At first glance the application of digital analysis using Benford's Law holds great promise as a fraud detection process. However, a closer look at the underlying statistical assumptions reveals that auditors seeking to use Benford's Law must be aware of the costs of the potential Type I errors that can occur during the analysis stage. For example, statistical considerations indicate that there is a far greater chance of making a Type I error if the Benford's Law analysis is completed on a “digit‐by‐digit” basis, as compared to the “test‐by‐test” basis typically employed by statisticians. In this paper, we explain the merits of each choice in terms of statistical concepts and practical audit process considerations.
Applying Digital Analysis Using Benford's Law to Detect Fraud: The Dangers of Type I Errors
Richard Cleary, Jay C. Thibodeau; Applying Digital Analysis Using Benford's Law to Detect Fraud: The Dangers of Type I Errors. AUDITING: A Journal of Practice & Theory 1 May 2005; 24 (1): 77–81. https://doi.org/10.2308/aud.2005.24.1.77
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