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SUMMARY
This study introduces and describes digital and number tests that could be used by auditors as analytical procedures in the planning stages of the audit. The mathematical basis of the tests is Benford's Law, a property of tabulated numbers that provides the expected frequencies of the digits in tabulated data. Several empirical studies suggest that the digit patterns of authentic numbers should conform to the expected frequencies of Benford's Law. Thus, auditors could test the authenticity of lists of numbers by comparing the actual and expected digital frequencies. The results could assist auditors in determining the nature and extent of other audit procedures. Several tests are presented that examine data for conformity of the digital frequencies to Benford's Law, and a successful illustration at an oil company is described. Other case studies from practice illustrating the detection of suspect items are briefly presented.
Key Words: Analytical procedures, Benford's Law.
S AS No. 56 requires auditors to use analytical procedures in planning the nature, timing and extent of other auditing procedures (AICPA 1988). This study introduces and illustrates how Digital Analysis could be used as an analytical procedure.l Digital Analysis focuses on digit and number patterns, and is based on a mathematical phenomenon known as Benford's Law (Benford 1938). Recent declines in the cost of the computing power of desktop and laptop computers have contributed to the feasibility of using Digital Analysis in analytical procedures.
Analytical procedures are defined by SAS No. 56 to be evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data (AICPA 1988). Analytical procedures are required in planning the examination, and in the overall review of the financial statements during the completion phase of the audit. Akresh et al. (1988) believe that SAS No. 56 places a greater emphasis on the use of analytical procedures than was previously the case, and that auditors will be evaluated and judged more critically on their use of analytical procedures. They state that analytical procedures are used extensively-but inconsistently, in practice-and that the procedures used are generally the less complex procedures. They include in the list of research needs the development of more effective, simple procedures.
Internal auditing standards also require analytical procedures. Gauntt and Glezen...