Journal of Forensic Accounting 1524-5586/Vol. V, 17-34.
ISSN/ISBN: Not available at this time. DOI: Not available at this time.
Abstract: ABSTRACT: Benford's law has been promoted as providing the auditor with a tool that is simple and effective for the detection of fraud. The purpose of this paper is to assist auditors in the most effective use of digital analysis based on Benford's law. The law is based on a peculiar observation that certain digits appear more frequently than others in data sets. For example, in certain data sets, it has been observed that more than 30% of numbers begin with the digit one. After discussing the background of the law and development of its use in auditing, we show where digital analysis based on Benford's law can most effectively be used and where auditors should exercise caution. Specifically, we identify data sets which can be expected to follow Benford's distribution, discuss the power of statistical tests, types of fraud that would be detected and not be detected by such an analysis, the potential problems that arise when an account contains too few observations, as well as issues related to base rate fraud. An actual example is provided demonstrating where Benford's law proved successful in identifying fraud in a population of accounting data
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Reference Type: Journal Article
Subject Area(s): Accounting