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CS Professional · Internal and Forensic Audit · Fraud Detecting Techniques

A forensic auditor applies Benford's law to expense claims of Mehra Logistics Ltd. Many claims cluster just below the Rs 50,000 approval limit, and digits 4 and 9 appear far more often as first digits than expected. What is the most appropriate conclusion?

The deviation is a red flag that justifies detailed examination of the clustered claims, not conclusive proof of fraud. Benford analysis highlights unusual digit patterns, such as amounts just under an approval limit, and the auditor must then corroborate them with supporting documents and enquiries.

  1. AThe data conclusively proves fraud by the claimants
  2. BThe data is reliable, as clustering is normal under Benford's law
  3. CThe deviation is a red flag warranting targeted examination of those claims, not proof of fraudCorrect
  4. DBenford's law is inapplicable, so no follow-up is needed

Explanation

Benford's law predicts that lower leading digits occur more often. Large deviations, particularly clustering just under an approval limit, suggest split or manipulated claims. It is an indicator that directs further testing and not proof of fraud. Calling it proof is wrong, and dismissing it ignores the red flag.

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