transactions can be easily generated. The documents can be exchanged among the parties involved in the transaction for the purpose of cross-validation (Dai & Vasarhelyi, 2017).
The major issue which the auditors may face is with respect to inaccurate data infused by the blockchain or cryptocu
ency users in order to indulge in fraud transactions. These transactions are thought to be true and accepted by most of users. Thus, it will have an impact on the financial reporting tool’s authenticity. Moreover the fraudulent users may alter the cryptocu
ency transaction history. This is a situation where the firm keeps all the transaction private and the firm will have 100% control over the transaction validation and will be able to control the transaction history as per their requirement. The best solution to address this issue is by engaging qualified auditors in the transaction validation process. The auditors while assessing the cryptocu
ency transactions from the accounting viewpoint may require vast accounting knowledge for recording the entries in co
ect ledger (Coyne & McMickle, XXXXXXXXXXFurther, the auditors will face challenges such as the implementation risks. These challenges will be the technological boundaries while transformation of the legacy system to the new migration system. They will also need to address the master copy of the database by a database administrator. Hence, the problems related to cryptography features which will ensure accuracy, integrity, validation controls, data backup and disaster recovery process must be addressed while implementation of the Blockchain system. According to the above cryptocu
ency risks, it will be the auditors who will need to modify the audit procedure accordingly. There will be no requirement of statistical sampling techniques due to which the auditors need to rely on data analytics. Due to this, there is another risk which arises is the expectation of the stakeholders that the financial statement will be free from material e
ors and frauds as all the data are scrutinized automatically (Appelbaum & Smith, 2018).
Conclusion
Thus, the new audit paradigm will consist of physical and virtual world which will imitate the physical world. Further, it’s the smart contract will help to automate the business system where the contracting parties may engage an assurance provider for verification of the smart contract as per the co
ect business accounting logic. It will be Certified Public Accountant who are highly qualified and can
ing stability and sturdiness in the cryptocu
ency architecture. Thus, the businesses are getting highly complicated and to safeguard the interest of the stakeholders the auditors