Blockchain Technology and Its Impact on Auditing Practice

This essay sheds light on blockchain technology, its basic structure and benefits for the global business organisations. Finally, discussion has been made regarding its impact on the auditing procedures.

Running head: AUDITING PRACTICE
Auditing Practice
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Introduction:
Block-chain is the technology, which is being acknowledged as the "fifth evolution"
in computing. It is believed that this technology can become the missing trust layer for the
internet. The current essay would shed light on blockchain technology, its basic structure and
benefits for the global business organisations. Finally, discussion has been made regarding its
impact on the auditing procedures.
Blockchain technology and its basic structure:
This technology can create in trust in digital data. Block-chain technology enables the
user to write the information that needs to be saved within the database, once it has been done
there is no scope of modifying or removing it, this is a feature that is new to the users. The
block-chain follows a certain pattern or structure, which is discussed below:
The first part of this technology is block, in which a series of transaction done within
a certain period is recorded. The volume, time and activation of blocks are being specified for
every block-chain and they are not similar for every event. Individually, the blocks record the
movement of their token or crypto-currency (Belle 2017). Suppose, the transactions are the
recording of information within a database of block-chain, a certain value is provided to it in
order to make the data interpret what this information stands for in a financial transaction.
The second part of this technology is the chain, a clutter that links one block to
another. Certain mathematically calculated values with the help of codes form these chains
and allow them to keep the blocks together (Crosby et al. 2016). This is one of the most
difficult concepts associated with block-chain and is not easy to understand. These codes
allow the formation of the trust information mathematically calculated for forming the trust in
block-chain technology. The clutter or hash gets formed in block-chain from the data that was

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saved in the previous block database; this hash is just like fingerprint of the database that
allows saving data to be locked in order and time.
The final part is network, it completely comprises of nodes. These are just like the
running of algorithmic programs that helps in securing the network of a computer system.
These nodes contain all the transactions done over a certain period which was saved within
the block-chain. With the help of internet anyone can operate the functioning of these nodes
from any place on the globe (Sikorski, Haughton & Kraft 2017). This is because these nodes
cannot be maintained by an individual because it is a difficult, time taking process, so they
are out sourced and the company has to pay these people the remuneration for maintaining
the nodes.
Current and potential uses of blockchain technology by business:
Any kind of transaction demands the interchange of assets between two or more
business parties. Until and unless a barter system is maintained there is always a third party
that acts as the broking house for the business parties so that the deal can take place. Here, the
block-chain technology comes into play for eliminating the involvement of a third party that
can compromise the vital information of the business deal. This technology helps to perform
the business deal in a secured and in a sequential manner. The benefits of block-chain are as
follows-
The transaction is done between two legitimate parties, with the help of digital
information, which is termed as efficiency and it helps to settle the business deal without any
delays (Yermack 2017). On top of this, the activation of commercial actions that help in
satisfying both the business houses is done through "smart contracts" feature. Thus, it helps to
complete all the tasks systematically that reduces cost and time of carrying out the business
deal for both.

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Block-chain allows the recording of all the transactions sequentially and it lasts
forever and this allows the two parties to keep track of the life of an asset during audit. This is
important for verifying the source of authenticity of an asset if required (Tapscott & Tapscott
2016). The current implication of this process is seen in Everledger, it helps them to keep
track of diamonds.
Traceability helps in tracing the supply chain process of goods, which help in tracking
the recent position of a component (Mougayar 2016). The data related to this component can
be delivered to or from the owner in order to take the next set of actions.
The absence of clarity in performing the business transactions can lead to a situation
of lack of trust between the parties conducting the business deal. If the parties do fair
business without hiding the details from each other, it would help in creating a clean and
trusted business environment. Transparency helps in reducing negotiation and will help in
maintaining a healthy business relation (Gans & Catalini 2017).
With the help of block-chain technology, the business transactions get verified, this
takes place due the independently created cryptographies that help in authenticating the
information delivered or received by either parties (Cohen, Samuelson & Katz 2017).
Assurance of the information helps to unlock it with the help of a network within the database
by following Internet of Things (IoT). This helps to link assets to the required set of actions
through closed loop cyber autonomous processes. This process is used by the defense
industry with the help of a certain version of Internet of Things (IoT), for protecting the ip
and verification of information as well.
Complete traceability is ensured during lifecycle of an asset, with the help of which
the designers and manufacturers can facilitate lifelong asset management into their products
to make them more efficient. This can allow receiving of information from shipping,
installing, preservation and deactivation of asset (Cohen, Samuelson & Katz 2017).

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Impact of blockchain technology on the traditional audit process:
With the growth of internet system over the past few decades, it has been observed
that an aggressive progress has been noticed towards achieving the goal of creating a digital
world. The bock-chain technology is the next milestone on this journey of evolution. The
opportunities associated with block-chain technology are discussed below-
Blockchains are designed in such a way that allows them to be intrinsically protective
against any modification of stored information in the database. Firstly, it can serve as an
open, ledger that can record transactions done between two parties efficiently and allows
verification and it lasts in the database forever (Fanning & Centers 2016). Blockchain acts as
the source verifier of transactions for any specific transaction that has been reported. For
example- if a client is not requested to show their bank statements or a third party is being
sent a confirmation. The auditor can verify the business transactions on publicly available
blockchain ledgers. These automated verification processes would help in reducing the cost
of auditing of the businesses and would improve auditing environment.
Secondly, due to the innovation of the technology of blockchain, the traditional
processes of sample testing would receive heavy competition. This technology would help
the auditors in auditing the specific financial period that has been recorded via block chain.
This is going to improve the efficiency level and engagement of authentically conducted
audit would be assured (Dai &Vasarhelyi 2017). With the help of this technology it would
take approximately ten minutes to validate an audit of low value as a single block
verification, which has been judged to be an appropriately done audit. The more the value of
a transaction it would approximately take an hour to be verified, which implies audit
verification for a transaction of more value is done within an hour, which is equal to six
blocks.

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This technology is said to be a secured one, however, occurrence of any type of
fraudulent activities cannot be fully denied. In July 2017, a hacker managed to steal $32
million ethereum, one of the most popular virtual currencies. It was analysed that the real
problem was not in the block-chain technology; however, the software that was used had
some deficiencies in it, although the hacker was caught and brought to justice (Deloitte.com
2018). It was also realised that the adoption of block-chain technology needs a secured
environment in such a way that all the other associated security processes are not breached at
any cost. In order to provide an assurance up to the required level, the audit processes need to
focus on the operating effectiveness of internal IT controls.
There are several challenges that get associated with the implementation of block-
chain, they are as follows-
If the employee of a certain financial company accidentally or intentionally sends
bitcoin to an unauthorised recipient. There is no option in this technology to reverse the
transaction that has been made (Michelman 2017). Hence, the auditors need to examine
whether there is any availability of automatic control system or not that can help them in
validating transactions before they are performed.
In case, a company experiences phishing intrusion, then there is no such department
that can be informed of such an incident like- a fraud department, because there is no central
administration in block-chain technology (Kokina, Mancha & Pachamanova 2017). This can
also lead to a situation of fraud in the company. The auditors need to come up with the
solution if the company suffers a phishing attack. They need to determine whether the
internal controls are working properly in order to efficiently detect such an incident or not.
If a private key is lost due to a malfunction in the hardware or software, it can result
in the loss of virtual currencies such as bitcoins, which can be related to a certain private key.
Then the network will lose all the bitcoins and they will not be available to anyone on the

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network. They would lose access to them forever and it will not be possible to circulate them
even (Rooney, Aiken & Rooney 2017). The company needs to adopt efficient replenishment
methods, as well as, proper recovery processes would help them in preventing occurrence of
such incidents. Thus, reduction in the loss of bitcoins and recovery processes associated with
it would be able to determine the reliability of block-chain technology.
Though the technology of blockchain seems to be a secured one, however, this is a
new technology and is inclined to threats via different types of malwares found in the
internet. This technology would help to automate auditing; on the other hand, it would be
even more vital to prevent blockchain from threats. The development of such technologies
would help the companies to take an aggressive role and they would be able to assure that the
financial statements are free from any sort of misrepresentation of data (Treleaven, Brown &
Yang 2017).
Conclusion:
It is evident from the above discussion that blockchain technology follows a certain
structure, which includes block, chain and network. Moreover, it has been assessed that
blockchain technology provides a range of benefits to the business organisations for assisting
in their daily operations. Finally, it has been found that this technology helps in automating
the audit process; however, it is vulnerable to various kinds of malware.

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References:
Belle, I 2017, ‘The architecture, engineering and construction industry and blockchain
technology’, Digital Culture, vol. 8, no. 3 pp.279-84.
Cohen, LR, Samuelson, L & Katz, H 2017, ‘How Securitization Can Benefit from
Blockchain Technology’, The Journal of Structured Finance, vol. 23, no. 2, pp.51-4.
Crosby, M, Pattanayak, P, Verma, S & Kalyanaraman, V, 2016, ‘Blockchain technology:
Beyond bitcoin’, Applied Innovation, vol. 2, no. 7, pp.6-10.
Dai, J & Vasarhelyi, MA 2017, ‘Toward blockchain-based accounting and
assurance’, Journal of Information Systems, vol. 31, no. 3, pp.5-21.
Deloitte.com 2018, Impact of Blockchain on the Accounting Profession | Deloitte US,
Deloitte United States, viewed 1 Sep. 2018,
<https://www2.deloitte.com/us/en/pages/audit/articles/impact-of-blockchain-in-
accounting.html>.
Fanning, K & Centers, DP 2016, ‘Blockchain and its coming impact on financial
services’, Journal of Corporate Accounting & Finance, vol. 27, no. 5, pp.53-7.
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no. 2, pp.91-100.
Michelman, P 2017, ‘Seeing Beyond the Blockchain Hype’, MIT Sloan Management
Review, vol. 58, no. 4, pp.17-23.

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changing money, business, and the world, Penguin.
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1, pp.7-31.