Top Stories Auditing Cryptocurrency? know the basics and How to Report It Preparing for crypto audits requires accountants to understand blockchain, stay updated on regulations, use specialized tools, and maintain clear communication By Kavi Priya – On January 7, 2025 7:28 pm – 4 mins read Cryptocurrencies, often called virtual digital assets ( VDAs ), are intangible tokens recorded on distributed ledger technology like blockchain. These tokens enable transactions to offer access to other assets or services, and may even represent ownership interests. Their volatile nature and decentralized framework make them uniquely challenging to classify and report under traditional accounting standards. Understanding Cryptocurrency Reporting ( Global Context ) Cryptocurrencies are neither cash equivalents under IAS 7 nor financial instruments under IAS 32 or IFRS 9. They lack the stability and contractual characteristics required for these categories. Instead, they typically align with the definition of intangible assets under IAS 38 or inventories under IAS 2, depending on their intended use. Boost Your Earning Potential: Upskill in Tax and Finance Click here

Measurement Models Under IAS 38, cryptocurrencies can be measured using: Cost Model: Initial recognition at cost, subsequently reduced by amortization or impairment. Revaluation Model: Measurement at fair value if an active market exists, with changes recognized in equity or profit and loss. For entities acting as broker-traders, cryptocurrencies may qualify as inventory under IAS 2 and be measured at fair value less costs to sell. Preparing for a Crypto Audit As cryptocurrencies continue to grow in popularity, accountants must adapt their approaches to handle the unique challenges of auditing these digital assets. Here are some straightforward strategies to help accountants prepare for crypto audits effectively.

1. Learn About Cryptocurrency Technology Understanding how cryptocurrencies work is the first step to effective auditing. Accountants should: Invest in Training: Join certification programs focused on blockchain and cryptocurrency auditing to build foundational knowledge. Understand Wallets: Learn how cryptocurrency wallets work, including how private keys secure access and authorize transactions. Use Blockchain Tools: Familiarize yourself with blockchain tracing tools, which help you track and verify transactions directly on the ledger. 2. Design Audit Procedures for Crypto Cryptocurrencies present risks that require specific audit procedures. To address these: Trace Transactions: Use blockchain analysis tools to follow the movement of cryptocurrency between wallets and verify balances. Verify Ownership: Develop methods to confirm control of digital assets, such as asking clients to sign messages from their wallets to prove ownership.

3. Use Specialized Crypto Audit Software The right tools can make auditing cryptocurrencies much easier. Look for software that can: Match Transactions: Automatically reconcile transactions across multiple wallets and exchanges to ensure accuracy. Secure Data: Choose platforms certified under AICPA SOC 1 & 2 standards to ensure strong data security. Integrate Tax Calculations: Select software that integrates with tax systems to handle fee accounting and capital gain calculations effortlessly.

4. Strengthen Internal Controls A key part of cryptocurrency audits is evaluating how clients manage their digital assets. Accountants should: Check Private Key Management: Review how clients secure their private keys to prevent loss or unauthorized access. Verify Access Controls: Ensure systems are in place to track and restrict access to wallets and prevent unauthorized transactions. 5. Stay Updated on Crypto Regulations Cryptocurrency regulations are constantly evolving, so staying informed is essential. Accountants should: Monitor Updates: Regularly review changes to standards like GAAP, PCAOB guidelines, and IRS requirements. Educate Clients: Help clients understand new accounting rules, such as ASU 2023-08, and how they affect financial reporting for crypto assets. 6. Use Blockchain’s Transparency One of blockchain’s advantages is its public nature, which can simplify audits. Accountants can: Access Real-Time Data: Use the blockchain’s open ledger to directly view transaction details without waiting for client-provided information. Reconcile Periodically: Regularly check transactions and balances to ensure all activity is recorded and accurate.

7. Communicate Crypto Risks Clearly Auditors must highlight cryptocurrency-specific risks in their reports to help stakeholders make informed decisions: Address Key Risks: Use emphasis of matter paragraphs or key audit matters ( KAM ) to point out material crypto holdings or significant activities. Provide Clear Explanations: Explain the financial implications of crypto transactions in simple terms so clients and stakeholders can understand the risks  Cryptocurrency Taxation and Regulation in India Cryptocurrency is a decentralized digital asset that operates as a medium of exchange using blockchain technology. Under Indian tax laws, it is classified as a Virtual Digital Asset ( VDA ), which includes cryptocurrencies, NFTs, and tokens. In 2024, no changes were made to crypto taxation in the Interim Budget. However, in 2023, several key updates were introduced. Investors must declare crypto or NFT income as capital gains if held as investments or as business income if used for trading.

A dedicated section, “Schedule – Virtual Digital Assets (VDA),” was added to Income Tax Return (ITR) forms for FY 2022-23, with deadlines for filing set as July 31, 2023, and December 31, 2023, for belated returns. Cryptocurrencies are defined under Section 2(47A) of the Income Tax Act as Virtual Digital Assets, excluding gift cards or vouchers, and focusing on cryptographically generated assets like cryptocurrencies and NFTs. India has no specific accounting standard for cryptocurrencies, companies must comply with Schedule III of the Companies Act, disclosing holdings, gains, and losses from digital assets in financial statements. Challenges in Auditing Cryptocurrency Auditing cryptocurrency presents unique challenges that demand specialized approaches.

Some key obstacles include: Ownership Verification: Verifying control over digital assets, often dependent on private keys, requires innovative procedures such as requesting signed messages from wallets. Valuation Complexity: Price volatility and varying exchange rates complicate fair value determination. Transaction Completeness: Reconciling on-chain and off-chain transactions requires blockchain analysis tools to ensure comprehensive audit coverage. Access Risks: Loss of private keys results in irretrievable assets, emphasizing the need for stringent access controls. Regulatory Uncertainty: Inconsistent global regulations add complexity to compliance and disclosure requirements. Conclusion To prepare for crypto audits, accountants need to learn about blockchain technology, create audit methods that fit the unique needs of digital assets, and stay updated on changing regulations. Using the right tools, improving how companies manage and secure their crypto, and communicating clearly with clients can help accountants handle the challenges of auditing cryptocurrencies and provide accurate, trustworthy financial information.