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CS Professional · Internal and Forensic Audit · Fraud Detecting Techniques

An internal auditor at Kaveri Pharma Ltd runs a test on the accounts payable file and finds that the first digits of invoice amounts do not follow the expected declining frequency pattern, with an unusual excess of invoices starting with 7 and 8. Which technique is being used, and what does the result suggest?

Benford's Law analysis is being used. Naturally occurring numbers show leading digit 1 most often, with frequency declining thereafter. An excess of invoices starting with 7 and 8 deviates from this pattern and suggests possible manipulation or fabrication, warranting further investigation rather than proving fraud.

  1. ABenford's Law analysis; the data may have been manipulated or fabricated and needs further investigationCorrect
  2. BRatio analysis of liquidity; the company has excess cash
  3. CStratified sampling; the population is homogeneous
  4. DTrend analysis of sales; revenue is seasonal

Explanation

Benford's Law expects lower leading digits (especially 1) to appear more often in naturally occurring data. A significant deviation, such as excess 7s and 8s, signals possible manipulation and calls for deeper investigation. It is an indicator, not proof of fraud.

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