StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Benford Law and Applications in Auditing - PowerPoint Presentation Example

Summary
The paper “Benford Law and Applications in Auditing” is a bright example of a finance & accounting presentation. Benford’s law is used to define an observation for which many collections of numbers that might be represented in the form of either mathematical or even real-life data, the first significant digits cannot be uniformly distributed as should be expected in most cases…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER96.7% of users find it useful

Extract of sample "Benford Law and Applications in Auditing"

Benford Law & Applications in Auditing Student’s Name Institution Benford Law Benford’s law is used to define an observation for which many collections of numbers that might be represented in the form of either mathematical or even real-life data, the first significant digits cannot be uniformly distributed as should be expected in most cases but; in fact, they are heavily skewed towards the rather smaller and insignificant digits (Berger, 2011). In essence, this law indicates that the significant digits in most of any data sets adhere to a specific form of logarithmic distribution pattern. In auditing, the Benford’s law is used to detect possible anomalies in enormous amounts of data sets. It states that in all real life scenarios, the first ever digit of a given data set is always 1 (Berger, 2011). This frequency is set to reduce significantly as long as the first digit is altered to a specific higher number that falls between 2 and 9. It is important to note that in auditing, a given set of non-manipulated naturally occurring numbers would always depict a higher level of frequency for the leading digit as being 1 while the lowest digit set as 9. In the event that the aforementioned trend is distorted at any particular point, auditors are fairly positioned to detect possible errors or even fraud for that matter. In using the Benford law to detect possible error or fraud, the auditors specifically go through any degree of abnormalities in enormous sets of data (Berger, 2011). In fact, it goes ahead to track possible differences that might exists between the proportionality and Benford law proportionality in order to measure the exact level of deviations between the two stated variables and in the case that it is found out the existence of the differences to be wider it is then concluded there is fraud (Berger, 2011). It is important to note that this level of fraud can also occur in the form of an error. How to Utilise ActiveData in Microsoft Excel 2013 to Detect Fraud After conducting the initial process of downloading ActiveData that could be applied in Microsoft Excel 2013, the next crucial step is to adhere to the below instructions on the excel file labeled; PayablesData.xls. These instructions include the following; i) Place and click the cursor on the Active Data within the quick access bar and choose “Digital Analysis” tab ii) A specific window will pop up; go ahead and choose “Invoice-amount” and thereafter, UNCHECK while making sure to “Include Stratified Analysis”. Move forward and check on “First Digits Test” before clicking on “Finish” button. A perfect representation of the above steps can be shown using the below snapshot: After conducting this, we are set to access a new table as well as a corresponding line graph that portrays a normal proportion of a certain leading digits that are positioned between indicated proportions and the Benford law proportion. The next phase of instructions is to establish any possible differences that might exist between the aforementioned two types of proportionalities. In the event that there exists an enormous level of deviation between the two; then, it is fair to argue that the entire data set or rather selected field being statistically abnormal. It is depicted to be statistically abnormal, even though it is deemed to be a naturally occurring number, since it fails to adhere to the Benford law of frequency. By looking at the differences that exists between two digit counts; in this case between 40 and 41, it is established that there is a great level of deviation between the proportionality in comparison to the Benford proportionality hence a significant possibility of there being errors or fraud. The graph below portrays the results of an error or fraud; From the graph above, note that there are two digit counts that fail to touch the Benford proportion curve. The two digit count 4-5 represents the differences in 40 and 41 noted above. The abnormality is a clear indication that the data set does not adhere to the Benford law or even the law of naturally-occurring numbers. Moving forward to get the drill-down of entries existing between 40 and 41, it is clearly noted that there are a significant number of duplicate invoices for each of these digit counts that might depict a probable error occurrence or an intentional plan to engage in fraud. These two tables below can be seen to be expounding this feature in a more clear and concise manner. From the above screenshot, it can be seen that multiple invoice numbers have different amounts and vendor numbers. Probable Reasons as To Why Personnel Engage Fraudulent Activities People engage in fraud for many reasons, which is dictated by different situations can be categorised into three definitive aspects that include; imminent levels of pressure, a higher chance or rather opportunity to engage in the fraudulent activity as well as matters related to rationalization. In regards to imminent level of pressure; as an important factor that prompts people to engage in the fraudulent behavior, a staffing personnel working within different departments are driven by intensive financial needs so that they seek easier ways of accessing cash resources. They rely on the most accessible route to get the cash at the expense of the many legit ways for which they can adopt. Psychological research conducted to determine the reasons for why employees engage in fraud ascertained that they suffered from financial pressures and need to meet their respective financial commitments. A perfect example of pressure as a cause of fraud can be explained with a case where loyal bookkeeper for a certain company was denied a $200 monthly pay rise. Because of this, the bookkeeper felt very enraged and so, he technically engaged in stealing the same amount for a period of 10 years until he retired. His replacement discovered that the retired bookkeeper had been pressurized to steal precise sum of money for which he had earlier on requested. In regards to opportunity, it is deemed to be deeply ingrained amongst people especially because they always desire to possess extra materials that they cannot afford using their monthly wages. Thus, in the event that an opportunity presents itself, then they will not hesitate to engage in it. Research indicates that fraudulent activities do not happen in isolation rather it is crime that involves an integration of motive and chance. In essence, the chance to engage in fraud is in most cases dealt with by adopting a series of internal controls especially in cases where the proper checks and balances have been put in place it becomes a challenge to defraud a company at any given moment in time. The best way of deterring opportunity to commit fraud is to ensure there is proper division of labor or even responsibilities. In relation to rationalization as a factor that prompts fraudulent behavior, the aspect is defined by the different justifications that employees use to make their engagement in the act look right. A best case scenario is when employees engage in defrauding companies just because they think their seniors are corrupt in all their dealings. All of these aspects should be present in the event that a fraud is detected. References Berger, A. (2011). A basic theory of Benford’s law” Probability Surveys, 8, 1-126 Read More

CHECK THESE SAMPLES OF Benford Law and Applications in Auditing

The Informational Role of Bank Loan Ratings: barclays libor manipulation

"The Informational Role of Bank Loan Ratings: Barclays Libor Manipulation" paper highlights the following: 1) Definition and comparison between Libor and Euribor rates.... 2) When did Barclays join the 12 financial institutions that set LIBOR rates?... 3) How Barclays attempted Libor Manipulation Scandal....
18 Pages (4500 words) Research Paper

How Much IT Involved in Auditing

This dissertation "How Much IT Involved in auditing " analyses the extent to which IT is involved in the auditing procedures in the UK and Kurdistan of Iraq.... Notable standards for effectiveness in auditing have evolved.... The main research question chosen was 'What is the impact of IT on auditing?... The impact of IT in terms of cost and effectiveness on the auditing procedures has been analyzed.... This research has extensively analyzed the computer-aided auditing tools, the rules of auditing in the UK and Kurdistan, the impact of these tools in different levels of auditing, the compatibility of the auditors with these new technologies and the usage of these tools in the United Kingdom and Kurdistan....
56 Pages (14000 words) Dissertation

Better Use Computer Assisted Auditing Techniques for Auditing

Computer Assisted Audit Technique (CAAT) is a method in which auditing procedures are automated and are performed using computers, helping in speeding up the auditing process.... CAAT is by far an innovation in the field of auditing.... The main objective of auditing is to ensure that financial statements are free from material misstatement and are presented fairly by the management....
16 Pages (4000 words) Essay

Benfords Law or the First Digit Law

Benford's law is a data mining approach that is used in auditing in order to examine the digit properties in different accounting data for the purposes of character identification.... Based on this idea, Benford's law could be used in auditing and forensic auditing to act as an indicator.... This essay analyzes Benford's law or the first digit law, that states that the first digit in different types of data sets is usually distributed in a non-uniform manner....
4 Pages (1000 words) Essay

Key Audit and Risk Management Concepts

The “COSO Model” is an integrated framework used by organizations in developing, implementing and assessing internal control with the objective of achieving improved performance.... The model facilitates control and mitigation of risks to an appropriate level thereby enhancing.... ... ... The paper "Key Audit and Risk Management Concepts" is a great example of a finance and accounting essay....
8 Pages (2000 words) Essay

Role of Information Technology on Internal Audit

The benefits accessed by an internal audit from the roles of IT include more efficient auditing, enforcement of quality and internal audit standards, time-saving, resource efficiency use, better planning, adequate analysis, 100% audit data audit, and effectiveness of the internal audit among other benefits.... he auditing Standards Board (ASB) envisaged the role of IT in internal audit in the wording of SAS 94 stating that IT provides efficiency and effectiveness of internal audit in a firm through improving timeliness, accuracy, and availability of information, facilitates additional analysis, enhance monitoring, and reduce circumvention of control risks....
12 Pages (3000 words) Essay

Value of IDEA and ACL in Accumulation and Analysis of Data for Forensic Auditor and Accountant

urley (2005) on the other hand argues that the application of computer technology in auditing is not a modern-day thing but arose in the early years as a result of expediency.... n the viewpoint of Rittenberg, Schweiger, and Johnstone (2008), forensic auditing is often carried out for purposes of investigating and prosecuting criminal activities like; embezzlement of funds, corruption, bribery, asset misappropriation, fraudulent disbursements, and other forms of fraud....
13 Pages (3250 words) Literature review

Data Mining and Accounting

Data analysis applications during this period were very tiresome, slow, and expensive.... The paper 'Data Mining and Accounting' is a felicitous example of finance & accounting case study ю Data mining, also known as knowledge discovery in databases KDD or data, involves a data analysis technique in which data is analyzed from different angles to come up with recognized patterns that can be interpreted into useful information that can be applied to solve problems or to help in operations....
6 Pages (1500 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us