Cryptocurrency audits and challenges

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Crypto assets–There are many unknowns about where the future of this emerging and complex subject is heading, but one thing is certain: crypto transactions impact an entity’s finances. Those impacts must make their way to the financial statements. And those statements must be audited for accuracy and assurance.

It won’t be long before organizations and clients of all types have cryptocurrency in their financial mix. For example, a manufacturer might use blockchain in the near future to satisfy their customers' desires for transparency. A bank might begin storing digital assets for patrons. E-commerce entrepreneurs might take crypto payments as more of their customers request it. Additionally, any person or business might use it to diversify their investment portfolios.

Let’s further discuss how these impact the audit function.

The advantages of crypto

Cryptocurrency and blockchain technology can give the auditing function a boost. Automation will make financial transactions more efficient. Blockchain will make them transparent. Together, these will enhance auditability.

Complex layers

However, every cryptocurrency transaction adds a layer of complexity to the auditing function. Auditors must proactively work crypto and blockchain controls into their overall auditing tasks. In addition to auditing existing usages, they must also examine future ones.

Auditing cryptocurrencies presents unique challenges. Currently, a lack of a comprehensive regulatory framework is a significant hurdle.

Auditors must compare their knowledge and expertise to the challenges to determine if they can handle auditing clients using cryptocurrency. Consider the following complexities of crypto and blockchain technology:

• Valuation difficulties
• Lack of physical evidence
• Security and custody risks
• Limited audit trails
• Universal scope

These challenges require specialized understanding and expertise from auditors. Those wishing to remain in the game must commit to deepening their knowledge of blockchain technology and staying updated on regulatory advances. Auditors must develop procedures for effectively auditing cryptocurrency assets, even working alongside experts for help and oversight.

Quality control

Auditors must put policies and procedures in place for deciding whether to accept or continue with clients who use crypto. And if they continue, they must determine best practices for performing the necessary tasks for tracing and assuring reports.

Audits and reviews may require specialized knowledge and skills. Additionally, concealed identities carry inherent risks a firm may not be ready to take on yet. Auditors must carefully carry out the critical task of recognizing illegal acts and the related parties.

Similar procedure

Although crypto assets have unique intricacies, an audit resembles a cash or foreign exchange audit. Auditors will:

• Verify that transactions align with crypto holdings.
• Assess proper risk mitigation, such as the entity’s ability to handle the tax obligations of trading digital assets.

True, the devil is in the details, like crypto’s use of concealed identities. For this reason, auditors must recognize the expertise level they can provide for the clients they serve.

Proactive planning

Since participation in crypto assets is likely to continue growing, auditors must plan ahead if they want to continue meeting the needs of their firms or various clients. They must:

• Determine the specialized skills, knowledge, and software necessary to do the job effectively and efficiently. They will face challenges in cryptography, distributed ledger technology and valuation. In addition, they’ll meet either ambiguous or mounting regulations and laws, especially dealing with know-your-customer (KYC) and anti-money laundering (AML).
• Stay updated on the various business models and tech involved in crypto asset transactions to identify and assess transactions and issuers.
• Uncover the issuer and their environment for potential, magnitude and sources of misstatements. Potential misstatement issues will depend on asset location–whether the crypto is in the owner’s digital wallet or with a third party. Magnitude depends on the variety of types, customers and transactions, plus record storage. As for sources, auditors must understand the structure of the operations with those involved.
• Discover the issuer’s objectives, strategies and business risks. Unknown and concealed identities could pose compliance issues with AML and KYC regulations. Businesses involving themselves in cryptocurrency might do so with insufficient personnel or expertise to handle reporting needs.
• Seek to understand the issuer’s internal controls over financial reporting, including information systems, and how they play a part in managing or generating private keys (accesses and passcodes). Then, seek to test or request audit reports from the issuer’s auditor. Records aren’t always kept in the blockchain, either. Some could be stored outside the blockchain or in disparate systems.

Blockchain audits

Like a crypto audit, a blockchain audit reviews the controls of an entity’s use of blockchain technologies. In addition to reviewing related transactions, auditors ensure the proper protocols are in place to use blockchain. For example, they’ll look for adequate security and compliance controls.

Ahead of the learning curve

Auditors must readily adopt and innovate policies and procedures while adeptly navigating the intricacies cryptocurrency places on them. They must embrace an always-learning mindset as they hastily deepen their understanding of this new subject.

There’s no better, more comprehensive and fun way for an Ohio auditor to keep up with their continuing education (CPE) auditing courses than with a professional society membership. A membership subscription for accounting with The Ohio Society of CPAs is just what any professional auditor could hope for. In addition to free and discounted educational content, auditors will discover many benefits, including community connections and advocacy.

It’s more important than ever for auditors to be proactive. They need modern control strategies and risk management plans to keep up with emerging and intricate financial matters, like crypto assets and blockchain technology. Education is vital.