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

While examining the accounts payable ledger of Kaveri Engineering Pvt Ltd, a forensic auditor runs a test that compares the frequency of leading digits in invoice amounts with the expected logarithmic distribution, and finds an unusual number of invoices starting with 4 and 9 just below the approval limit. Which technique is being applied?

The technique is Benford's Law analysis. It compares the actual frequency of leading digits with the expected logarithmic distribution, so clusters of amounts just below an approval limit stand out as possible manipulated or split invoices needing further examination.

  1. ABenford's Law analysisCorrect
  2. BRatio analysis of liquidity
  3. CVertical common-size analysis
  4. DBank reconciliation

Explanation

Benford's Law predicts the frequency of leading digits in naturally occurring data sets. Deviations, such as clustering just below an approval limit, flag possible manipulation or split invoices. The other techniques do not examine digit frequency.

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