COURSE: AUDITING AND INVESTIGATION

ASSIGNMENT

QUESTION

Blockchain Technology: is it to modify or eliminate Audit process?

BLOCKCHAIN TECHNOLOGY;

Blockchain is a method of recording information that makes it impossible or difficult for the
system to be changed, hacked, or manipulated. A blockchain is a distributed ledger that
duplicates and distributes transactions across the network of computers participating in the
blockchain.

Blockchain technology is a structure that stores transactional records, also known as the block,
of the public in several databases, known as the “chain,” in a network connected through peer-
to-peer nodes. Typically, this storage is referred to as a ‘digital ledger.’

Every transaction in this ledger is authorized by the digital signature of the owner, which
authenticates the transaction and safeguards it from tampering. Hence, the information the
digital ledger contains is highly secure.

In simpler words, the digital ledger is like a Google spreadsheet shared among numerous
computers in a network, in which, the transactional records are stored based on actual
purchases. The fascinating angle is that anybody can see the data, but they can’t corrupt it.

AUDIT;

An audit is an "independent examination of financial information of any entity, whether profit

oriented or not, irrespective of its size or legal form when such an examination is conducted
with a view to express an opinion thereon.”
Auditing also attempts to ensure that the books of accounts are properly maintained by the
concern as required by law. Auditors consider the propositions before them, obtain evidence,
and evaluate the propositions in their auditing report.

AUDIT PROCESS;

The audit process is the series of steps followed by an auditor in order to conduct an audit
engagement with a client. The exact steps followed will depend on the nature of the audit
engagement, but typically follow the general steps noted below.

1. Request General Information from the Client.

2. Understand the Operating Environment of the Client.

3. Prepare an Audit Plan.

4. Conduct Fieldwork.

5. Review the Audit Results.

6. Draft an Audit Report.

7. Communicate the Audit Results to the Client in a Closing Meeting.

WHETHER BLOCKCHAIN TECHNOLOGY MODIFIES OR ELIMINATES AUDIT PROCESS;

Blockchain technology is still in its nascent stages but it holds tremendous opportunities. The
technology platform has the potential to have a significant impact on the way companies build
their processes and, in turn, on how they are audited, offering the audit process greater
accuracy, transparency and ease. One day, the use of blockchain may reduce the need for
confirmations and reconciliations and allow for real-time transparency to external parties.

A blockchain is a ledger where transactions and data are pseudo-anonymously recorded and
confirmed. It’s a record of events shared between multiple parties. More importantly,
particularly regarding an audit. Once information is entered, it is extremely cost prohibitive to
alter. Everything is written to a blockchain only once. There is no such thing as reversing a
transaction; an entity can only append more data. Think how often the auditor spends time
verifying whether stored data has been edited through fraud or error.

One of the most important considerations of audit methodology is the premise of data
reliability. Since blockchain technology represents a new medium by which the auditor could
rely not only on information, but also on the exchange of value, the reliability of data obtained
from a blockchain will be paramount. Therefore, before an auditor is able to assess traditional
financial statement risks and assertions, the auditor should first gain comfort over the security
of the underlying blockchain a client is using.

When evaluating a blockchain for its data reliability, the focus is on the potential ability for the
blockchain to be manipulated or altered. Blockchain technology utilizes a concept called a
consensus mechanism that dictates how parties reach agreement on the transactions to be
added to a blockchain. As an auditor is evaluating a blockchain’s data reliability, the auditor
should evaluate the susceptibility of a blockchain’s consensus algorithm to attacks. Can
someone create an unauthorized transaction that gets appended to the blockchain? Could
someone perform a double spend? In cryptocurrency, an example of double-spending would be
sending someone one unit of cryptocurrency and then, after it arrives at the recipient’s wallet
address, reverse the transaction in the sender’s own record of the blockchain, but not the
recipient’s.

An additional consideration to the reliability of data on a blockchain is the accuracy of that data.
A board member of the Public Company Accounting Oversight Board (the PCAOB) stated the
following in a speech that addresses this consideration: “Blockchain does not magically make
information contained within it inherently trustworthy. Events recorded in the chain are not
necessarily accurate and complete. Recording a transaction on a blockchain does not alleviate
the risk that the transaction is unauthorized, fraudulent or illegal. Blockchain also does not
address threats that parties to a transaction are related, or that side agreements exist that are
not reflected in the chain.” As such, it is important that the auditor also understands the
process by which data is submitted to a blockchain and the related control processes associated
with accurate entry.
After an auditor has gained comfort over the data reliability of a blockchain, the focus can shift
to the assertions over digital asset transactions and balances, which have their own set of
challenges and benefits.

Therefore, blockchain technology does not eliminate audit process but rather modifies audit
process.