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CMA Intermediate · Corporate Accounting and Auditing · Application of Technology in Audit and Audit Trail

During an audit of Sundaram Textiles Ltd, the auditor applies Benford's Law to the first digits of 20,000 expense claims. The distribution shows a marked excess of claims beginning with digit 9 compared with the expected pattern. What is the most appropriate inference?

A marked excess of first digit 9 signals possible anomalies, such as claims deliberately kept below an approval limit, and calls for further investigation. Benford's Law analysis only highlights unusual patterns; it does not prove fraud or confirm control effectiveness.

  1. AThe claims are proven to be fraudulent and should be reported as fraud
  2. BThe data may contain anomalies, such as amounts kept just below an approval limit, needing further investigationCorrect
  3. CThe population is too large for the test to be reliable
  4. DThe internal controls over expenses are confirmed as effective

Explanation

Benford's Law is an indicator tool; deviation suggests possible manipulation, for example amounts set just under an approval threshold such as 9,xxx. It does not prove fraud, so the auditor must investigate further. Large populations suit the test, and the deviation does not confirm effective controls.

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