Crypto and blockchain assets have transformed the financial world, making it crucial for businesses to understand their digital asset holdings. Crypto auditing is essential to navigate the unique complexities of crypto accounting.

Acctual's crypto accounting software provides the tools needed for efficient crypto auditing, ensuring easy management of digital assets. 

Table of Contents

• What Is Crypto Auditing?

• What Is Blockchain Auditing

• 3 Best Techniques For Effective Crypto Auditing

• Top Challenges Of Crypto Auditing

• Regulatory Landscape And Compliance In Crypto Auditing

• How To Overcome Crypto Auditing Challenges

• Crypto Auditing As A Means Of Risk Management

• Pay Your Bills In Crypto With Our Crypto Accounting Software Today － Book A Demo To Learn More

What Is Crypto Auditing?

A crypto audit reviews an organization's use of digital assets to ensure proper controls are in place. While digital assets have their intricacies, a crypto audit resembles a cash or foreign exchange audit in many respects. The NCUA Examiner's Guide provides a valuable framework for understanding cash-like instruments, which can be applied to a crypto audit. 

By determining the types of crypto-like instruments your organization deals with and ensuring proper monitoring and record-keeping, you can conduct a thorough and effective crypto audit. A crypto audit might assess if proper risks are being considered if your organization is using crypto, such as being able to handle the potential tax consequences of trading digital assets. If you accept crypto as a form of customer payment, a crypto audit would likely include areas verifying transactions that align with crypto holdings.

The Internal Audit Plan: Ensuring Compliance and Control

The internal audit plan should be designed to provide reasonable assurance that an institution's internal control system is functioning as intended and is sufficient to ensure the institution's books and records are maintained under sound business practices and applicable standards. The plan should include procedures for verifying the accuracy of the institution's books and records. 

These procedures should consist of verifying the accuracy of the institution's accounting system, the accuracy of the institution's ledgers and subsidiary accounts, and the institution's recordkeeping procedures. Internal controls and auditing procedures should be designed to provide reasonable assurance that an institution's internal control system is functioning as intended and is sufficient to ensure the institution's books and records are maintained under sound business practices and applicable standards.

A Thorough and Effective Crypto Audit: Best Practices

The NCUA Examiner's Guide provides a helpful framework for understanding cash-like instruments, which can be applied to a crypto audit. By determining the types of crypto-like instruments your organization deals with and ensuring proper monitoring and record-keeping, you can conduct a thorough and effective crypto audit. 

A crypto audit also assesses if proper risks are being considered if your organization is using crypto, such as being able to handle the potential tax consequences of trading digital assets. If you accept crypto as a form of customer payment, a crypto audit would likely include areas verifying transactions that align with crypto holdings.

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What Is Blockchain Auditing?

Blockchain auditing is a comprehensive review and analysis of a blockchain network or application’s security, performance, and compliance with established standards and regulations. The main objectives of a blockchain audit are to identify vulnerabilities, ensure the integrity of smart contracts, and verify that the system operates as intended, especially in terms of security protocols and consensus mechanisms. The ledger is distributed across many participants in the network—it doesn’t exist in one place. 

Instead, copies exist and are simultaneously updated with every fully participating node in the ecosystem. The participants share the same ledger, enabling a distributed network to work without a central authority. One of the most promising aspects of blockchain technology for auditors is that every transaction is recorded on a digital ledger as a "block." This record is distributed across a network of computers. Audit blockchain technology automatically conducts a network of internal checks to ensure that all copies of the ledger match.

The good news is that a blockchain is theoretically easy to audit because accurate information on blockchain transactions should be readily available to all participants. The ledger is distributed across many participants in the network — it doesn’t exist in one place. Instead, copies exist and are simultaneously updated with every fully participating node in the ecosystem.

As an auditor, you can influence the design of a blockchain system before it goes live, which can significantly reduce the number of future audit hours needed for the complex tasks traditionally associated with auditing. Investigative methods are essential in blockchain auditing, including network discovery, blockchain data collection, Bitcoin analysis, wallet analysis, blockchain explorer tools, and blockchain-based analytics.

3 Best Techniques For Effective Crypto Auditing

1. Assess Crypto and Blockchain Usage

The first step in effectively auditing crypto and blockchain is understanding the organization's current and planned use of these technologies. This involves investigating how the finance department manages digital assets and whether proper controls exist. Future usage is crucial to gauge whether the organization has the resources to handle crypto-related risks.

2. Identify Top Risks

Once the auditor grasps the organization's crypto and blockchain usage, identifying potential risks associated with digital assets becomes the next crucial step. For instance, the auditor needs to assess whether the finance team possesses the suitable systems and tools to track crypto transactions as efficiently as any other organizational asset. 

Since crypto investors use various exchanges and wallets, data on every buying and selling event can be challenging to obtain.

In assessing risks, it's essential to recognize that individual investors often use digital assets differently. The auditor must ensure that data related to crypto transactions is not scattered across different systems and evaluate the security of the organization's blockchains. Collaboration with IT leaders is necessary to ensure that the blockchains and associated cyber protocols maintain data security.

3. Establish Controls

After pinpointing the top crypto risks and control deficiencies, the next step is recommending better controls to management for overall and process-specific crypto operations. For instance, collaborating with the legal department to establish liability controls for blockchain networks can help mitigate risks effectively. Liability considerations are vital, such as determining legal/regulatory liability in a "permission" network for issues like data breaches or smart contract errors. A lack of legal controls could exacerbate existing risks.

Pay Your Bills In Crypto With Our Crypto

Acctual is crypto accounting software for businesses and freelancers transacting in digital assets. It simplifies accounts payable and receivable, making it easy to pay bills and send invoices in crypto. Our flexible options let you pay in crypto while vendors receive fiat, receive crypto while clients pay in fiat, or receive fiat while clients pay in crypto. We also integrate with your accounting system, saving you time on month-end reconciliation.

Key features:

• Multi-level approvals for bills

• Fiat-to-crypto and crypto-to-fiat payments

• Built-in AML screening

• Crypto invoice links

• Automatic payment notifications

• With our seamless AP/AR process, automated bookkeeping, built-in internal controls, with flexible payment options, you can simplify your financial operations with us.

Book a call with our team to learn about how you can pay bills and send invoices in crypto with our crypto accounting software today!

Top Challenges Of Crypto Auditing

The Competence Challenge

The competence challenge is a significant hurdle for auditors regarding crypto assets. Many auditors must understand the risks when designing their audit approaches for crypto-related engagements. They often need to evaluate management's grasp of crypto-related risks properly. 

The crypto expertise required on the audit team varies depending on the client's specific use of crypto assets, such as trading liquid assets versus engaging in decentralized finance (DeFi) activities. Auditors must have the right skills and knowledge to tackle these unique challenges.

The Custody Challenge

Another major obstacle is the custody challenge. Clients may hold their crypto assets in self-custody, custody on a crypto exchange, or a combination. When using self-custody, auditors must evaluate the client's crypto custody policy, storage procedures, backup and recovery processes, compromise policies, and grant/revoke policies. 

If the client uses a crypto exchange for custody, auditors need to conduct thorough vendor due diligence on factors such as regulatory status, insurance coverage, know-your-customer (KYC) and anti-money laundering (AML) practices, internal controls, reputation, longevity, and available audit reports. Additionally, accessing complete historical transaction data from exchange APIs can be complex and challenging.

The Accounting Challenge

The accounting challenge is the third key hurdle. The lack of authoritative accounting guidance has led to crypto assets being accounted for as indefinite-lived intangible assets under US GAAP and similar treatment under IFRS. The industry has a strong call for fair value accounting and digital asset-specific authoritative guidance from standard setters like FASB and IASB. 

In October 2022, FASB decided companies should measure crypto assets at fair value, recognize increases/decreases in comprehensive income, and expense certain acquisition costs. Navigating the complex accounting treatment of crypto assets requires specialized knowledge and ongoing training for auditors.

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Regulatory Landscape And Compliance In Crypto Auditing

The regulatory landscape for digital assets is constantly evolving and varies significantly between jurisdictions. This dynamic nature presents another layer of complexity for crypto audits, emphasizing the need for auditors to continuously learn and adapt to this fragmented and rapidly changing regulatory environment. In the US, the Internal Revenue Service (IRS) treats digital assets as property for tax purposes, meaning that every crypto transaction can be taxable. 

This necessitates careful record-keeping and thorough audits to ensure compliance. On the other hand, in countries like Singapore, digital assets are treated as goods and services for tax purposes. This means that crypto companies are subject to Goods and Services Tax (GST) on their crypto transactions, adding another dimension to the audit process.

Crypto audits are not just about ensuring that all transactions are correctly recorded and accounted for but also about complying with relevant tax laws and regulations. It's crucial to remember that non-compliance can result in heavy penalties and damage to a company’s reputation. While crypto transactions are pseudo-anonymous, blockchains like Bitcoin and Ethereum transactions are permanent and visible to the public. 

The IRS has previously worked with contractors like Chainalysis to link blockchain transactions to known individuals. Additionally, major exchanges like Coinbase and Kraken have already reported user information to the IRS. Tax reporting requirements are only set to grow more strict. In the future, all centralized exchanges will be required to send information on capital gains and losses to users and the IRS via Form 1099.

How To Overcome Crypto Auditing Challenges

Embracing Regulatory Changes

The world of crypto auditing is lively and always changing, with rules and standards constantly being updated and improved. To stay ahead of the game, CFOs and CEOs should proactively embrace these changes rather than merely react to them. 

By engaging with legal experts, attending seminars, and actively participating in industry discussions, financial leaders can remain informed and prepared to navigate the complexities of the regulatory landscape. This proactive approach ensures compliance and fosters a culture of adaptability and innovation within the organization.

Investing in Technology

Utilizing advanced technology is vital for simplifying the audit process in the crypto world. Blockchain analysis tools are invaluable for auditors, enabling them to trace transactions back to their source, identify patterns, and detect anomalies. 

Additionally, crypto accounting software such as Acctual streamlines the process by allowing the importation of transactions from multiple blockchains and exchanges, providing a detailed dashboard of assets. Financial leaders can enhance efficiency, accuracy, and transparency in their auditing processes by embracing technological solutions.

Building a Diverse Team

In crypto auditing, having a diverse team of auditors with varying expertise is vital for success. This includes professionals with knowledge of crypto technology, tax law, and financial auditing. A diverse team offers a broader perspective and a more comprehensive understanding of the unique challenges posed by crypto audits. By fostering collaboration and leveraging the strengths of each team member, organizations can enhance their capabilities and effectively navigate the complexities of financial audits in the crypto landscape.

Establishing a Thorough Record-Keeping System

A robust and comprehensive record-keeping system is a cornerstone of successful crypto audits. This includes maintaining detailed records of all crypto transactions, historical price data, and information on the parties involved. Acctual provides an intuitive platform for organizing and managing these records, enabling financial leaders to access critical information efficiently. By establishing a thorough record-keeping system, organizations can ensure accuracy, transparency, and compliance in their auditing processes.

Developing a Robust Risk Management Framework

Developing a robust risk management framework is vital to effective crypto auditing. This framework helps organizations identify, assess, and mitigate risks associated with their crypto operations, such as volatility, security threats, and regulatory compliance issues. Financial leaders can confidently safeguard their assets and navigate the dynamic landscape of crypto auditing by regularly reviewing and updating the risk management framework to reflect changing market conditions and regulatory developments.

Collaboration with Regulators

Establishing a collaborative relationship with regulators is critical to ensuring compliance and avoiding penalties in crypto auditing. By regularly communicating with regulatory bodies and actively participating in regulatory initiatives, organizations can stay informed about evolving regulations and demonstrate a commitment to transparency and accountability. This collaborative approach fosters trust and credibility within the industry, enabling financial leaders to navigate the complexities of crypto audits with regulatory compliance at the forefront of their operations.

Crypto Auditing As A Means Of Risk Management

Crypto audits play a crucial role in a company’s overall risk management strategy, providing valuable insights into the company’s financial health and identifying potential risks. Let's delve deeper into how crypto audits contribute to risk management:

Identifying Financial Risks

Crypto audits help identify financial risks such as liquidity, market, and credit risks by thoroughly examining a company’s financial transactions and records. By spotting warning signs and suggesting corrective actions, auditors can prevent potential economic losses and ensure the company's stability.

Ensuring Regulatory Compliance

Non-compliance with regulatory requirements poses a significant risk for crypto companies. Crypto audits ensure that a company adheres to all relevant laws and regulations, mitigating legal and compliance risks.

Detecting Fraud and Errors

Crypto audits are crucial in detecting fraudulent activities and errors in financial transactions. Early detection can save a company from financial losses and reputational damage.

Providing Assurance to Stakeholders

A successful crypto audit assures stakeholders, including investors, about the company’s financial health and integrity. This can enhance the company’s reputation and foster trust among stakeholders.

Improving Operational Efficiency & Profitability

A thorough crypto audit can enhance operational efficiency and profitability by revealing inefficiencies in a company’s operations and suggesting areas for improvement.

In risk management, crypto audits are not just a regulatory requirement but a strategic tool that provides valuable insights and contributes significantly to a company’s success. 

A well-conducted crypto audit can provide a clear picture of a company’s financial health, ensure regulatory compliance, detect anomalies, and offer recommendations for improvement, thereby playing a vital and strategic role in risk management.

Pay Your Bills In Crypto With Our Crypto Accounting Software Today － Book A Demo To Learn More

Acctual is crypto accounting software for businesses and freelancers transacting in digital assets. It simplifies accounts payable and receivable, making it easy to pay bills and send invoices in crypto. Our flexible options let you pay in crypto while vendors receive fiat, receive crypto while clients pay in fiat, or receive fiat while clients pay in crypto. We also integrate with your accounting system, saving you time on month-end reconciliation.

Key features:

• Multi-level approvals for bills

• Fiat-to-crypto and crypto-to-fiat payments

• Built-in AML screening

• Crypto invoice links

• Automatic payment notifications

• With our seamless AP/AR process, automated bookkeeping, built-in internal controls, with flexible payment options, you can simplify your financial operations with us.

Book a call with our team to learn about how you can pay bills and send invoices in crypto with our crypto accounting software today!

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