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uditors can use Benford’s Law to identify Below, I discuss data analytics techniques that can
general ledger irregularities — both those be used to identify such irregularities, including using
A that can indicate fraud and those that do the Runs test to detect ridges and valleys in your
not. In this article, I introduce audit data analytics results, and also identifying actionable spikes in your
techniques that practitioners can use to identify results. (View an instructional video on Benford’s
deviations from Benford’s Law. Law-based journal entry testing with the version
As a reminder, Benford’s Law gives us the of this article at journalofaccountancy.com and
expected proportions of the first (as well as the first- download an Excel spreadsheet that can be used to
two, the first-three, and so on) digits in tabulated prepare the first-two digits graph, and to calculate
data. Accounting data, including journal entry the number of runs, spikes, and the mean absolute
amounts, have been found to conform reasonably deviation.)
closely to these expected proportions. Deviations
from Benford’s Law could indicate that the general BENFORD’S LAW-BASED JOURNAL ENTRY
ledger includes large counts of fictitious journal TESTING
PHOTOS BY BRANDONJ74/GETTY IMAGES includes irregularities in the form of unusually high their testing threshold, which could be an indica-
Benford’s Law-based testing could direct auditors
entries that are below the auditor’s testing thresh-
old. They could also indicate that the general ledger
to large counts of journal entries that are below
tor of a certain type of fraud mechanism. In the
duplications of same-dollar transactions. These ir-
regularities are not necessarily fraudulent but might
HealthSouth fraud, for instance, the accounting
personnel abused the testing threshold of $5,000
be due to factors such as processing inefficiencies
by creating thousands of fraudulent journal entries
or high duplications of amounts that are per diem
travel allowances.
journalofaccountancy.com that were just below that threshold. Below, I September 2022 | 13