Forensics Journal - Stevenson University 2015 | Page 15

FORENSICS JOURNAL

A horizontal analysis compares trends of data over time. It calculates
the variance of a financial statement line item between two periods
and then calculates a percentage increase or decrease. Again, these
variances are measured against an analyst’s expectations. For both
the vertical and horizontal analysis, variances that are outside the
expectation should be investigated. For example, a horizontal analysis
comparing the income statement of the current year to the prior year
would reveal if there were significant declines. Decreases from the
prior period might appear reasonable because of declining economic
conditions or a diminished demand for the company’s products.
But if the same decreases do not appear reasonable, it may mean
that there is fraudulent activity and further investigation is required.

analysis tools and can be calculated using Microsoft Excel. Benford’s
Law analyzes “the frequencies of digits in each position of the
number for naturally occurring numbers” (Mantone, 2013, p. 239).
In Benfords’ research, he tested over 20,000 different observations
of numbers. For each of the numbers 0 to 9, Benford determined the
probability of each of those numbers occurring in the first, second,
third, or fourth numerical position. As an example, for the number
1,562, “1” is the first position, “5” is the second position, “6” is the
third position, and “2” is the fourth position. According to Benfords’
findings, the number “1” has a 30% probability of occurring in the
first digit (Mantone, p. 239). Since naturally occurring numbers can
be predicted, unnaturally occurring numbers would fall outside of the
probability results of Benford’s calculation. Unnatural numbers could
be those created by a person committing fraud.

Liquidity ratios, which are fairly easy to calculate, are the working
capital and current Ʌѥ