Auditing Cryptocurrency: A Comprehensive Analysis of Challenges

This report delves into the multifaceted challenges associated with auditing cryptocurrencies. It begins by defining cryptocurrency and its evolution, highlighting the unique aspects of these digital assets that complicate traditional auditing processes. The report then explores the benefits and drawbacks of cryptocurrencies, providing context for the challenges auditors face. A significant portion of the report is dedicated to outlining the specific difficulties encountered during cryptocurrency audits, including understanding digital currencies, assessing risks for investors, and navigating the lack of established regulations. The report discusses the implications of these challenges and suggests areas for future research and development in the field of cryptocurrency auditing. Finally, the report concludes by emphasizing the need for auditors to stay informed about evolving regulations and technologies to effectively audit cryptocurrency transactions.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
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Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
The concept of Crypto currency..................................................................................................2
Challenges faced during Cryptocurrency auditing:.....................................................................4
Conclusion.......................................................................................................................................5
References........................................................................................................................................6

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Introduction
Auditing is the process of inspecting the books of accounts to measure the accuracy of
the financial records. In the recent age, there is a constant change in the method of transactions
with the help of internet. This new technology changed the way in which people interact and
perform commercial transactions (Vigna and Casey 2016). The Cryptocurrency has been evolved
as a substitute of previous modes of transactions. This technology has made it possible to
perform the various international transactions with a very low operational cost, but it also
imposes a series of regulation related challenges since this system is not governed by any kind of
governmental agency, whereas its users are the sole responsible for its operation. Many countries
have issued regulations and informations on the use of Cryptocurrencies, but these initiatives,
most of the time, do not provide definitive answers regarding the technique this digital
instrument should be treated and the process of regulating the same (Suzuki and Murai 2017).
Discussion
The concept of Crypto currency
A Cryptocurrency is referred to as a virtual or digital currency that uses technique of
cryptography for security. Cryptography is the art of solving the codes .In case of crypto
currency it is difficult to fraud as there is a unique security feature (Bolt 2017). The anonymous
nature of the crypto currency transactions helps to avoid the various fraudulent accounting
activities like tax evasion and money laundering.ir has an organic nature that is it not issued by
the central authority thus, immuning the transactions from government manipulation and
interference.

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History of crypto currency
Pseudonym Satoshi Nakamoto who is referred to as an individual or a group launched the
first crypto currency in 2009 named Bitcoin. By the time of September 2015, more than 14.6
million bitcoints were circulating the total market with a value of $3.4 billion since then a
number of competing Cryptocurrencies evolved in the global market in the name of litecoin,
namecoin and PPcoin.
Benefits and drawbacks of crypto currency
With the help of Cryptocurrencies, it is more easy to transfer funds between two parties
in a transaction. The private and the public keys for security purposes facilitate the transfers in
the process. The crypto currencies help in the reduction of processing fees and enable the users
to avoid the steep bank charges and other charges by financial bodies for wire transfer.
The Bitcoin contains various block of chains where it stores the online ledger of all the
transactions that have been conducted through Bitcoins software (Bunjaku, Gorgieva-Trajkovska
and Miteva-Kacarski 2017). There is a structure of data for the ledgers that are exposed to threat
from the hackers can be easily copied across the computers running through the Bitcoin software
and the threat can be easily be identified. Many experts see this block chain as having important
uses in the technologies like the online voting and crowd funding. Low transaction cost is the
Cryptocurrencies makes the payment process more efficient.
However, the Cryptocurrencies does not have any central repository, as they are virtual.
If there is no backup of the holding, a digital Cryptocurrency balance can be wiped out by a
crash of the computer. As the prices are based on demand and supply, the rate of Cryptocurrency
that can be exchanged for another currency can widely fluctuate. Moreover, Crypocurrencies are

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not immune to hacking threats. In the history of Bitcoins, consists of more than 40 threats that
include more than $1 million in value.
Challenges faced during Cryptocurrency auditing:
The auditing refers to the financial inspections of the books of accounts to verify its
accuracy. Crypotocurrencies exists virtually; they are the virtual money that is not backed by any
government or the central bank (Dai and Vasarhelyi 2017). The Cryptocurencies are designed to
operate in the peer to peer economy without any centralized repository or registration. There is a
existence of uncertainty that is causing the Cryptocurrency startups face challenges while
auditing.
As a auditor, while understanding Cryptocurrency the various challenges faced during the audit
process can be jotted down as follows:
 Understanding the Digital currencies: The digital currency and other digital assets are
the representation of digital values that are traded as a medium of exchange. Since crypto
currencies and other digital assets experience high rate of risk and reduced liquidity,
open- end fund and close end funds with side pockets are common in the investment
funds (Decker et al. 2015). Moreover, the tokens are not easily and profitably disposable.
The investment fund structure must be tailored according to the investment strategy that
is not easy to inspect.
 Risk to attract investors: In the digital asset class, the security assets are the major
concern for both investment managers and investors. The hacking news and the theft that
been caused by the investors become wary of investing (Broby and Paul 2017). The
losses due to hacking and theft is limited to the value of the digital assets held.

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 Audit considerations: There are unique considerations for the digital assets, while the
funds are being audited. The auditor job is to obtain the proofs of the existence of the
assets and control of these assets for the third parties such as banks, brokers and private
investees. Unless the digital assets are held with any exchange, it becomes time
consuming and difficult to calculate.
 Current state regulations: The Cryptocurrencies are highly regulated by various
agencies and jurisdictions, but that regulatory body does not provide enough guidance.
From the legal point of view, the status of the Cryptocurrencies like the Bitcoinis not
agreed, as they are not backed by any government supervision. The auditors lack in
knowledge about the set of rules and policies according based on which the books shall
be audited (Sapovadia 2015).
Conclusion
The evolution of Cryptocurrency had been evolved to ease the method of financial
transactions. The cash and other financial modes of transaction as are being replaces by the
digital software. Although, many countries are banning the use of the Cryptocurrencies as
payment outright as there is many legal and logistical hurdles. The Cryptocurrencies are not
backed up by any authorized body hence, as an auditors many challenges had been faced. The
lack of regulation and uniformity pose a great challenge to the auditors and the accountants to
calculate the financial accuracy.

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References
Bolt, W., 2017. Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction.
Broby, D. and Paul, G., 2017. The financial auditing of distributed ledgers, blockchain and
cryptocurrencies. Journal of Financial Transformation, 46.
Bunjaku, F., Gorgieva-Trajkovska, O. and Miteva-Kacarski, E., 2017. Cryptocurrencies–
advantages and disadvantages. Journal of Economics, 2(1).
Dai, J. and Vasarhelyi, M.A., 2017. Toward Blockchain-Based Accounting and
Assurance. Journal of Information Systems, 31(3), pp.5-21.
Decker, C., Guthrie, J., Seidel, J. and Wattenhofer, R., 2015, September. Making bitcoin
exchanges transparent. In European Symposium on Research in Computer Security (pp. 561-
576). Springer, Cham.
Sapovadia, V., 2015. Legal Issues in Cryptocurrency. In Handbook of Digital Currency (pp. 253-
266).
Suzuki, S. and Murai, J., 2017, July. Blockchain as an Audit-Able Communication Channel.
In Computer Software and Applications Conference (COMPSAC), 2017 IEEE 41st Annual (Vol.
2, pp. 516-522). IEEE.
Vigna, P. and Casey, M.J., 2016. The age of cryptocurrency: how bitcoin and the blockchain are
challenging the global economic order. Macmillan.