Question

Benford's Law is:

1) The most expensive of all the digital analysis methods to implement and use.
2) The most effective way to identify actual frauds.
3) A method that uses vertical financial statement analysis.
4) An effective way to identify anomalies in data sets.

Answer 1

Benford's Law predicts the frequency of leading digits in data sets. It's used as a tool to detect anomalies, which may indicate error or fraud, but it is not the most expensive method nor specifically the most effective in fraud detection.

Step-by-step explanation:

Benford's Law is a principle that predicts the frequency distribution of digits in naturally occurring collections of numbers. Specifically, it posits that in many data sets, the number 1 will appear as the leading digit about 30% of the time, while higher digits will appear as the leading digit with decreasing frequency. This is not vertical financial statement analysis, nor is it necessarily the most expesive digital analysis method or the most effective way to identify actual frauds. However, it is recognized as an effective way to identify anomalies in data sets, which may indicate potential errors, biases, or fraud. Analysts and auditors use it as a tool for fraud detection by comparing the expected frequency of digits in their data to the observed frequencies.