Benford Law and Applications in Auditing - PowerPoint Presentation Example

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