Blockchain Audit Process
The term blockchain has been on the Internet for a long time, and it has had exponential growth recently. Its success is directly related to the increasing value of cryptocurrencies (e.g., a virtual currency Bitcoin) based on blockchain technologies.
Blockchains provide an entirely new way of recording, processing, and storing financial data and transactions. As a result, it can customize the business ecosystem and make radical changes in many spheres like accounting, artificial intelligence, real estate, banking, financial services, aviation supply chain, and social media.
What Is Blockchain Technology? How Does It Work?
Blockchains are decentralized, distributed ledgers for tracking assets, recording transactions, and maintaining control over balances. It helps to reduce risks by detecting malicious requests and treats and brings transparency for many uses. In simple words, a blockchain is a system of recording information that makes it nearly impossible to hack, change, or attack the system as there is no central administration.
For verifying and managing identities, blockchains use two types of Cryptographic keys.
- Public key: It’s a user’s identity on blockchains, which can be freely shared with other parties.
- Private key: As the name suggests, it is only for personal use and can’t be shared.
The primary function of the keys is to perform successful digital asset transactions between two parties and produce a safe digital identity reference for each of them. The secured identity, also referred to as the digital signature, is essential for this technology.
Main Concepts of Blockchain Technology
- Blocks: Every chain consists of blocks, and there are three important elements in every block: Nonce, Hash, and Data. A nonce is a 32-bit whole number generated in the block creation process. A block header hash, in its turn, is generated from the nonce. And data refers to the data in the block.
- Nodes: Nodes are the connecting point of ledgers to the chains. Any electronic device can maintain the blockchain’s copies and keep network processing.
- Miners: These are used to create new locks on the chain. The process is known as mining. After a block is successfully mined, all the nodes on the network accept the change.
Other techniques and technologies used in blockchains include peer-to-peer networks (the same as distributed networks), encryption methods, and computing means.
Impact of Blockchain on the Audit
Many entities and processes have been migrating to blockchain solutions in recent years. The audit is not an exception too. Blockchain Audit can be a revolutionary solution for audit firms and internal/external auditors who look for accelerated results in financial statements and related services.
Data reliability is the most crucial premise of the audit processes. That being the case, blockchain technology represents a new level by which the auditor can rely on the exchange of values, except for mere information. That’s because blockchains are changing the way companies manage their businesses and the ways of information processing and exchange. Practically, the blockchain could serve as a distributed ledger, efficiently recording financial transactions between two users in an invariable way. So, for example, instead of asking clients for bank statements and sending confirmation requests to third parties, auditors can easily access publicly available blockchain ledgers and verify reported transactions. This automatic process can allow increasing the efficiency of financial reporting and auditing. However, the successful implementation of blockchains mainly depends on the security of the basic environment. To satisfy modern technology needs and provide assurance, service auditors will need to provide services that have complex protection measures.
Blockchain and Audit Trail
Now, let’s see how blockchains are used in creating a transaction’s immutable audit trail.
Maintaining an audit trail of recorded transactions is one of the most basic needs of software solutions. However, audit trail facilities based on relational databases are always at the risk of being altered. Because of this, most businesses have to keep printed records and physically audit transactions. That’s also one of the reasons why the number of blockchain-based industries is increasing drastically. Storing the audit trails on blockchains gives a kind of a “timestamp effect:” it clearly records when, how, and what happened. Auditors can always check the transaction history, which is available on an immutable ledger.
Digital Assets: Accounting and Audit
The process of digital assets audit is evolving quickly. However, the existence of blockchain technologies doesn’t change the role of auditors.
The ecosystem of digital assets is quite different and challenging. In practical experience, there are a lot of risks and threats, such as the specific risk of material misstatement that auditors need to respond to and solve quickly.
We listed some of the key factors concerning the assertions of existence and financial statement and cryptocurrency valuation that auditors can consider.
- Use a third party to the custody of your assets.
- Initiate some digital asset transactions for proving their existence and your control over them.
- Have cryptographically signed messages from the management using private keys.
- Use blockchain technology for protection purposes.
- Make sure smart contracts have been correctly implemented.
We live in a digital era full of discoveries, technological innovations, and developed business models. And though blockchain is still in its growing stages, it holds immense opportunities. The advantages of this technology and its significant impact on different sectors are not a secret anymore.
As time passes, many companies, firms, and individuals may need to think about implementing and using blockchains for more satisfying and result-oriented outcomes. Technology platforms have all the required abilities to impact the way businesses are audited and process their operations. And the day when the use of blockchains can bring accuracy, ease, and transparency to the audit system is not far away.