Financial auditing is already a complex task, demanding specialized skills and expertise to assess a company’s complete set of books and records. When it comes to crypto companies, these challenges multiply exponentially. Need to verify asset balances? There’s no bank confirmation for that. Trying to validate transaction details? They’re on the blockchain, good luck! Does your client hold assets on behalf of others? Congratulations, audit risk has been raised!
In this case study, we’ll explore key audit procedures for evaluating the financial statements of a crypto exchange. We’ll cover existence, ownership, and other critical financial statement assertions, using a simplified balance sheet and income statement to illustrate key audit steps.
The roadmap focuses on several steps for auditing crypto exchanges, including:
- Client Acceptance: Auditors should conduct thorough background checks, assess the financial maturity of the exchange, and ensure compliance with professional and regulatory standards before taking on an audit.
- Risk Assessment and Planning: Identifying inherent, control, and fraud risks is vital. Key high-risk areas include customer safeguarded assets and trading revenue, both of which are vulnerable to fraud or misappropriation.
- Fieldwork and Testing: Auditors should test crypto-related accounts, ensuring the completeness, existence, and valuation of company-held digital assets and customer liabilities. Verification methods include blockchain queries and cryptographic signature tests.
- Revenue Testing: When evaluating trading revenue, auditors should ensure accuracy by examining trade details, testing for fictitious transactions, and verifying that fees are correctly calculated.
- Customer Asset Liabilities: A focus on ensuring that the liabilities related to customer assets are properly reported, with procedures to verify the existence and completeness of these balances.
- Gains/Losses and Commingled Assets: Auditors need to revalue assets and ensure that customer assets are not mistakenly reported as corporate assets, especially when the exchange holds assets in the same wallets for both customers and the company.