With blockchain now more than just a fuzzword, much research is being done on what impact this cultural paradigm shift will have on the traditional audit process. Facilitating audits and improving accountability is one of the key benefits of Blockchain technology.
Currently, the most important application of blockchain appears to be in the cryptocurrency space. Three types of entities determine the state of a Blockchain, namely the bank or a group of banks in a financial ledger or the insurance agencies in an insurance registry, etc., as well as external users who are not involved in the consensus but want to verify that the data is correct.
The third party consists of auditors and regulators. The benefits of external auditing of Blockchain auditing services are consistent with Web 2.0, which is shifting applications from service-centric to user-centric. When using blockchain, accountability is verified as part of the timestamps created by the system. In this way, each user can confirm whether the service is working as intended. If the service fails the verification, the user has evidence of malicious behaviour with which to hold the service accountable. The ability of each user to choose a trust model that is within their comfort zone, such as a full node, a lightweight node, a non-trusted wallet with multiple signatures, or a trusted third party, gives Bitcoin a significant advantage. This leads users to trust the blockchain rather than the blockchain’s processors.
This increased trust is leading to increased development and integration of this technology by third parties. Another useful feature of the blockchain is the verification of the authenticity of each recorded statement. Non-repudiation is achieved through a combination of digital signature and public key infrastructure. The public key infrastructure is important to prevent anyone, including blockchain administrators, from backdating transactions and to ensure that verification of authenticity is not largely dependent on the security of the public key system used. Audits can take many forms. They can take the form of financial audits, compliance audits, and regulatory audits, and blockchain technology can be used in all of these cases. An audit typically examines financial statements or, in the case of a regulatory or standards compliance audit, a set of requirements or standards.
Data analytics in the image
Blockchain technology will solve many problems with the current audit structure. Companies will not be able to change their records or reverse engineer their financial documents for audit purposes. Data analytics will come into play, as visualising data without data analytics will be difficult due to the large amounts of data provided by a blockchain. Data will also allow consulting firms to help plan and make important decisions for the development of the business.
In the near future, auditors will need to develop new skills to confirm the integrity of their audits. Auditors will need to evolve into analysts who read the data provided by the blockchain and verify the integrity of the chain. Auditors dealing with compliance issues will need to help handle identities in the future to confirm how assets are linked to individuals, organisations or companies. In addition, the traceability of raw materials as they move through a company’s supply chain around the world will allow auditors to track what happens to raw materials, or even the final product produced by a company, over time, while providing evidence of transactions.
Bitcoin from an auditing perspective
Every time we send a bitcoin, the associated hash not only references the transaction, but also provides us with the audit trail we need to perform the audit. Some of the details it provides us with are:
- Did the transaction really take place?
- Does the balance exist?
- Do we own bitcoin?
- How is the balance displayed? Let us assume that it is displayed in BTC.
- Are the balance and the time period in which the transaction was completed recorded in the correct time period?
- How is the transaction represented and disclosed?
Since the transaction does not create any rights or obligations, the situation is simpler. A payment either takes place or it does not. In most cases, a public key, a digital signature, and a Pay2PubKey hash are enough to verify the new Bitcoin transaction at a basic level.
Balances between accounts will be viewable in real time. A hash code specific to an individual transaction will be used to verify the transaction by auditors. The unique alphanumeric signature establishes a link between the payment made by an entity and the corresponding entry in the supplier’s records. The same hash proves that the transaction took place between each party at the time stamped with a time stamp. With such proof, falsification of numbers becomes impossible.
What opportunities does the blockchain offer for the audit process?
Blockchain can be used as a distributed ledger that can be used by two parties to record transactions in a verifiable and permanent manner. For example, instead of asking customers for account statements or sending confirmation requests to third parties, auditors can log into a website and confirm transactions on publicly accessible blockchains. Automating this process can increase cost efficiency within the audit process.
This can also make a big difference in random audits. Instead, auditors can access the entire database to audit the entire population of transactions within the observation period. This comprehensive coverage provides a huge improvement in the level of trust achieved through the review process.
In the blockchain, it takes a long time to verify a low-value transaction because a single block verification is considered sufficient. The more blocks that pass before a transaction is verified, the more immutable it becomes. Typically, a high value transaction can be verified within 1 hour. Traditional financial transactions take a month or more to be verified. This fast turnaround time for blockchain verification means that transactions can be confirmed at regular intervals over a period of time, rather than having a final valuation or audit at the end of the year. This advantage could easily be applied to the assessment of “smart” audits of the financial and risk positions of banks and other financial service providers.
Advantages of blockchain audit services
1. Greater transparency
Using blockchain technology makes transaction history more transparent. Since the blockchain is a kind of distributed ledger, all network participants have the same documentation, not just individual copies. This shared version can only be updated by consensus, meaning everyone must agree to it. Changing a single transaction record would require changing all subsequent records and agreement by the entire network. Therefore, the data on a blockchain is more accurate, consistent, and transparent than paper-heavy processes. It is also available to all participants who have permission to access it. Changing a single transaction record would require changing all subsequent records and colluding the entire network. That can be, you know, a headache.
2. Increased security
The blockchain is more secure than other systems for recording data in several ways. Transactions must be agreed upon before they are recorded. After a transaction is approved, it is encrypted and linked to the previous transaction. This, combined with the fact that the information is stored on a network of computers rather than on a single server, makes it very difficult for hackers to compromise transaction data. In all industries where protecting sensitive data is critical – financial services, government, healthcare – blockchain offers the opportunity to fundamentally change the way vital information is exchanged by helping to prevent fraud and unauthorised activity.
3. Improved traceability
If your business deals with products traded through a complex supply chain, you know how difficult it can be to trace an item back to its origin. When the exchange of goods is recorded on a blockchain, you get an audit trail that shows where an item came from and the stages it went through on its journey. This historical transaction data can help verify the authenticity of assets and prevent fraud
4. Increased efficiency and speed
With traditional, paper-heavy processes, trading is a time-consuming process that is prone to human error and often requires third-party mediation. By streamlining and automating these processes with blockchain, transactions can be completed faster and more efficiently. Because records are maintained through a single digital ledger shared by all participants, there is no need to reconcile multiple ledgers and less clutter. And when all participants have access to the same information, it’s easier to trust each other without the need for numerous intermediaries. As a result, clearing and settlement can occur much more quickly.
5. Reduced costs
For most businesses, reducing costs is a priority. With blockchain, you don’t need as many third parties or intermediaries to provide guarantees because it doesn’t matter if you can trust your trading partner. Instead, you only need to trust the data in the blockchain. Also, you won’t have to look through as many documents to make a trade because all parties will have access to a single, immutable version.