At a recent cryptocurrency conference in Miami, the digital representation of the financial stock exchange bull was unveiled. Created by artist Furio Tedeschi, the bull signifies the world moving towards digital transactions and the use of cryptocurrency. What is even more intriguing when one looks at the robot-crypto statue is that it depicts the new era of digital assets and its dominance over Wall Street's charging bull statue, which signifies traditional Finance. Owing Digital assets are on the rise in the UAE, and businesses have started to invest in digital assets, which are now part of the statutory audit of their financials.
Digital currencies are also a part of financial statements, and the next generation of audits must be prepared to verify, classify, and account for digital assets.
Significant Changes in Auditing the Digital Assets
1. Blockchain Has a Permanent Record of Transactions
Blockchain ledger transactions can be easily traced if they are recorded over nodes. These are permanent cryptographically protected transactions, each having its time stamp. You can check the verified transaction history and the ledger postings, which are available digitally for auditing purposes, anytime.
2. Blockchain Holds a Public History of Verified Transactions
The seamless way a blockchain transaction is designed provides an auditor with enough proof of a transaction, and its backup is readily available on the digital platform for verification. It saves a lot of time, where auditors must go through and fro to keep asking for transaction documents in a general audit environment.
3. Industry-level Audit
Information regarding transactions between parties is available on the private network; Since there is no difference in the reporting format, it eases the auditor's job to verify both sides of a transaction. It helps auditing companies in Dubai to audit on an industrial level easily.
4. View Real-time Settlements
Auditors in Dubai will be able to view transactions in real-time that are dated and even from a few years ago. Hence, an Auditor can take the trade verification and any action required on the financials in a real-time scenario.
Challenges With Auditing the Digital Assets in UAE
- Digital assets such as cryptocurrency might provide proof of transaction but highly emphasizes the anonymity of parties conducting the transactions. Hence, in a country like UAE, with strict laws and Islamic Finance, it will pose a challenge for an auditor to verify that the entries conducting the business transactions are not fraudulent or of illegal nature.
- Auditors need to unlearn the traditional methods of auditing when it comes to working with digital assets. Digital assets are built on pseudonymous codes and are alphanumeric. Hence getting access to records is one, but the auditor has an extra task also to verify the parties involved in the transaction are real and not just a fraudulent account like a shell company.
- The management must provide a standard classification of the digital assets in the financial statements. In the future scenario for auditing, a legal framework for digital assets is required as each digital asset has its valuation and set of risks.
- An open-source blockchain asset poses even more threats as it is available to developers to work on. Hackers can manipulate data through hacking or any security shortcoming in the software.
Crypto assets which are a part of digital assets, cannot be classified as an inventory because it is not physical. They cannot be held as cash or cash equivalents as it doesn't meet the definition. It is also significantly volatile and therefore has to be an approved method of legal tender in the country. According to FASB ASC 350, they are recorded as intangible assets due to their lack of physical substance.
While hiring an audit firm in Dubai for a statutory audit that includes digital assets, a company must be aware that the audit company in Dubai is capable of auditing digital assets in Dubai. They should also be mindful of the auditors qualified for auditing digital assets in UAE. At Farahat and Co, we have auditors on our team who hold industry expertise and understand the use of digital assets in the financial statements, and can evaluate the same.