Technology in Auditing Using Benford’s Law
What started out as a curious observation by an astronomer in 1881 has the potential to have a significant impact on the audit profession 125 years later. In 1881, the astronomer “Simon Newcomb noticed that the front pages of his logarithmic tables frayed faster than the rest of the pages…”. Newcomb concluded “the first digit is oftener 1 than any other digit”. Newcomb quantified the probability 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 curiosity and left it at that. (Caldwell 2004)
In the 1920’s, a physicist at the GE Research 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 restricted range of numbers such as market values of stock nor could it be a set of assigned numbers such as street addresses or social security numbers. (Nigrini 1999)
The underlying theory behind why this happens can be illustrated using investments as an example. If you start with an investment of $100 and assume a 5% annual return, it would be the 15th year before the value of the investment would reach $200 and therefore change the first digit value to 2. It would only take an additional 8 years to change the first digit vale to 3, an additional 6 years to change the first digit to 4, etc. Once 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 remarkable predictability. (Ettredge and Srivastava 1998)
In 1961, Roger Pinkham tested and proved that Benford’s law was scale invariant and therefore would apply to any unit of measure and any type currency. In the 1990’s, Dr Mark Nigrini discovered a powerful auditing tool using Benford’s law. He was able to determine that most people 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 starting with digits in the mid range (5, 6, 7).
Numbers do not exist. They are creations of the mind, existing only in the realm of understanding. No one has ever touched a number, nor would it be possible to do so. You may sketch a symbol on a paper that represents a number, but that symbol is not the number itself. A number is just understood. Nevertheless, numbers hold symbolic meaning. Have you ever asked yourself serious questions about the significance, implications, and roles of numbers? For example, “Why does the number ten denote a change to double digits?” “Is zero a number or a non-number?” Or, the matter this paper will address: “Why does the number three hold an understood and symbolic importance?”
Lucas Pacioli was the first to describe a system of debts and credits in accord with journals and ledgers in 1494. These basics came together to be the concoction for what is known as accounting. Since the formal establishment of accounting in 1494, the field has expanded as the demands of the ever-changing economy became greater. The industrial revolution created the first jump in the field forcing the creation of sectors within. Since this first creation of sectors, accounting as a field has been creating more specific sects to accommodate a large variety of areas. The most common and large sects created this far include public and private accounting. Although both sects carry the same basis for their work, the variation between the two lies in their demographic, demands, and decoration.
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Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
According to the article authored by Mark Rupert, what are the seven best practices in the roles and responsibilities of an internal audit function?
Osric drawled, despite being about the same age as the young, seedy looking guard. He nodded meekly, and thrust open the doors for the Tarlys, and followed behind. He dashed ahead, going off to look for the young
I like numbers, they make sense to me. For example, I remember what I made for the 10,951st dinner: quite lovely salmon, fresh veg, salad, and great shortcake for dessert. Too bad he didn’t get a chance to eat it. More numbers, it was 5:38 p.m. when I called 9-1-1.
As audit firms look to invest in big data, it will be even more critical to understand the implications of using big data and analytics on the audit profession. There are multiple ways in which data analytics would enhance the effectiveness and efficiency of external audits. From looking at the complete population, to finding trends, to allowing employees to do less routine tasks, there are multiple ways big data benefits audits. Big data would also enhance critical procedures performed for the sales and collection cycle. These benefits are not without some drawbacks that would need to be addressed by the profession.
Accounting: From Clay Tablets to the Cloud, How Technology has Changed the Accounting Profession Every business professional knows that accounting is the language of business. The language of business has especially been transformed in the last 38 years due to the almost constant change in technology and technology. Accounting professionals have become the interpreters for the language of business, a language that all business professionals must understand to be successful. in today’s highly competitive market.
Sandberg, J., Solomon, D., & Blumenstein, R. (2002, June 27). Accounting Spot-Check Unearthed A Scandal in WorldCom's Books. Retrieved from The Wall Street Journal: http://online.wsj.com/article/SB102512901721030520.html
Leonardo Fibonacci was one who introduced the Hindu-Arabic number system into Europe. This number system is the one we still use today, based on ten digits with its decimal point, plus the symbol for 0. Again, these numbers are 0-9 with the decimal poi...
The recording of accounting history allows for research of a high calibre and quality to be developed. If developments and research of the past were not recorded
The evolution of auditing is a complicated history that has always been changing through historical events. Auditing always changed to meet the needs of the business environment of that day. Auditing has been around since the beginning of human civilization, focusing mainly, at first, on finding efraud. As the United States grew, the business world grew, and auditing began to play more important roles. In the late 1800’s and early 1900’s, people began to invest money into large corporations. The Stock Market crash of 1929 and various scandals made auditors realize that their roles in society were very important. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. The auditors’ job became more difficult as the accounting principles changed, and became easier with the use of internal controls. These controls introduced the need for testing; not an in-depth detailed audit. Auditing jobs would have to change to meet the changing business world. The invention of computers impacted the auditors’ world by making their job at times easier and at times making their job more difficult. Finally, the auditors’ job of certifying and testing companies’ financial statements is the backbone of the business world.
"Accountants." WISCareers. University Of Wisconsin System Board of Regents, 2009. Web. 20 Nov. 2009. .
The major characters of the tradition audit are all information what is needed by auditors are on the paper and the manual calculators and without high communication technology. Auditors usually were limited by the place in the paper time. When a several people are working on the same auditing project for a client with offices in cities across the country, even worldwide, it takes a lots all time those auditors get the information which they need from the client, even there is risk paper information disappear for many reasons. on the another hand, mail paper information increase the auditing cost. The mistake caused by the manual calculators inevitably, no matter how fixed auditors concentrate on recalculate is, after all auditors are human. The global business become major in the modern business world, some example, several auditors who are in different locations are working a same auditing project, or auditors are in different city even country with the client, when there is issue among these auditors or between auditors and client, they only can communicate with each other by phone or be together and have meeting. Phone call can not make sure information been watched in the same time when the voice is talking about the issue, but having a meeting takes time and money make all people together, it increases auditing cost.