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CS Professional · Internal and Forensic Audit · Basic Concepts of Forensic Audit

In a forensic audit at Rajan Steels Ltd, a Benford's Law test on 10,000 expense entries shows digit 7 as the leading digit far more often than expected, with many entries around Rs 7,000 to Rs 7,900 raised by one employee. What is the most appropriate inference and next step?

The deviation is an indicator, not proof, so the auditor should examine the flagged entries and their supporting documents in detail. Benford's Law suits large datasets, but anomalies only direct further investigation and must be corroborated with evidence.

  1. AConclude fraud is proven and report it as such
  2. BTreat it as an indicator warranting targeted examination of those entries and supporting documentsCorrect
  3. CIgnore it because Benford's Law applies only to small data sets
  4. DDiscard the test and rely only on management representation

Explanation

Benford's Law deviations are red flags, not proof. Applies best to large natural datasets, so 10,000 entries suit it. The auditor should drill down into the flagged entries and vouch them against supporting evidence before concluding anything.

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