chartered accountant
Blockchain technology is a distributed ledger system that records transactions between various parties within a network. This internet-based ledger connects nodes, enabling it to document all transactions from its inception.
In essence, blockchain serves as a complete distributed ledger that maintains a detailed record of every transaction ever processed, verifying the validity and authenticity of each transaction through all nodes in the network.
When a transaction is initiated from one node, all other nodes engage through a predetermined blockchain mechanism to validate and authenticate it. Once accepted, the transaction updates all copies of the ledger, a process governed by the consensus algorithm.
While network nodes can add new transactions after they are validated and timestamped, they cannot erase any transaction once it has been accepted.
The integration of blockchain technology into auditing presents several opportunities that significantly improve audit procedures.
Audit Trail
Blockchains are designed to resist data modification. They serve as open, distributed ledgers that securely record transactions among parties approved by all nodes, ensuring authenticity and providing auditors with a comprehensive audit trail.
Accessibility
Blockchain acts as a verification source for reported transactions, allowing for real-time auditing.
Increased Coverage of Audit Procedures
Traditionally, auditors rely on samples due to high transaction volumes. Blockchain integration enables auditing of the entire transaction population, significantly boosting the assurance level in audit engagements.
Speed and Efficiency
In blockchain networks, low-value transactions typically take about 10 minutes to validate, while high-value transactions may take approximately one hour. This is in contrast to traditional financial transactions, which can take months to process.
Real-Time Auditing
Traditional audits often verify transactions post-fiscal year, limiting error correction. Blockchain empowers auditors with real-time assessment capabilities, facilitating immediate detection and resolution of inaccuracies.
Reliability
Due to its consensus mechanism, blockchain technology is one of the most reliable systems available, ensuring agreement on transaction approvals. Auditors must evaluate risks related to potential attacks on the consensus algorithm when assessing reliability.
Data Accuracy
Blockchain's immutability enhances data accuracy compared to conventional databases. Auditors benefit from receiving an unfiltered audit trail, valuable for various analyses.
The Financial Accounting Standards Board (FASB) now mandates fair-value accounting for crypto assets, while the Securities and Exchange Commission (SEC) requires Form 1099-DA for crypto transactions.
The Public Company Accounting Oversight Board (PCAOB) will implement amendments in 2024, requiring auditors to assess the reliability of technology-assisted analysis tools (e.g., blockchain validators).
Blockchain technology embodies an encrypted digital accounting system that necessitates a fundamental rethink of traditional auditing practices. Its transparency allows for the recording of supporting documentation, authorizations, journal entries, and value transfers on a single platform. Consequently, the requirement for confirmations and reconciliations diminishes, as these can happen in real-time on a shared blockchain.
This innovation transforms the audit process from a retrospective, point-in-time effort into continuous, real-time monitoring, integrating the foundations of audit and internal control into every transaction.
The evolution of technology through blockchain offers significant opportunities for Chartered Accountants (CAs) and Certified Public Accountants (CPAs). These advancements are poised to improve audit procedures, enhancing their effectiveness while minimizing the time and effort necessary for audits.