September 11, 2018 Blockchain, Fintech

Use of Blockchain in Auditing

The traditional accounting is a labor-intensive work which brings upon huge human resource cost along with lower efficiency. The entire ecosystem also involves a lot of audit of orders, delivery notes, invoicing and payment records which are usually maintained by third-party verifications.

How auditing currently works:

  • The organization’s management prepares the financial report. It must be prepared in accordance with legal requirements and financial reporting standards.
  • The organization’s directors approve the financial report.
  • Auditors start their examination by gaining an understanding of the organization’s activities and considering the economic and industry issues that might have affected the business during the reporting period.
  • For each major activity listed in the financial report, auditors identify and assess any risks which could have a significant impact on the financial position or financial performance, and also some of the measures (called internal controls) that the organization has put in place to mitigate those risks.
  • Based on the risks and controls identified, auditors consider what management does has done to ensure the financial report is accurate, and examine supporting evidence.
  • Auditors then make a judgment as to whether the financial report taken as a whole presents a true and fair view of the financial results and position of the organization and its cash flows, and is in compliance with financial reporting standards and, if applicable, the Corporations Act.
  • Finally, auditors prepare an audit report setting out their opinion, for the organization’s shareholders or members.

How Can Blockchain help in auditing?

– Blockchain can help in maintaining transparency in audits.

One of the most appealing aspects of blockchain technology is the degree of transparency that it can provide. The technology can allow for the immutable tracking of anything across the audit process. The use of data visualization will allow auditors to not only provide assurance over the systems, but it will also allow consulting firms to assist with planning and decision making. Following are some of the key points for usage of blockchain in audit transparency:

  1. The entire audit process can be ported to blockchain technology. In a nutshell, this will provide two benefits:
    • Many organizations hire multiple audit teams. There is a need for a corruption-free ecosystem for synchronization between audit reports between the auditing teams. When we use blockchain for auditing process, auditors will be aware of the audit process done by another audit team, thereby increasing the genuineness of the system.
    • The organization will be aware of the audit process, thereby tracking the audit process lucidly.
  2. The audit reports will be put on the blockchain. The next auditors can verify if the audit is done right.
  3. The financial reports of the organization can be put on the blockchain, this will ensure that the reports are immutable and cannot be denied by the organization later.

– Removes dependency of the enterprise in auditing.

An audit is often a heavy process that requires a team of professionals to spend a significant amount of time to review a large number of transactions and accounts of the client’s books. In this scenario, blockchain technology could play a really disruptive role.

As blockchain has its foundation in the distributed ledger concept and cryptology — which promises transparency, immutability, security, auditability, high cost-efficiency and is ‘ever available’ — an immediate application of blockchain technology in the audit verifications is connected to external confirmation procedures.

External confirmations are a critical part of all audit processes, as they give the audit team the ability to check external sources of the information that are provided internally by the company. But what if the ledger of such an enterprise is in a decentralized, public blockchain?

In a scenario like that, the auditors would be able to obtain all the information related to the financial transactions of a company without the need to confirm them through an external confirmation procedure, hence saving time and resources.

An environment where all the ledgers would be easily accessible, cross-checks of transactions would be still possible. If, for example, Company A has a liability with Company B, the auditors or any stakeholders could easily verify whether that is correctly recorded, by cross-checking the respective public ledgers.

Ready-to-access information will also facilitate the review of bank details, where the external auditors examine all the information pertaining to a company and commercial banks, including bank accounts, loans, guarantees and signatory powers. Apparently, blockchain can remodel the conventional techniques for invoicing, paperwork and contracts as it provides a canonical source of truth.

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