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Benford Law in Auditing

Benford law is very old but very important law of mathematics which is used in Auditing and Forensic accounting. Today, most of accounting software gives option to auditor to use Benford analysis of Benford law. So, new accountant and auditors should understand Benford law.


What is Benford Law?

How to Use Benford Law in Auditing?

Benford law was developed by Frank Benford in 1938. It tells the possibility of coming the 1 to 9 digit in large number of normal data. The probability of digit is calculated with following formula.

P (d) = log (d+1) - log(d) = log ( 1+1/d)

It applies on the large number of data set which come from two combination like quantity X price or conversion of meter into foot for example 15 meter = 45 foot from 1 meter X 3 foot

As per Benford law, there is 30% chance of coming first digit is one. Other digit's possibility will be low. Following is the chart.


How to Use Benford Law in Auditing?

We know that auditor's duty is to check the accounting mistakes and fraud in books of accounts. There are two reasons of using Benford Law in Auditing.

1st Reason : In accounting, we see there is big data of purchase and sales. Both are combination of quantity X price which satisfy the basic condition of applying of Benford analysis.

2nd Reason : There is the large number of voucher entries and ledger accounts. It will be difficult for Auditor to check all. So, auditor can easily use it as sampling auditing technique.

Now, we telling the Steps of Benford Law in Auditing

If there is the manual data. First of all, auditor convert it in any advance accounting software. Now, that accounting software will use the formula of Benford law. It will tell whether respective set of data generate first digit as 1 with 30% probability. If not, then there is some fraud in that respective set of data. This data may be the list of sales, purchase, account receivables, account payables or other expense list. So, auditor will concentrate to find that fraud and save to time from confirming the doubt of fraud in books of accounts.

Related : 100 Thing, I have Learned from Accounting Education 

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Accounting Education: Benford Law in Auditing
Benford Law in Auditing
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Accounting Education
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