### Cleary, R and Thibodeau, JC (2005)

#### Applying Digital Analysis Using Benford‘s Law to Detect Fraud: The Dangers of Type I Errors

Auditing - A Journal of Practice & Theory 24(1), pp. 77-81.

**ISSN/ISBN:** 0278-0380
**DOI:** 10.2308/aud.2005.24.1.77

**Abstract:** At first glance the application of digital analysis using Benford’s Law holds
great promise as a fraud detection process. However, a closer look at the underlying
statistical assumptions reveals that auditors seeking to use Benford’s Law must be
aware of the costs of the potential Type I errors that can occur during the analysis stage.
For example, statistical considerations indicate that there is a far greater chance of
making a Type I error if the Benford’s Law analysis is completed on a “digit-by-digit”
basis, as compared to the “test-by-test” basis typically employed by statisticians. In this
paper, we explain the merits of each choice in terms of statistical concepts and practical
audit process considerations.

**Bibtex:**

```
@article{,
author = {Cleary, Richard and Thibodeau, Jay C.},
title = {Applying Digital Analysis Using Benford's Law to Detect Fraud: The Dangers of Type I Errors},
journal = {AUDITING: A Journal of Practice \& Theory},
volume = {24},
number = {1},
pages = {77--81},
year = {2005},
doi = {10.2308/aud.2005.24.1.77},
URL = {http://aaapubs.org/doi/10.2308/aud.2005.24.1.77?code=aaan-site},
}
```

**Reference Type:** Journal Article

**Subject Area(s):** Accounting