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Now a days as we all know importance and use of automated software for accounting as well as for record keeping has been increased. Risk factor also has challenging role while conducting the audit in automated environment

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- Benford’s Law Practical Application
- Introduction : Now a days as we all know importance and use of automated software for accounting as well as for record keeping has been increased. Risk factor also has challenging role while conducting the audit in automated environment. To facilitate these challenges there are already many theorems are present but the important thing is how far we can use them while working in audit and assurance field. Out of these theorems one is Benford’s law which is mainly concerns with numeric indicators related to manipulation of accounts and records. Benford’s law describes the relative frequency distribution for leading digits of numbers in datasets. In this article we are discussing the possible ways to implement this theorem with understanding our needs and business practices of record keeping.
- Facts of Law:- it is an observation that in many real-life sets of numerical data, the leading digit is likely to be small. Generally In sets that obey the law, the number 1 appears as the leading significant digit about 30% of the time, while 9 appears as the leading significant digit less than 5% of the time. If the digits were distributed uniformly, they would each occur about 11.1% of the time.[Wikipedia] Benford’s law also makes predictions about the distribution of second digits, third digits, digit combinations, and so on. In short it is the frequency of occurrence of digits at first or second place in any relevant database as the case may be which is commonly observed in practice and probability is described by using percentage which is calculated by using formula = Log10(1+1/n). For calculating of probability of digit 1 we can put 1 in n’th place and got 30.1% and so on up to 9th digit, the probability percentage is stated below:- If N is 1 then=30.1% If 2 then=17.6% If 3 then=12.5% If 4 then=09.7%
- If 5 then=07.9% If 6 then=06.7% If 7 then=05.8% If 8 then=05.1% If 9 then=04.6% So we can calculate percentage of our data say Expenses list etc. by taking first digit of distribution and if occurrence is different than as above stated percentages then there is possibility of manipulation. The higher the difference higher is risk of manipulation. Simple comparison of first- digit frequency distribution from the data with the expected distribution according to Benford’s law ought to show up any anomalous results [Wikipedia]. One practical use for Benford’s law is fraud and error detection. It’s expected that a large set of numbers will follow the law, so accountants, auditors, economists and tax professionals have a benchmark what the normal levels of any particular number in a set are. Many audit software provides function which calculate deviation so one can calculate risk of manipulation.
- However this law is not always stands true when:- 1. Distributions that would not be expected to obey Benford’s law 2. Where numbers are assigned sequentially: e.g. cheque numbers, invoice numbers. 3. Where numbers are influenced by human thought: e.g. prices set by psychological thresholds ($9.99) 4. Accounts with a large number of firm-specific numbers: e.g. accounts set up to record $100 refunds. 5. Accounts with a built-in minimum or maximum 6. Distributions that do not span an order of magnitude of numbers. For using this law in excel:- Select the first digit of your distribution by using “left” function. Here the first digit is first number of 01-04-2021 miscellaneous expenses i.e.3 and for 02-04-2021 its 7 and so on. Then count how many times a single digit is repeated by using “count if” function and do this for all 1 to 9 digit Read more at: https://taxguru.in/finance/benfords-law-practical-application.html Copyright © Taxguru.in

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