Question

Benford's Law states the relative frequencies of the first digits in a dataset of naturally occurring random numbers will follow the trend seen in the table. Benford's law is used to detect fraud in accounting and other fields. We will consider three business called Business A, B, and C. We have their accounts payable database and have given the relative frequencies of the first digit for each item in their accounts payable. Relative Frequency First Benfords Business Business Business Digit Law 1 0.301 0.15 0.29 0.3 0.176 0.11 0.16 0.18 0.125 0.13 0.11 0.13 0.097 0.1 0.13 0.08 0.079 0.11 0.08 0.08 0.067 0.1 0.07 0.07 0.058 0.12 0.06 0.06 0.051 0.09 0.05 0.05 0.046 0.09 0.05 0.05 RELATIVE FREQUENCY 1. Choose one of the businesses above and mark the spots on the graph where the bars for that business would go to Write here which business you choose to graph. 1 2 3 6 7 8 9 4 5 FIRST DIGIT 2. The variable 'First Digit' is circle one: quantitative / categorical 3. Consider Business A. Do you think there may be possible fraud? Explain. 4. Consider Business B. Do you think there may be possible fraud? Explain. 5. Consider Business C. Do you think there may be possible fraud? Explain. As a note: This does not confirm if a business has fraud, but is used an initial screening. For example, say you investigate business B. Maybe they happen to buy a lot of items that cost $450. Or maybe there's a company policy that says every payment over $500 has to be approved and they're trying to sneak something by their supervisor.

Answer 1

1. Choosing the business A, the spots are marked on the graphs as shown below: RELATIVE FREQUENCY 1 2 3 7 8 9 4 5 6 FIRST DIGIT 2. The variable 'First Digit' is categorical as it signifies the accounts that have first digit given by the numbers provided in the variable. 3. There may be possible fraud in Business A because the relative frequencies trend is not same as the trend in Benfords law trend. 4. There may be possible fraud in Business B because the relative frequencies trend is not same as the trend in Benfords law trend. 5. There may be possible fraud in Business C because the relative frequencies trend is not same as the trend in Benfords law trend. Good luck with your studies!!!