What is Benford's Law and how can it be applied to detect financial statement fraud?

Expert Solution

Benford Law is a mathematical theory which deals with a set of digits. It states that in a data sets, the leading digits i.e. the first digit of the set is distributed in a non uniform way. The probability of having 1 as the leading digit usually has the highest probability, 2 as the leading digit having lesser probability and the probability of having the each successive number as the leading number will be progressively smaller.

The law can be applied to detect a financial statement fraud while audit of the financials. If majority of the financial statement figures have leading digits or the first digit as 9,8 or 7 , it may indicate that the management has deliberately modified figures in the financials.

As per Benford law , all the digits in the series 1-9 must be distributed equally in the data set. However, if there is one digit or there are two digits that are leading in the data set, then it is an indication of a fraud.

ekkarill92 answered 5 months ago

The IRS currently uses Benford's Law to detect fraudulent tax data. Suppose you work for the...

The IRS currently uses Benford's Law to detect fraudulent tax data. Suppose you work for the IRS and are investigating an individual suspected of embezzling. The first digit of 162 checks to a supposed company are as follows: Digit 1 2 3 4 5 6 7 8 9 Observed Frequency 46 32 20 21 13 12 6 2 10 What is the P-Value? Report answer to 4 decimal places P-Value = Write a statement to the law enforcement officials that...

Illustrate how financial statement ratios can be used to detect frauds and the types of frauds...

Illustrate how financial statement ratios can be used to detect frauds and the types of frauds they detect

1. List some controls that reduce fraud risks. 2. Explain how you can detect fraud

1. List some controls that reduce fraud risks. 2. Explain how you can detect fraud.

why it is important for readers of financial statements expect auditors to detect fraud in financial...

why it is important for readers of financial statements expect auditors to detect fraud in financial statement of company they audit? I need to talk about pros of the subject 5 mins in front of class. Please help to scope it. Thank you

what is Fraud Scheme/Financial Statement Fraud Due? brief explanation with example.

How do you detect billing scheme fraud

In your opinion, how can internal auditors best detect fraud in their organization? Provide explanations to...

In your opinion, how can internal auditors best detect fraud in their organization? Provide explanations to support your answer.

How is probability theory applied in fraud detection?

How can Kepler’s law of planetary motion be applied to the case of geo-stationary satellite? What...

How can Kepler’s law of planetary motion be applied to the case of geo-stationary satellite? What are the orbital parameters required to determine a satellite orbit? Name and explain them. Determine the maximum and minimum range in kilometer from an earth station to a geo-synchronous satellite. To what round trip propagation times do these correspond? Mention the effect of eclipse on the orbital motion of a satellite. Mention the effect of gravitational force due to sun and moon on the...

Occupational fraud victims are concerned about how to detect fraud effectively and efficiently. Write an essay...

Occupational fraud victims are concerned about how to detect fraud effectively and efficiently. Write an essay on "Occupational Fraud: Detection". In the essay, State and describe the manner in which occupational fraud may be detected, and explain what factors determine the effectiveness and efficiency of the manner of fraud detection.

Question