Technology in Auditing Using Benford?s Law :: essays research papers

Technology in Auditing Using Benfords jurisprudenceWhat started out as a curious observation by an stargazer in 1881 has the potential to have a significant impact on the audit profession 125 years later. In 1881, the astronomer Simon Newcomb sight that the front pages of his logarithmic tables frayed faster than the rest of the pages. Newcomb concluded the archetypal physique is oftener 1 than any other digit. Newcomb quantified the luck of the occurrence of the different digits as being the first digit and as well as the second digit. For the most part, Newcomb just considered it a oddness and left it at that. (Caldwell 2004)In the 1920s, a physicist at the GE question Laboratories, Frank Benford, thought it more than a curiosity and conducted extensive testing of naturally occurring data and computed the expected frequencies of the digits. In Table 1, there is a table of these expected frequencies for the first four positions. Benford also determined that the data could not be constrained to only show a dependant range of numbers such as market values of run nor could it be a set of assigned numbers such as street addresses or social security numbers. (Nigrini 1999)The underlying theory base why this happens can be illustrated utilise coronations as an example. If you start with an investment of $ snow and seize a 5% annual return, it would be the fifteenth year before the value of the investment would reach $200 and wherefore change the first digit value to 2. It would only take an additive 8 years to change the first digit vale to 3, an supererogatory 6 years to change the first digit to 4, etc. erstwhile the value of the investment grew to $1,000 the time it would take to change the first digit (going from $1,000 to $2,000) would revert back to the same pace as it took to change it from $100 to $200. Unconstrained naturally occurring numbers will follow this pattern with odd predictability. (Ettredge and Srivastava 1998)In 1961, Roger Pinkham tested and proved that Benfords law was scale ceaseless and therefore would apply to any unit of measure and any fibre currency. In the 1990s, Dr Mark Nigrini discovered a powerful auditing tool using Benfords law. He was able to determine that most pack assume that the first digit of numbers would be distributed equally amount the digits and that people that make up numbers tend to use numbers first with digits in the mid range (5, 6, 7).