Auditors’ Generation of Diagnostic

Hypotheses in Response to a
Superior’s Suggestion: Interference
Effects*
BRYAN K. CHURCH Wilfrid Laurier University
ARNOLD SCHNEIDER Emory University

Attract. This study investigates the effects of a superior’s suggestion on auditors'

gen- eration of additional hypotheses from long-term memory (LTM). It investigates
whether an inherited hypothesis affects the category membership of additional
hypotbeses retrieved from LTM, in particular when hypotheses from few alternative
categories are considered. Based on research in cognitive psychology, the authors
pre- dicted that providing auditors with a superior’s suggestion would interfere with
their generation of additional hypotheses from the same transaction cycle as that of
the supe- rior’s suggestion. The experimental results are consistent with the expected
interfer- ence effect. Auditors who inherited a superior’s suggestion from a particular
transac- tion cycle generated fewer additional hypotheses from the same transaction
cycle than did auditors who were not provided with a superior’s suggestion.
Moreover, the effect came into play immediately when auditors inherited a
hypothesis involving a typical problem: the first hypothesis generated tended to come
from a different transaction cycle than that of the superior’s suggestion.

Jtérumé. Dans l’article qui suit, les auteurs se penchent sur I’incidence que peut avoir
la suggestion d’un supérieur sur les hypotheses supplémentaires que formulent les
vérifi- cateurs en puisant dans la • mémoire â long terme •. lis cherchent â déterminer
si une hypothése transmise exerce une influence sur la catégorie â laquelle
appartiennent les hypotbéses supplémentaires tirés de la mémoire â long terme, en
particulier lorsque les hypotheses envisagées proviennent d’un petit nombre de
catégories possibles. En s’appuyant sur la recherche en psychologie cognitive, les
auteurs supposent que la sug- gestion communiquée par un supérieur aux
vdrificateurs perturbera chez ces derniers la formulation d’hypotbéses
supplémentaires tirées du méme cycle d’opérations que celui dont provient la
suggestion du supérieur. Les résultats expérimentaux des chercheurs confirment cet
effet perturbateur. Les vérificateurs â qui un supérieur a transmis une suggestion
d’hypothése provenant d’un cycle d’opérations donné ont formulé morns
d’hypothéses supplémentaires provenant du méme cycle d’opérations que les
vérifica- teurs 4 qui aucune suggestion n’a été faite par un supérieur. En outre, l’effet
perturba-

• The authors gratefully acknowledge the helpful comments of Steve Allen, Brian
Gaber, Tom McKee, Frederick Phillips, Claude Pilote, Rick Tubbs, two anonymous
referees, and participants in workshops at the University of Cincinnati, Loyola
University of Chicago, and Wilfrid Laurier University.
Contemporary Accounñng Research Vol. 10 No. I (Fall 1993) pp 333-350 CAAA
334 B.K. Church A. Schneider

teur se manifeste immédiatement au moment ot1 les vérificateurs se voient

transmettre une hypothése faisant intervenir un probléme type: la premiére
hypothése formulée tend I provenir d’un cycle d'opérations différent de celui
dont la suggestion du supérieur est issue.

The application of analytical procedures may be characterized as a diagnostic

process. As part of the process, auditors accumulate evidence to identify plausi-
ble explanations for unusual fluctuations in financial data. They often formulate
diagnostic hypotheses to direct their search for such evidence (e.g., Einhorn
1976; Libby 1985; Church 1990; Libby and Frederick 1990; Peters 1990;
Bedard and Biggs 1991a, 1991b; Anderson, Kaplan, and Reckers 1992; Koonce
forth- coming). Hence, auditors’ abilities to accumulate evidence efficienUy and
effec- tively may be affected by the way that they formulate diagnostic
hypotheses.
Auditors may inherit diagnostic hypotheses, or they may generate their
own hypotheses. Inherited hypotheses are suggested by others, specified by
decision aids, or obtained from previous years’ working papers, whereas
gen- erated hypotheses are retrieved from long-term memory (LTM). Both
means of hypothesis formulation are used throughout the audit process
(Church 1990; Bedard and Biggs 1991a, 1991b). For instance, audit seniors
may inherit hypotheses from their superiors (e.g., managers), which in turn
may prompt them to generate additional hypotheses. Inherited hypotheses
provide an ini- tial direction for accumulating evidence. However, if such
hypotheses are incorrect, additional hypotheses must be generated to guide
the subsequent search for evidence. Few studies have examined the effects
of inherited hypotheses on evidence accumulation (Libby 1985; Libby and
Frederick 1990; Bedard and Biggs 1991a, 1991b). Because auditors test
these hypotheses in the course of performing their audits, the effects of
inherited hypotheses on evi-
dence accumulation are important to research on audit judgment.
This paper investigates the effects of a superior’s suggestion on auditors’
generation of additional hypotheses from LTM. The investigation uses a supe-
rior as the source of the inherited hypothesis to make the hypothesis credible
(Anderson and Kida 1990). It also uses this source because communication
among audit team members occurs throughout the audit process, and such
communication affects the likelihood that the correct hypothesis is generated.
Further, recent research on accountability (e.g., Messier and Quilliam forth-
coming) proposes that a superior’s suggestion could impact auditors’ genera-
tion of additional hypotheses. The current experiment uses actual superiors’
names as the source of an inherited hypothesis. The authors are not aware of
any prior studies that have included actual names in the experimental instru-
ment, yet the use of actual names is likely to affect task realism and, in turn,
the consideration given to a superior’s suggestion.
The next section argues that a superior’s suggestion can interfere with audi-
tors’ generation of additional hypotheses from the same transaction cycle as
that of the superior’s suggestion. An investigation of interference effects is
important because it can provide insights into auditors’ abilities to efficiently
and effectively apply diagnostic processes (Kinney and Haynes 1990).
 Auditors’ Generation of Diagnostic Hypotheses 335

Obviously, efficiency and effectiveness are of primary concern to public

accounting firms, especially in today’s environment of increased competition
and rampant litigation. If researchers can demonstrate conditions under
which interference effects occur, public accounting firms can take actions
(e.g., develop decision aids) to mitigate such effects.
The remainder of this paper is organized into four sections. The first sec-
tion provides a framework for the study. The second section describes the
research methods, and the third section presents the experimental results The
final section includes a discussion of the experimental results.

It is assumed here that the retrieval of an item from LTM is analogous to

sam- pling with replacement (Rundus 1973; Raiijmakers and Shiffrin 1981),
which means that previously accessed items (including items that have been
inher- ited) may be resampled or retrieved again. Items stored in LTM and
those accessed previously are separate and identifiable. The authors readily
acknowledge that retrieval is affected by the associative relationships that
exist between items stored in LTM (e.g., Collins and Loftus 1975: Anderson
1983). So the likelihood that a particular item will be retrieved is affected by
the associative strength relating that item to those already accessed (which
includes items involving the contextual setting and items inherited) in
compar- ison with the strengths relating all other items to those already
accessed (e.g., Brown 1968; Karchmer and Winograd 1971; Rundus 1973;
Roediger, Stellon, and Tulving 1977; Raiijmakers and Shiffrin 1981). The
main point is that retrieval is affected by the relative strength of a particular
item.
The relative ease or difficulty of retrieving an item is affected by the num-
ber of items that have already been accessed. Once an item is accessed, its
rel- ative strength is heightened, and the probability of resampling it is
increased. In turn, the probability of sampling other items, those that have
not been accessed previously, is decreased. Therefore, interference effects
will become much more pronounced as the number of inherited items
increases, which is
entirely consistent with the results of previous studies using the part-list cuing
procedure (e.g., Slamecka 1968).1
Although the discussion above refers to interference effects that influence
the total number of items retrieved, such effects also may influence the cate-
gory membership of items retrieved from LTM. Rosch (1978, 30) suggests
that a category consists of a number of objects that are considered
equivalent. It is a means to organize and store knowledge in LTM. Items
belonging to the same category are closely associated and may be stored
together in LTM. At a superordinate level, oak trees, maple trees, and spruce
trees all fall into the same category: trees. In auditing, transaction cycles
form superordinate cate- gories (e.g., Waller and Felix 1984; Libby 1985:
Libby and Frederick 1990; Frederick 1991; Tubbs 1992). Auditors are likely
to organize knowledge about problems (errors or irregularities) around
transaction cycles. For example, problems involving sales are likely to be
organized together in LTM.
336 B.K. Church A. Schneider

The authors investigate whether providing auditors with a hypothesis from a

particular transaction cycle inhibits their retrieval of additional hypotheses
from the same transaction cycle. More specifically, we investigate interference
effects within a category. No other auditing studies have looked at these effects
at the category level, yet such effects can hamper auditors’ performance of
diagnostic processes; that is, interference effects can influence auditors’ genera-
tion of additional hypotheses and, in turn, their accumulation of evidence.
Therefore, examination of interference effects within a category is warranted.
Such effects are most likely to occur when the number of alternative cate-
gories from which to access available hypotheses is small. This condition is apt
to be fairly common. In many cases, auditors may consider hypotheses
(involving problems) from few alternative categories because few misstate-
ments have been discovered on previous years’ engagements (Hylas and
Ashton 1982; Loebbecke, Eining, and Willingham 1989; Ashton 1991); that is,
an examination of previous years’ working papers indicates a small number of
areas (transaction cycles) in which misstatements are likely to occur. As well,
auditors may consider hypotheses from few alternative categories to improve
audit efficiency and to make the diagnostic process cognitively manageable
(Snowball 1980).
Consider the following example illustrating interference effects at the
cate- gory level when hypotheses are considered from two alternative
categories. Suppose an unexpected fluctuation is uncovered in a client’s
gross margin ratio. The cause of this fluctuation is believed to be a problem
(error or irreg- ularity) with either the sales or purchases transaction cycle.
An auditor is given the task of discovering the exact source of this
fluctuation. In the process of performing the task, the auditor’s superior
suggests a specific sales problem (e.g., sales cutoff error) as being the cause.
The likelihood of retrieving additional sales problems is affected by the
associations in LTM among the inherited sales problem, competing sales
problems, competing purchases problems, and lhe contextual setting. The
superior’s suggestion of a specific sales problem serves to heighten the relative
strength of associations between that problem and the contextual setting;
however, it also may diminish the relative strength of associations between
competing problems and the contextual setting. When the number of alterna-
tive categories from which to generate additional problems is reduced (say to
two as in the example), the availability of competing problems is reduced. In
turn, the relative strength of the inherited sales problem is intensified, and the
likelihood of re-retrieving this problem is increased.
The re-retrieval of the sales problem may create an interference effect
within the sales category. As the inherited sales problem is re-retrieved, the
strength of associations between that problem and the contextual setting
increases. The authors suggest that as the relative strength of the inherited
sales problem increases, the relative strength of associations between
compet- ing sales problems and the contextual setting decreases. This result
is expected because the inherited sales problem and competing sales
problems are closely
 Auditors’ Generation of Diagnostic Hypotheses 337

associated: the problems are from the same category. By comparison, as the
inherited sales problem is re-retrieved, the relative strength of associations
between competing purchases problems and the contextual setting is likely to
be unaffected. This result is expected because the inherited sales problem
and competing purchases problems are not as closely associated: the
problems are from divergent categories. Therefore, the auditor is likely to
have more diffi- culty generating additional sales problems than additional
purchases prob- lems.
Interference effects within a category are expected regardless of whether
the superior’s suggestion involves a typical problem or an atypical problem.
Libby and Frederick (1990) suggest that typicality impacts the category
mem- bership of additional hypotheses retrieved from LTM, for which
typical prob- lems are defined as those that occur frequently and atypical
problems are defined as those that occur infrequently (see also Barsalou
1985; Nosofsky 1988). This paper suggests that when auditors consider few
alternative cate-
gories,2 typicality does not impact the presence of interference effects at the
category level, but it may impact the strength of such effects. A suggestion of a
typical problem is more strongly associated with the contextual setting than a
suggestion of an atypical problem (Libby and Frederick 1990, 353, n. 5). This
assertion implies that a typical problem is more likely to be re-retrieved than
an atypical one. In turn, interference effects within a category may be more
pronounced when a superior suggests a typical problem.
This paper focuses primarily on the effects of a superior’s suggestion of a
typical problem. A superior is much more likely to suggest a typical problem
as opposed to an atypical problem (Libby 1985), and in turn, auditors are
much more likely to inherit a typical problem. Based on the earlier discussion,
our research hypothesis, expressed in its alternative form, is as follows:
H p: Auditors who inherit a superior’s suggestion are less likely to generate
additional hypotheses from the same transaction cycle as that of the supe-
rior’s suggestion than are auditors who do not inherit a hypothesis.

Auditors’ preexisting or general beliefs are likely to impact the strength of

associations between problems and the contextual settin, g 3 Going back to the
example, if the auditor believes, in general, that the unexpected fluctuation is
likely to be caused by a sales problem, the relative strength associated with com-
peting sales problems is heightened and the likelihood of retrieving additional
sales problems is increased. In contrast, if the auditor believes, in general, that
the unexpected fluctuation is likely to be caused by a purchases problem, the
relative strength associated with competing sales problems is weakened and the
likelihood of generating additional sales problems is decreased. Preexisting
or general beliefs are shaped through education and experience. Hence, they
are not manipulated in this study, but an attempt was made to measure them.
As discussed later, participants’ general beliefs may provide some insights into
the experimental findings.
338 B.K. Church A. Schneider

Reecurch methods

The current study used 50 experienced staff and audit seniors as participants.*
The participants were provided by nine national accounting firms located in a
large city in the United States. Participants had an average of 1.96 years of
audit experience. The range of experience was one-half year to four years, and
48 of 50 participants had at least one year of audit experience. 5
Experienced staff and audit senion were used as participants because they
are likely to have inherited a hypothesis from a superior on previous audits. The
use of experienced staff and audit seniors as participants is appropriate because
the experimental task is straightforward. The results in Abdolmohammadi and
Wright (1987) and Bonner (1990) suggest that experienced staff and audit
seniors perform capably on noncomplex tasks.

Procedures
The research design consisted of two treatment groups and a control group.
Participants in both treatment groups inherited a hypothesis from their
immediate superior, whereas participants in the control group did not inherit a
hypothesis.
The research questionnaires were administered via personal visits to the
participants by one of the researchers. The experimental task was similar to
that used by Libby (1985). Initially, participants were provided with back-
ground information about a hypothetical client, indicating the client’s size
and line of business. Next, participants learned that the client’s gross margin
ratio was higher than expected (discovered during preliminary analytical
proce- dures). They were told that the surrounding economic conditions had
not changed and, as such, they could assume that the unexpected fluctuation
was due to a problem with a particular account balance. Specifically, they
were informed that the problem involved either the account balance for net
sales or net purchases. Participants were told that their objective was to
identify potential problems (i.e., errors or irregularities) that were likely to
be the cause of the unexpected fluctuation. Some additional information
about sales and purchases also was provided to participants. To this point,
all participants received the same set of materials.
Next, participants in both treatment groups were provided with a superior’s
suggestion* as to the cause of the unexpected fluctuation. Participants in one
group inherited a sales cutoff error (sales group). and those in the other
group inherited a purchases cutoff error (purchases group). Cutoff errors
were used because they occur frequently (Hylas and Ashton 1982; Coakley
and Loebbecke 1985; Ham, Losell, and Smeiliauskas 1985) and so are likely
to be suggested by a superior (Libby 1985). The source of the inherited
hypothesis (cutoff error) was identified as a superior with whom participants
had worked previously (as well as currently). Previous research (e.g.,
Rebele, Heintz, and Briden 1988) suggests that auditors are sensitive to the
source of inherited hypotheses. In general, hypotheses provided by superiors
are viewed as credi- ble (e.g., Anderson and Kida 1990).
 Auditors’ Generation of Diagnostic Hypotheses 339

Actual superiors’ names were included in the experimental materials.*

Participants in both treatment groups were led to believe that their immediate
superior from a recent engagement had at an earlier time completed a similar
task in which he or she identified the one problem most likely to cause an
increase in the gross margin ratio. Participants were told that their superiors
consented to allow their names and responses to be included in the experi-
mental materials. The reasons for including superiors’ names and suggestions
were to enhance the realism of the task (i.e., communication between a supe-
rior and a subordinate occurs throughout an engagement) and to assist partici-
pants in identifying likely problems. Moreover, we wanted the source to be a
known and respected individual. Subsequently, participants in both treatment
groups were required to list three additional problems* (errors or irregulari-
ties) that were likely to account for the unexpected fluctuation in the client's
gross margin ratio. Participants were told to assume that the unexpected fluc-
tuation was caused by a single problem or multiple occurrences of the same
problem (i.e., there is only one cause). Further, they were instructed to list the
problems in the order that they came to mind and to be specific about the
accounts affected by each problem. This instruction was intended to force par-
ticipants to express themselves clearly and, in turn, to make their responses
easier to code as being attributable to a misstatement of sales or a misstate-
ment of purchases.
Because participants in both treatment groups were informed that the
source of the unexpected fluctuation involved either sales or purchases, they
were made aware of the set of alternative categories. Participants in the sales
group were cognizant of the possibility of problems involving purchases, and
participants in the purchases group were cognizant of the possibility of prob-
lems involving sales. The fact that participants were instructed to consider
problems from only two different categories creates a situation that is con-
ducive to producing an interference effect within a category.
As previously mentioned, the research design also included a control
group. Participants in this group were not provided with a superior’s sugges-
tion. Otherwise, they received the same set of instructions as participants iii
the treatment groups, with one exception. Participants in the control group
were required to list four additional problems (errors or irregularities) that
were likely to account for the unexpected fluctuation in the gross margin
ratio. They were required to recall one more problem than participants in the
treat- ment groups because they had the opportunity to recall and list all
available problems. Treatment participants, on the other hand, did not have
the oppor- tunity to recall and list the inherited problem.
Next, participants were administered a background questionnaire. All par-
ticipants were asked to indicate (1) the amount of their audit experience and
(2) their general belief as to whether an overstatement of the gross margin
ratio is caused by a misstatement of sales or purchases. Participants in both
treatment groups also were asked to write down the problem that they had
inherited (i.e., their superior’s suggestion). This question was included as a
 340 B.K. Church A. Schneider

manipulation check to ensure that participants attended to their superior’s

suggestion. Furthermore, participants in both treatment groups were asked to
indicate whether the experimental superior (whose name was included in the
experimental materials) was their immediate superior on their present work
assignment. Participants who responded negatively to this question were
asked to indicate how long it had been since they had worked with that supe-
rior. These questions were included as additional manipulation checks. Last,
participants were debriefed and dismissed.

Results
Preliminary findings
First, participants’ responses to the questions concerning the manipulation
check were examined. One participant was unable to correctly recall his
supe- rior’s suggestion, and another participant had not worked previously
with the experimental superior (i.e., the superior identified on the
participant’s ques- tionnaire). Also, one participant failed to answer the
questions concerning the manipulation check. These three participants were
excluded from the analysis discussed below. The results reported throughout
the remainder of this sec-
tion were obtained using participants who attended to their superior’s sugges-
tion and who had worked previously with their experimental superior.10
Next, the quality of participants’ responses were reviewed to ensure that
they were at a sufficient level to perform the experimental task. Participants’
responses (the problems listed) were classified as plausible or implausible.** A
response was classified as plausible if it could explain the unexpected increase
in the gross margin ratio. A response was classified as implausible if (1) it did
not involve sales or purchases, (2) it did not involve an error or irregularity, or
(3) it could not explain the unexpected increase in the gross margin ratio (e.g.,
a problem that could explain an unexpected decrease in the gross margin
ratio). Of 165 responses,12 131 (or 79 percent) were classified as plausible.
This rate is higher than that reported by Tubbs (1992), and it is near that
reported by Libby and Frederick (1990) for more experienced auditors (i.e.,
managers). The present findings indicate that participants were of a
sufficient level to capably complete the experimental task.
Last, the number of different types of problems listed by participants was
investigated to ensure that the results could not be attributed to a small num-
ber of problems being available in LTM (i.e., a statistical artifact). For exam-
ple, if only four problems are available and one is suggested, then the other
three problems will be generated. Any significant result would be driven by
the small number of problems available. Hence, a list of problems generated
by participants was constructed and 27 different types were found. This find-
ing indicates that the results (presented below) are not attributable to a small
number of problems being available.
1

Main findings
The problems (generated hypotheses) listed by participants were classified as
 Auditors’ Generation of Diagnostic Hypotheses 341

affecting either sales or purchases.** The primary concern was with the
num- ber of problems listed in each category. Because participants (in
different groups) were required to list either three or four problems, the
proportion of problems listed in each category was analyzed. Press (1972,
264-265), hpw- ever, warns that when using proportions, variances will be a
function of group means. So, unequal means will cause group variances to
differ, which implies heteroskedasticity. Press recommends applying an
arcsin Up transformation to circumvent this problem. Hence, this
transformation was applied to the data of this study.
Each participant had a vector of responses representing the proportion of
problems listed affecting sales and the proportion of problems listed
affecting purchases. Because the proportions sum to 1, an analysis of both
proportions would be redundant. Therefore, only one proportion (that for
sales) was used as the dependent measure.
The analysis, however, may be complicated by the fact that participants in
the two treatment groups did not have an opportunity to recall and list the
inherited problem. Participants in the control group, on the other hand, had
an opportunity to recall and list all available problems. Libby (1985) and
Libby and Frederick (1990) focus only on problems that all participants
(both treatment and control) have an opportunity to list. They do not count
inher- ited problems (i.e., both the cutoff error that participants inherit as
well as the cutoff error inherited by participants in the other treatment group)
in deter- mining the proportion of problems listed in each category. This
approach is conservative in that it biases against finding an interference
effect in the
experimental task.14 Hence, the present study excluded inherited problems
(i.e., cutoff errors) in its main analysis.*5 A one-way ANOVA was performed
to test for differences between participants in the three groups.

ANOVA results
The ANOVA results are shown in panel A of Table 1. The group variable had
a significant effect at p < .04. An inspection of the group means, however, is
necessary to determine whether this result is consistent with the expected inter-
ference effect. Both transformed and raw means are presented in panel B of
Table 1. The raw means (computed without applying the arcsin Up transfor-
mation to the data) are presented solely for descriptive purposes.@6
As panel B of Table 1 indicates, participants who inherited a sales cutoff
error listed fewer problems affecting sales than (1) participants who inherited
a purchases cutoff error and (2) participants who did not inherit an error.
This finding suggests that providing participants with a sales cutoff error
interferes with the generation of additional errors affecting sales. Contrary to
the expec- tation, participants who inherited a purchases cutoff error did not
list signifi- cantly more sales errors than did participants in the control group.
To further investigate the findings, the authors examined participants’
gen- eral beliefs as to the cause of an overstatement in the gross margin
ratio. All
342 B.K. Church A. Schneider

TABLE 1
A2'iOVA results: The effects of inheriting a superior’s suggestion on
participants’ generation of additional hypotheses
Panel A: Inlterhed hypotheses are zzot cozasteA
Source df Sum of squares Mean square F-test
Between groups 2 .859 .429 3.67
Within groups 44 5.148 .117 p -- .P ›36
Total 46 6.006
Paxzel B: Group
means
Group Count Transformed mean’ Raw mean
Sales 16 .455 At .26
Purchases 15 .727 B .461
Control 16 .751 B .468

Transformed means are the proportion of problems listed affecting sales after
applying the arcsin Up transformation, which is used in the ANOVA.
Raw means are the proportion of problems listed affecting sales without applying the
arcsñi Up transformation. The raw means are presented for descriptive purposes.
transformed means that do not share the same letter are significantly different
(P < .o5).

TABLE 2
Contingency table for general beliefs as to the cause of an overstatement in the gross
margin ratios
Sales Purchases Control
Response group group group Totals
Probably sales 4 3 8 17
Probably purchases 10 12 4 24
Don’t know 1 0 3 4
Totals
‘Two participants did not respond to this question. Therefore, n = 45 instead of n = 47.

participants were asked to respond to the following question: “In general, do

you think that an overstatement in the gross margin ratio is more likely to be
caused by a problem with sales or purchases?” They could respond (1) proba-
bly sales, (2) probably purchases, or (3) don’t know. The number of partici-
pants per group choosing each response is shown in Table 2.* 7
A casual inspection of Table 2 suggests that the general beliefs of partici-
pants in the treatment groups were different from those of participants in the
control group. The authors do not have an explanation for these differences.
However, the efforts to randomly assign participants to experimental groups
 Auditors’ Generation of Diagnostic Hypotheses 343

were somewhat restricted. Experimental materials were slightly different for

different treatment participants: each treatment participant’s materials
included the name of an actual superior. As a result, the authors were pro-
vided a list of prospective participants by participating firms and prepared
individual experimental materials prior to meeting with the participants.
Unfortunately, on a few occasions, participants who were not on the
prospec- tive list substituted, without the authors’ prior knowledge, for
participants who were unable to meet with them. To avoid wasting these
participants, they were provided with materials prepared for the control
group.*®
An examination of Table 2 suggests that participants in the sales group and
those in the purchases group had similar general beliefs, so these two groups
are directly comparable. As indicated in Table 1, the sales groups listed
signif- icantly fewer erson affecting sales than did the purchases group. The
compari- son between these two groups in Table 1 clearly suggests that the
manipula- tion had an effect, and it provides some evidence of an
interference effect. A comparison between each treatment group and the
control group, however, is much more difficult because the general beliefs
are not the same. The authors cannot say conclusively whether the
significant difference between the sales group and the control group
(reported in Table 1) is caused by the manipula- tion or by differing general
beliefs. Nor can they say conclusively whether the lack of a significant
difference between the purchases group and the control group (reported in
Table 1) is caused by the manipulation or by differing gen- eral beliefs.
Nevertheless, the authors believe that the significant difference between the
sales group and the purchases group provides some evidence of an
interference effect.

First error listed

The first error listed by participants was analyzed to investigate how quickly
an interference effect could come into play. There was no a priori expectation,
and, therefore, this analysis is intended to provide additional insights. A con-
tingency table was constructed to compare the classification of the first prob-
lem listed by participants in each treatment group with the classification of the
first problem listed by participants in the control group. Cutoff errors were
initially included in analyzing the data. The results are shown in Table 3.

TABLE 3
Contingency table for the first error listed
Saies Purchases Control
First error listed group group groap Totals
Error affecting sales 1 9 12 22
Error affecting purcbases 15 6 4 2S
Totals 16 Chi-square = 16.727 and p -- .0002.
15 16
344 B.K. Church A. Schneider

The chi-square result indicates that the first error listed was not indepen-
dent of the participant’s group. Fifteen of 16 participants in the sales group
listed a purchases error first. Although this result suggests that an interference
effect comes into play very quickly, this finding also could be explained by par-
ticipants’ general beliefs (i.e., participants in the sales group believed that, in
general, a misstatement of the gross margin ratio is caused by an error affecting
purchases). By comparison, a majority of participants in the purchases group
listed a sales error first. These participants believed that, in general, an over-
statement in the gross margin ratio is caused by a misstatement of purchases In
spite of their general beliefs, though, they were inclined to list a sales error
first. Hence, this result provides convincing evidence of an immediate interfer-
ence effect. Although a majority of participants in the control group also listed
a sales error first, this finding appears to reflect their general belief that an
overstatement in the gross margin ratio is caused by a misstatement of sales.
The analysis discussed above, excluding cutoff errors, was repeated. The
purpose of this additional analysis was to determine whether the results
reported in Table 3 were driven by participants listing cutoff errors first. If
that is the case, the results do not necessarily suggest that an interference
effect comes into play very quickly. The superior’s suggestion initially may
have facilitated the retrieval of other errors concerned with the same audit
objective (e.g., Libby 1985, 664), as opposed to interfering with the retrieval of
other errors from the same transaction cycle. A contingency table was con-
structed to compare the classification of the first noncutoff error listed by par-
ticipants in each of the three groups.
The results are shown in Table 4. The findings are almost identical to those
discussed above. The first noncutoff error listed by participants in both treat-
ment groups tended to be from the transaction cycle that was different from
that of their superior’s suggestion. Thus, the results suggest that the superior’s
suggestion interferes with the generation of additional hypotheses from the
same transaction cycle at a very early stage.

Secondary findings
The authors conducted an additional experiment to investigate whether the

TABLE 4
Contingency table for the first error listed excluding cutoff errors
Sales Purchases Control
First error listed group group group Totals
Error affeding sales 2 9 12 23
Error affecting purchases 14 6 4 24
Totals 16 15 16 47

Chi-square = 13.585 and p -- .ID11.

 Auditors’ Generation of Diagnostic Hypotheses 345

results hold when auditors inherit an atypical problem rather than a typical
one. The procedures were identical to those used in the earlier experiment
except that the superior’s suggestion differed. Data were collected from 46
additional participants who inherited a mechanical error recording either sales
returns or purchases returns. Archival data suggest that such errors occur
infrequently (Ashton and Hylas 1982; Coakley and Loebbecke 1985; Ham et
at. 1985) and, thus, may be considered atypical. Participants’ responses were
analyzed along with the responses of the 16 control group participants who
took part in the earlier experiment. Evidence of an interference effect was
found, although it was slightly weaker than that found in the earlier experi-
ment. Unlike the earlier experiment, however, the interference effect did not
come into play quickly when auditors inherited an atypical problem.

The purpose of this study was to investigate interference effects at the cate-
gory level. It examined whether a superior’s suggestion influences the cate-
gory membership of additional hypotheses retrieved from LTM, in particular
when hypotheses from few alternative categories are considered. The results
are consistent with the expected interference effect. Auditors who inherited a
superior’s suggestion from a particular transaction cycle generated fewer addi-
tional hypotheses from the same transaction cycle than did auditors who were
not provided with a superior’s suggestion. Moreover, the effect came into play
immediately when auditors inherited a hypothesis involving a typical problem:
the first hypothesis listed (generated) tended to come from a different transac-
tion cycle than that of the superior’s suggestion.
This paper focused on auditors’ generation of additional hypotheses in
response to a superior’s suggestion of a typical problem. This focus is
justified because auditors are much more likely to inherit a typical
hypothesis as opposed to an atypical one. Nevertheless, an additional
experiment was con- ducted in which participants were provided with a
superior’s suggestion of an atypical problem. Libby and Frederick (1990)
found that typicality can affect the category membership of additional
hypotheses retrieved from LTM. It was found that in the experimental
setting, typicality does not impact the pres- ence of interference effects at the
category level. Hover, typicality appears to affect how quickly interference
effects come into play: the category member- ship of the first hypothesis
listed (generated) by auditors who inherited an atypical hypothesis did not
tend to come from any particular category.
A difference between this study and that of Libby and Frederick is that
the current one examined an experimental setting in which participants were
instructed to consider hypotheses from few alternative categories. It argues
that such a setting is realistic and that in this setting, typicality is unlikely to
impact the occurrence of interference effects within a category. By compari-
son, Libby and Frederick examined an experimental setting in which partici-
pants could consider hypotheses from many alternative categories. Other dif-
ferences also are apparent between this study and that of Libby and
346 B.K. Church A. Schneider

Frederick, which in turn could account for the different findings. First, this
study used an actual superior’s name in the experimental materials for the
source of an inherited hypothesis, as opposed to a suggestion without any spe-
cific source. Second, it had participants focus on an unexpected fluctuation in
only one financial ratio rather than several. Third, it prompted participants
with the set of alternative category names, whereas Libby and Frederick did
not provide such a prompt. Finally, it elicited a small number of additional
hypotheses (three) in contrast to the six elicited by Libby and Frederick.
The present study is subject to the caveats of usual controlled experi-
ments. As noted previously, the assignment of participants to experimental
groups was not entirely random. The interpretation of the findings is some-
what limited in that treatment participants had different general beliefs than
did control participants. Further, the test for an interference effect is a joint
test of the effect of a superior’s suggestion and of auditors’ organization of
knowledge in long-term memory. It is assumed here that knowledge of prob-
lems (errors and irregularities) is organized, at a superordinate level. by
transaction cycle. This assumption seems reasonable in light of prior
research (Waller and Felix 1984; Libby 1985; Cushing and Loebbecke 1986;
Libby and Frederick 1990; Tubbs 1992). Another possible limitation is that
participants’ responses may have been affected by the ability to recall more
recently experienced errors.
Despite the limitations discussed above, these findings provide useful
insights into an area that is receiving increasing attention in auditing.
Previous studies have examined various issues related to interference effects;
however, the authors are not aware of any studies that have examined such
effects within a category. Some of the issues that have been investigated
previously include the effect of the number of inherited items on auditors’
probability assessments of the number of missing items (Rennie 1992), the
effect of pro- viding auditors with an incomplete problem representation on
their retrieval of the correct problem representation (Bedard and Biggs
1991a, 1991b), and the effect of the order in which participants are
instructed to think about items from alternative categories on their retrieval
of additional items and on their probability assessments of items from
alternative categories occurring (Moser 1989; Heiman 1990; Anderson et al.
1992; Koonce 1992). The results of these studies are largely mixed. In some
cases, interference effects are found, and in others, such effects are not
found. Much more needs to be learned about the potential inhibiting effects
of inherited items (Kinney and Haynes 1990; Koonce forthcoming). Hence,
the authors encourage future research that investigates issues surrounding
interference effects.

Endnote8
1 Using this pr mdure, participants are required to recall a list of items seen
previ- ously. Some participants are prompted with a subset of the items (i.e.,
part of the list) wbile others are not. Frederick (1991) has applied this procedure
to an internal control setting using auditors and found evidence of an
interference effect.
 Auditors’ Generation of Diagnostic Hypotheses 347

2 Libby and Frederick used an experimental setting in which bypotheses from many
alternative categories could be considered: participants’ responses were coded into
one of seven categories.
3 Preexisting or general beliefs may re0ect domain-specific knowledge possessed by
participants. The importance of such knowledge has been dismissed elsewhere
(Bonner 1990; Bonner and Lewis 1990; Bonner and Pennington 1991; Bedard and
Biggs 1991b).
4 The autbors also conducted a pilot study using nine participants provided by a
national accounting finn. The procedures, discussed in the next subsection, were
modified slightly based on the findings of tbe pilot study.
5 In general, the results are unchanged if the two participants witb less than one year
of experience are excluded from the analysis.
6 As in Libby’s study (1985, 654, n. 6), the esect of the participant’s relations witb his
or ber superior ie ao oazitted variable ia tbe preheat dcsigo. Tbis study assuages
that the effect of this variable randomizes across participants in different groups.
7 Of course, the authors obtained the consent of the superior before using his or
her name.
8 To control the information provided to the various experimental groups, actual sug-
gestions from superiors could not be used. Participants were debriefed fo£owing the
experimental task and informed tbat their superior had not actually provided the
suggestion. The reasons for induding superiors’ names in the experimental materials
were also discussed. No one was observed taking offense at the way the task was
conducted. Further, the experimental materials were approved by a university
human subjects committee. These procedures are entirely consistent with the guide-
lines put forth by the American Psychological Association, as well as the Canadian
Psychological Associafion. See Dopuch (1992) and Gibbins (1992) for a general dis-
cussion about the value of deception in complex experimental designs.
Asking for a large number of addioonal problems would be inappropriate because
auditors, in general, have limited experience with financial statement errors (Ashton
1991) and irregularities (Loebbecke ct al. 1989). The results of the pilot study indi-
cated that participants who inherited a problem could generate three additional
problems witbout too much difficulty.
10 Althougb some treatment participants were not presently working on the same
engagement as their experimental superior, most had worked witb them recently.
This was not surprising because there was a lag between the time of obtaining supe-
riors’ names and administering the experimental task.
11 Initially, both authors coded all data independently and then compared results.
There were very few discmpancies, and these were resolved after discussion.
SubsequenUy, a colleague of one of the authors recoded the data to validate the
original codings. The colleague had auditing experience and was blind as to the pur-
ple of the study. The recoded data were virtually identical to the original codings.
12 Although treatment participants were instructed to list three additional problems
and control participants were instructed to list four problems, some subjects listed
more than three or four problems. All problems listed were classified.
13 Two participants listed one problem that could not be classified as affecting either
sales or purchases. One participant listed two problems that could not be classified
as affecting either sales or purchases. These problems were not counted in the
analysis because participants were specifically instructed to list problems that
affected either sales or purchases.
14 For example, a participant who inherits a sales cutoff error may list a purchases
cut- off error, a purchases recording error (transaction recorded at an incorrea
amount), and a sales recording error. If inherited problems are not counted, tbe
proportion of problems listed affecting sales is 1f2 (i.e., the purchases cutoff error
is not counted). If inherited problems are counted, on the other band, the
proportion of problems
348 B.K. Church A. Schneider

listed affectiiig sales is 1/3 (i.e., the purchases cutoff error is counted). The former
approach works against finding an interference effect because the proportion of
problems affec’ting sales is greater (i.e., 1f2 > 1f3).
15 Although not reported, the results are stronger if cutoff errors are included in the
analysis.
16 The results are unchanged if the analysis is performed using the untransformed data.
17 The participants were also asked, in an open-ended manner, tbe following: “In gen-
eral, what problem do you think is the most likely cause of an overstatement in the
gross margin ratio†" The responses were classified as affecting sales, purcbases, or
neither. The results were virtually identical to those reported in Table 2.
18 A total of four participants was substituted into the control group. The analyses
were repeated excluding these participants and, in general, the results were unaf-
fected.

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