computer as his son’s graduation gift—all the while describing the purchases as routine business expenses.”” Example of Profiling in Auditing Profiling is also useful in continuous auditing, If we consider the dollar amount of each transaction, we can develop a Z-score by knowing the mean and standard deviation. Using our statistics knowledge and assuming a normal distribution, any transaction that has a Z-score of 3 or above would represent abnormal transactions that might be associated with higher risk. We can investigate further seeing if those transactions had appropriate approvals and authorization. An analysis of Benford’s law could also be used to assess a set of transactions. Benford’s law is an observation about the frequency of leading, digits in many real-life sets of numerical data. The law states that in many naturally occurring collections of numbers, the significant leading digit is likely to be small. If the distribution of transactions for an account like “sales revenue” is substantially different than Benford’s law would predict, then we would investigate the sales revenue account further and see if we can explain why there are differences from Benford’s law. Exhibit 3-10 shows an illustration of Benford’s law using the first digit of employee transactions. An abnormal frequency of transactions beginning with the number four may indicate that employees are attempting to circumvent internal controls, such as an approval limit. While the number one also exceeds the expected value, we would expect a larger volume of smaller numbers. We will discuss additional applications of Benford’s law in Chapter 6. EXHIBIT 3-10 Benford’s Law Applied to Large Numerical Datasets (including Employee Transactions)