Examining If Smart contract Projects Are Being Audited and How Its Audit Differs from Traditional Financial Companies

Crypto companies are rapidly changing their working methods and leveraging technology blockchain. Financial accounts are increasingly showing considerable Ethereum price balances and reflecting the results of cryptocurrency transactions. Ethereum price Has continued to rise over the years; it is not deemed related to the audit of crypto companies.

But are cryptocurrency companies audited? Does it affect Ethereum price? If yes, how does their auditing differ from that of traditional financial companies? We’ll look at how the Internal Revenue Service classifies crypto to answer this. We’ll also be looking at the overview, purposes, and types of auditing.

Overview of Auditing

Almost every company has its financial statements audited once a year, including the income statement, balance sheet, and cash flow statement. As part of their debt covenants, lenders frequently require the results of an external audit every year. Due to the overwhelming incentives to purposefully misstate financial facts to perpetrate fraud, audits are a legal necessity for some businesses.

What Is the Purpose of Auditing?

The most familiar type of audit is a financial statement audit. A financial audit is an objective review and evaluation of an organization’s financial statements to ensure that they are a fair and accurate portrayal of the transactions they claim to represent. The audit can be carried out internally by company employees or externally by a firm of Certified Public Accountants (CPAs).

Financial statements audit for crypto companies would establish Ethereum price and other cryptocurrencies, selling price, and profit and loss made.

The Internal Revenue Service’s (IRS) Classification of Cryptocurrency

According to the IRS, a virtual currency is a “digital representation of value” that serves as a “unit of account, a store of value, and a medium of exchange.” Regardless of the label applied, cryptocurrencies are classified as assets and are therefore qualified for federal income tax and auditing purposes, according to the IRS. Some virtual currencies are convertible, meaning they have the same value as one or more traditional currencies (fiat) and can be used to replace them. Bitcoin, Ripple, and Ethereum prices continue to rise. These digital currencies are some of the popular cryptocurrencies that utilize cryptography to safeguard transactions recorded digitally on a distributed ledger such as a blockchain.

The auditing of cryptocurrency companies has not been established to have any effect on Ethereum prices or other crypto prices, but how does auditing a crypto company differ from auditing a traditional financial company?

Smart Contract Audits

A smart contract audit is a thorough methodical examination and analysis of the code of a smart contract that interacts with a cryptocurrency or blockchain. This process is used to identify errors, issues, and security vulnerabilities in the code in order to recommend improvements and solutions. Smart contract audits are generally required because most contracts deal with financial assets and/or valuable items. 

Smart code audits are becoming increasingly important in the burgeoning DeFi industry, where bug-ridden smart contracts are frequently rushed out in order to meet investor demand.

Auditing Traditional Financial Companies: How It Differs

Auditing traditional financial companies differ from auditing crypto companies. The following are the types of auditing in traditional financial companies.

Types of Audits

Internal audits

Employees of a company or organization conduct internal audits. These audits are not distributed outside of the company. Instead, they are ready for use by management and other internal stakeholders.

Internal audits are used in businesses to improve decision-making by providing managers with actionable items to improve internal controls. They also ensure that laws and regulations are followed, as well as that financial reporting is done on time, fairly, and accurately.

Internal audits can also be used by management teams to identify flaws or inefficiencies within the organization before allowing external auditors to review the financial statements.

External audits

External audits, which are performed by external organizations and third parties, provide an unbiased opinion that internal auditors may not be able to provide. External financial audits are used to identify any significant errors or misstatements in a company’s financial statements.

When an auditor issues an unqualified or clean opinion, it indicates that the auditor is confident that the financial statements are correct and up to date.

External audits are critical for allowing various stakeholders to make confident decisions about the company being audited.

The primary distinction between an external auditor and an internal auditor is independence. It means they can provide a more unbiased opinion than an internal auditor, whose independence may be harmed due to the employer-employee relationship.

There are numerous well-established accounting firms that perform external audits for various corporations. The Big Four – Deloitte, KPMG, Ernst & Young (EY), and PricewaterhouseCoopers – are the most well-known (PwC).

Government audits

Government audits are carried out to ensure that financial statements are prepared correctly and do not misrepresent a company’s taxable income.

Within the United States, the Internal Revenue Service (IRS) conducts audits to ensure the accuracy of a taxpayer’s tax returns and transactions. The Canada Revenue Agency is the Canadian equivalent of the IRS (CRA).

Audit selections are made to ensure that businesses are not overstating one‘s taxable income. Misrepresenting taxable income, whether intentional or unintentional, is considered tax evasion. The IRS and CRA are now using statistical formulas and machine learning to identify taxpayers who are at a high risk of engaging in tax evasion.

The Auditing Criteria Board (ASB) of the American Institute of Certified Public Accountants establishes regulations for external audits done in the United States, known as generally accepted auditing standards (GAAS) (AICPA). The Public Company Accounting Oversight Board (PCAOB), which was established because of SOX in 2002, imposes additional requirements for audits of publicly traded businesses.

The International Auditing and Assurance Standards Board established a separate set of international standards called the International Standards on Auditing (ISA) (IAASB).

Having a CPA available will help you respond with specifics about your lending and margin trading activities. It will be extremely beneficial to have crypto tax experts who have successfully guided individuals through audits in the past.