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CS Professional · Internal and Forensic Audit · Fraud Detecting Techniques

An auditor at Kaveri Pharma Ltd applies Benford's Law to the first digits of 12,000 expense claims. The digit 9 appears far more often than the expected frequency, and many claims are just below the Rs 50,000 approval limit. What is the most appropriate inference?

The deviation is an indicator that justifies targeted examination of claims near the approval limit. Benford's Law highlights unusual digit patterns, and clustering below an authorisation threshold suggests avoidance of approval, but it does not by itself prove fraud.

  1. AThe data is proven fraudulent and the claimants should be dismissed
  2. BThe data is normal because Benford's Law applies only to payroll
  3. CThe first-digit deviation is an indicator warranting targeted examination of the claims near the approval limitCorrect
  4. DThe test is invalid because expense claims cannot be analysed digitally

Explanation

Benford's Law deviations are red flags, not proof of fraud. Clustering just below an approval threshold suggests possible splitting or manipulation to avoid authorisation, so the auditor should examine those items in detail. Concluding fraud outright is premature.

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