Under the COSO Internal Control framework, which of the following is a critical risk associated with the use of blockchain technology in financial reporting that an auditor must evaluate?

Answer options:

Inability to perform real-time auditing due to block confirmation times.

Centralized control of the ledger by a single administrator.

Reliability of the consensus protocol and the validity of smart contracts.

Lack of encryption for transaction data on the public ledger.

How to approach this question

Focus on the unique aspects of blockchain: Consensus and Smart Contracts. If these fail, the 'truth' of the ledger is compromised.

Full Answer

C.Reliability of the consensus protocol and the validity of smart contracts.✓ Correct

COSO guidance on blockchain emphasizes risks related to the technology stack, specifically the consensus protocol (how agreement is reached) and smart contracts (automated business logic). Errors here directly impact financial statement assertions.

Common mistakes

Focusing on general IT risks rather than blockchain-specific risks.

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