Computer assisted analytical procedures using Benford's Law

Abstract

This case introduces students to Benford's Law and Digital Analysis, which can be used as an analytical procedure and fraud detection tool. Digital Analysis (DA) is the analysis of digit and number patterns of a data set. Actual digit frequencies in a data set are compared to the expected frequencies according to Benford's Law [Benford, F. (1938). The law of the anomolous numbers, Proceedings of the American Philosophical Society, 78, 551–572.]. Minor differences suggest that the data have passed a reasonableness test, while major differences signal possible financial statement mis-statements. After describing Benford's Law and the basic DA tests, the case requires auditing students to download DA software and the actual accounts payable file of a software company from a designated Internet site. Students then, (1) analyse the data using three DA tests as an analytical procedure in an external audit context, and (2) graph and a report the results and audit-related conclusions. The teaching note includes the actual findings from the audit of that data set and guidance on using the case in an auditing course.