It has been argued that with the use of blockchain in auditing, the transaction and the record of the transaction will be the same thing. What does this mean?
Since the blockchain is an append-only log of all transactions that ever happened, the act of sending a transaction also creates the record of the transaction in the blockchain. To allow someone to audit your finances, you can now simply provide them with a list of all your addresses and records about the transactions to provide full transparency. Naturally, since fiat cannot be transferred with Bitcoin directly, this does not help to audit fiat payments.
However, there are some services building on top of Bitcoin such as e.g. colored coin systems that allow to transfer fiat denominated IOUs. These transactions could be audited similarly as regular Bitcoin transactions.
First Question: "Can blockchain be used for auditing?"
Yes. Please take a look at this paper produced by Delloite.
This is the conclusion of the paper:
The blockchain technology has the potential to shapeshift the nature of today’s accounting. It may constitute a way to vastly automate accounting processes in compliance with the regulatory requirements. As described above, there are numerous starting points to leverage blockchain technology. A cascade of new applications will likely follow that are built on top of each other, leading way for new, unprecedented services.
Second Question: "The transaction and the record of the transaction will be the same thing. What does this mean?"
This means that the accounting records of my transaction will be the same as the registered in the shared ledger, called blockchain.
At the present moment we don't have a such pure system.
Our actual system is easily corruptible, since I can go to a store, buy something from a merchant and pay him with paper money - my banknotes.
Since the paper money isn't 100% trackable - like a digital currency - we can't be 100% certain that this merchant will inform the government about this transaction, and thus let the government system "validate" this transaction according to the local regulatory requirements.
Example of the content of a record being different than it's original transaction:
Imagine that I got involved in a transaction while buying an used car. I paid the guy with 10k, (7k money and 3k transferred by bank).
This guy don't necessarily have to inform his accountant that he sold the car for 10k... Maybe he'll just tell that he sold the car for 3k and got a loss instead of a profit!
This way the 'formal economy' ledger will have the record for a 3k transaction, instead of a 10k record - according to the original transaction.