Write a two -page report discussing that answers the following questions:
What is the Newcomb-Benford Law
How can the Newcomb-Benford Law can be used for auditing
What are the limitation of the Newcomb-Benford law for auditing
|Subject||Law and governance||Pages||3||Style||APA|
The Newcomb-Benford Law
The Newcomb-Benford law also known as Benford’s law or the first-digit law, or the decree of anomalous numbers, is described as an examination regarding the regularity distribution of leading numbers in various real-life sets of statistical figures. According to the law, in various logically emerging collections of figures, the leading number is prone to be small (Cerioli et al 110). In sets that observe the Newcomb-Benford regulation, the number one emerges as the principal important digit about thirty-percent of the time, while number nine as the leading noteworthy figure less than five-percent of the time (Cerioli et al 110). If the figures were distributed consistently, they can emerge about eleven-percent of the time. Newcomb-Benford’s law predicts the allotment of second figures, third figures, number combination, among other aspects.
In regards to auditing, the Newcomb-Benford law has been utilized in detecting fraud in accounting. The distribution is often utilized on an individual account basis such as payable to detect the under or over use of certain digits (Hassler, Uwe, and Mehdi Hosseinkouchack 1763). Therefore, to apply the Newcomb- Benford’s rule, an accountant is obliged to count the times a number 1 emerges as the leading number in the data standards, the times a 2 emerges and other numbers, and then evaluate the resulting occurrence distribution. The allotment is considered normal if it adheres to the Newcomb-Benford’s distribution (Cerioli et al 110). Similar to the use of Normal distribution as a referencing tool and gold standard, the Newcomb-Benford law can be utilized to detect pattern in naturally emerging datasets (Barabesi et al 347). As a result, this can lead essential application in data science including catching anomalies or fraud detection. Moreover, the law is often used by auditors in recognizing and evaluating the perils of material misstatement by comprehending the unit and its setting. The law is also used in analytical procedures and audit sampling.
Various limitations emerge when applying the Newcomb-Benford law. For instance, some definite circumstances must be achieved for the law to be pertinent. The first condition is that the data should illustrate the same object. There can be diverse sets of data for split prices in the stock trade, lists of debts written off, degree of earth exhumed and city’s inhabitants among others (Barabesi et al 349). Another limiting condition is that there should not be anystipulation concerning what could be lower or upper limits (Hassler, Uwe, and Mehdi Hosseinkouchack 1767). Even though the Newcomb-Benford rule assessments can be functional with appropriate adjustment mostly if there are huge transactions in amid and upper and lower perimeter are widely separated. Another limiting condition is that the digits should not be distinct numbers such as cell phone numbers, given that they have a requirement to start with 9 or 8. Moreover, Newcomb-Benford law does not pertain to voucher figures if there is a requirement that a significant category of voucher to start with a precise code. For instance, trade voucher will start with 2 (Cerioli et al 110). Another limitation is that while Benford’s law point out that frauds have transpired, it often fails to distinguish the nature of the fraud or they occurred. On various occasions, the Newcomb-Benford law is appropriate for risk evaluation during or before audit (Cerioli et al 110). Nevertheless, coverage of potential fraud necessitates successive analysis, exploration, evidence gathering and reporting.
Barabesi, Lucio, et al. “Goodness-of-fit testing for the Newcomb-Benford law with application to the detection of customs fraud.” Journal of Business & Economic Statistics 36.2 (2018): 346-358.
Cerioli, Andrea, et al. “Newcomb–Benford law and the detection of frauds in international trade.” Proceedings of the National Academy of Sciences 116.1 (2019): 106-115.
Hassler, Uwe, and Mehdi Hosseinkouchack. “Testing the Newcomb-Benford Law: experimental evidence.” Applied Economics Letters 26.21 (2019): 1762-1769.