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CS Professional · Internal and Forensic Audit · Fraud Detecting Techniques

Meridian Pharma Ltd's forensic auditor analyses 2,000 vendor payments and finds that the leading digit distribution deviates sharply from the expected Benford's Law pattern, with an unusual excess of payments beginning with 4 and 9 for one vendor group. What is the most appropriate next step?

The auditor should treat the Benford deviation as an indicator and carry out targeted examination of underlying invoices, approvals and receipts for the flagged vendors. Digital analysis highlights unusual areas but does not prove fraud, so conclusions need corroborating documentary and other evidence.

  1. ATreat it as an indicator only and perform targeted examination of the underlying documents for those vendorsCorrect
  2. BConclude that fraud has been proven and report to the police
  3. CIgnore it because Benford's Law applies only to small samples
  4. DDiscard the vendor group from the population

Explanation

Benford's Law deviations are red flags, not proof of fraud. The auditor should follow up with targeted substantive work such as examining invoices, approvals and delivery evidence for the flagged group. Concluding fraud is premature, and Benford analysis suits large populations, so ignoring it is wrong.

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