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Challenges For Present-day Auditors: Blockchain

ACC5218 Auditing Practice

Submission Instructions:

  • The front style for your answer should be set to “Time New Roman” size 12 with 1.5 line spacing, 2.5cm margin & A4 page layout. 
  • The assignment should be typed and show the student’s name and number on the assignment. 
  • The policy statement on cheating and plagiarism is a cornerstone of academic integrity at USQ. All students are responsible for familiarizing themselves with the policy, seeking further advice if necessary and complying with it at all times. If you use any material, for example textbooks, journal articles etc. to support your answer, you are to use the Harvard Style of referecing in your answer for both in-text and bibliography referencing (students are expected to use external material and articles).  
  • The assignment will be submitted via Turnitin. It is expected tha student scores will be below 20% (students need to allow 24 hours to resubmit, so don’t leave it to the last minute).
  • Referencing: The Harvard (AGPS) style - USQ Library's referencing guide at http://www.usq.edu.au/library/referencing

Research Project 

This assignment is a research component within the Auditing Practice assessment. There is no model answer to this assignment. You need to conduct desk research and based on this consider the topic provided. The assignment should be written as an essay, with an introduction, paragraphs and a conclusion. The use of headings is desirable. Appropriate in-text referencing and a Bibliography should be provided.

Topic: The challenges facing contemporary auditors. 

You are required to consider the challenges facing contemporary auditors due to the increasing use of technology by businesses and the rise of blockchain:

  1. What is blockchain?
  2. Give two examples of how businesses are using blockchain.
  3. What aspects of the audit might be enhanced by auditors’ use of blockchain?
  4. What challenges are there in using blockchain for audit purposes?

Answer

Auditing Practice

The Challenges Facing Contemporary Auditors


Introduction: What is Blockchain?

A Blockchain is a list of records or also known as blocks that are linked with each other through cryptography. They are readable by the public and have been proposed for the use in business applications. Blockchain has created a new type of Internet as it allows digital information to be distributed but not copied (Harper, 2014). 

It was originally devised for the purpose of trading of Bitcoin - a digital currency, but today, it is now used for multiple business applications. Blockchain is a series of constantly growing blocks that will record the data and will form a database that can be accessed from any parts of the world the blocks are added in a chronological order and hence will allow the market participants to keep a track of their transactions (Harper, 2014). 

The digital currency transactions are carried out through these blocks and they are kept in a chronological manner. It is a central recordkeeping system that can be accessed from any part of the world without having a direct regulatory control of any authority. A computer connected to a network is referred to as a node in the field of Blockchain (Baron et al., 2015). They will get a copy of the transactions that are carried out in a given Blockchain. 

It can also be downloaded for different purposes. Blockchain was originally considered as one of the best accounting methods for the purpose of trading virtual currencies. The trading of virtual currencies utilized distributed ledger technology (DLT), which now appears in a variety of business applications. The technology of Blockchain is thereby primarily used for the purpose of - storing the data, retrieving the data, coding and inserting any form of document in the blocks, and also maintains the authenticity of all the records so far carried out in a given block (Baron et al., 2015). 

It is important to note that when a block is completed, another block will be created into the database system. Each time a block gets completed with all sets of data, a new one will be generated that will assist in storing further transactions. There is countless number of such blocks created in the Blockchain (Ashby, 2015). Each of them is linked to each other in a proper chronological and linear order. 

A block will be containing the hash of the previous block and hence complete information about all the addresses of the blocks can be retrieved from the genesis block to the most recently completed block. Also, these blocks are created and maintained through cryptography to keep it safe and secure against all the security issues in the field of technology. 

Blockchain was so designed that the transactions in it are immutable and hence cannot be deleted (Baron et al., 2015). The data can be distributed across any node but cannot be deleted. The size of Blockchain always increases and the respective individuals or companies will maintain them for the purpose of storage and synchronization. Today, it is finding several uses in across multiple business applications.

How Businesses are using Blockchain

Blockchain can be described as immutable, used in public and by public, decentralized, consensus-driven, secured through cryptography techniques, and trustless as it is not maintained or administered by any of the authorities (Baron et al., 2015). 

Prior to the advent of Blockchain, there were no systems or rather database systems that can assist in storing the data on such a large basis, and also which can be securely accessed in any part of the world (Baron et al., 2015). Also, people faced problems in verifying the ownership for a given digital asset. 

For example, if one wants to use the program of MS Office, it has to be verified by Microsoft through a centralized server operated by Microsoft (Baron et al., 2015). However, there were no such systems or applications existing through which such transactions were checked and verified. 

Second, to transfer to the shares in the stock market, the current model needs to have paperwork done or need a legal entity that will assist in transferring the shares to another entity. However, with the advent of Blockchain, there are digital assets available that can be used for the purpose of sending the digital files, assets such as shares to another account only after proper validation, and thus allowing having transfer of digital ownership in a trustless and decentralized manner (Levitin, 2016). 

Today, there are several business applications where the concept of Blockchain is utilized. The first is the supply chain management of several companies that can use Blockchain for their daily operations. Blockchain can provide a transparent and immutable history about wholesalers, manufactures, and even retailers to the companies, based on which the company can formulate their supply chain management strategy. 

They can thereby precisely and quickly detect the inefficiencies in the system and can carry out improvement plans to meet the changing demands of the customers. The retail industry is growing very fast in today's consumer world. Hence, there is a need to manage the traffic by the retail stores and also there is a need to determine the consumption pattern. 

The retail stores can issue retail loyalty points through digital transactions and can store the data in the Blockchain. These points can thereby be redeemed by the customers at the retail store locations (Levitin, 2016). Also, it will provide valuable information to the retail stores about the consumption pattern and the future demands of the customers.

The third is the healthcare sector, wherein it is becoming difficult to maintain the patient's records. Also, these organizations need to follow the HIPPA laws and other regulations, which increased the manual workload for the organization (Levitin, 2016). However, by utilizing Blockchain, they can not only store the data of the patients but will be able to share the data across all the departments of the organization. 

As a result, data redundancy will be reduced, the maintenance costs will be reduced, and instead it will increase the overall efficiency of the organization. Similarly, even patients can access to their records from any parts of the world and they can even transact to pay their medical fees with the help of this system. 

Certain companies in Russia such as Robomed Network have already started using Blockchain for the purpose of delivering value-based services in the healthcare sector. The next is the Energy Sector, where Blockchain ledgers can be used for the purpose of recording energy trades (Levitin, 2016). These transactions will be transparent, immutable and will be available across all the platforms. The trades carried out through Blockchain will be efficiency and fast compared to the traditional trading networks. 

It will save a lot of paper while conducting such processes. Blockchain also finds applications in the field of Database Management and Data-sharing Marketplace, where companies will be allowed to share the data with one another (Levitin, 2016). It will help them in carrying out necessary innovation programs and will also help in improving the networking infrastructure across the world. Thus, Blockchain finds applications in the form of Smart Contracts, as Cloud Storage, for Supply Chain Communications, for Paying Employees, and also for electronic voting in the near future.

Aspects that might be enhanced by the Auditors' use of Blockchain

As discussed, Blockchain will serve as an open source of Distributed Database System across the world. Hence, it will record the transactions between two parties in a verifiable and permanent way. So for example, if clients are transacting with the banks, each of the transaction will be recorded on the blocks, which later can be verified by the auditors and accountants (Levitin, 2016). They can easily verify the transactions on publically available Blockchain ledgers. 

Further, it will improve the overall process integrity as the transactions will remain safe and secure in a given block. The traceability of such transactions will be easy as one can easily locate the block from the ledger available in public from any node located in any parts of the world. The security of Blockchain is highly advanced and it will be difficult to hack the data from it. 

The encryption techniques will not allow the hackers to impact the centralized database system with viruses, Trojans, or any other forms of Malware. The processing of the audit transactions will be done faster compared to the traditional system and also the manual procedures will get decreased (Levitin, 2016). It will thereby assist the auditors to improve their overall efficiency in such a scenario. 

Challenges for Audit Purpose in using Blockchain

Despite the major advantages listed of Blockchain, there are challenges associated with audit purpose in Blockchain. First, the power consumption utilized in using and maintains Blockchain is quite high. It will increase the overall costs of the auditing practices in a given business scenario. The average cost per transaction will increase to $75 and will be difficult for small-scale companies and individuals to bear such costs for auditing their transactions (Turpin, 2014). 

Today, with increased usage of Blockchain, there are also storage problems identified in Blockchain. Further, one of the major challenges in using Blockchain is that there are no central regulatory authorities that are monitoring the practices and transactions of Blockchain. 

Hence, the issues of human error, unavoidable security flaw, and political issues connected with Blockchain will pose major threats for the auditors in a given scenario (Turpin, 2014). They thereby need to make sure of overcoming these challenges first and only then utilize Blockchain for the purpose of conducting auditing practices for given firms or companies.

Conclusion

Despite the fact that Blockchain is one of the major inventions of today's technological era, there are cons associated with it. Further, there are no regulatory authorities that are monitoring the practices and transactions carried out through Blockchain. Hence, it will be difficult for the third party entity - the government to monitor the transactions of the individuals, small firms, and large companies (Turpin, 2014). 

They might indulge into unethical and corruption practices and hence can disrupt the entire economical system of the nation. It is therefore advisable to the auditing company to avoid using Blockchain, unless these challenges are met with proper solution. They need to carry out their traditional method working approach that will ensure safety and security of all the transactions and procedures carried out in a given working scenario.

It is necessary for the government of all the nations to first verify the technology of Blockchain, provide legal status and only then allow Business Corporation to utilize it for business purposes. Researchers have claimed several negative impacts of Blockchain, and hence, there is a need of proper centralized regulatory authority that can monitor the transactions across the world. Further, the auditing teams need to collaborate with the accounting teams and the government and only then utilize the concept of Blockchain, if required. However, as of now, they can continue with their traditional working practices and approaches to complete the assigned tasks. It will subsequently help them achieve required objectives in a given working environment

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