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.

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