church1993.pdf

Auditors' Generation of Diagnostic
Hypotheses in Response to a Superior's
Suggestion: Interference Effects*
BRYAN K. CHURCH Wilfrid Laurier University
ARNOLD SCHNEIDER Emory University
Abstract. This study investigates the effects of a supedor'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
hypotheses retdeved from LTM, in particular when hypotheses from few alternative
categodes are considered. Based on research in cognitive psychology, the authors pre-
dicted that providing auditors with a supedor's suggestion would interfere with their
generation of additional hypotheses from the same transaction cycle as that of the supe-
dor's suggestion. The expedmental results are consistent with the expected interfer-
ence effect. Auditors who inhedted a supedor'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 supedor's suggestion. Moreover, the effect
came into play immediately when auditors inhedted a hypothesis involving a typical
problem: the first hypothesis generated tended to come from a different transaction
cycle than that of the supedor's suggestion.
Risumi. Dans l'artide qui suit, les auteurs se penchent sur Tinddence que peut avoir la
suggestion d'un supedeur sur les hypotheses suppiementaires que formulent les vedfi-
cateurs en puisant dans la « m^moire k long terme ». Ds cherchent 4 determiner si une
hypothSse transmise exerce une influence sur la categode h laquelle appartiennent les
hypotheses suppiementaires tires de la memoire h long terme, en particulier lorsque les
hypotheses envisag^es proviennent d'un petit nombre de categodes possibles. En
s'appuyant sur la recherche en psychologie cognitive, les auteuts supposent que la sug-
gestion communiqu^e par un supedeur aux vedficateurs perturbera chez ces derniers la
formulation d'hypoth^ses suppiementaires tirees du meme cycle d'op^rations que celui
dont provient la suggestion du supedeur. Les resultats expedmentaux des chercheurs
confirment cet effet perturbateur. Les vedficateurs h qui un supedeur a transmis une
suggestion d'hypothSse provenant d'un cycle d'operations donne ont formuie moins
d'hypothSses suppiementaires provenant du meme cycle d'operations que les vedfica-
teurs h qui aucune suggestion n'a ete faite par un supedeur. En outre, l'effet perturba-
* The authors gratefully acknowledge the helpful comments of Steve Allen, Bdan Gaber,
Tom McKee, Frededck 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 Accounting Research Vol. 10 No. 1 (Fall 1993) pp 333-350 ®CAAA

334 B.K. Church A. Schneider
teur se manifeste imm^diatement au moment oh les verificateurs se voient transmettre
une hypothSse faisant intervenir un problfime type: la premiere hypothdse formulae
tend i provenir d'un cycle d'op^rations different de celui dont la suggestion du
sup^deur 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 fiuctuations in financial data. They often formulate
diagnostic hypotheses to direct their search for such evidence (e.g., Einhom
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 efficiently 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 tum 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 Ouilliam 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.
Framework
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).^
Although the discussion above refers to interference effects that infiuence
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 aU 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.

TTie 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 tum, 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. TTiis 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 the 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

assodated: 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 assodated: 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 altemative 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 tum, 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 altemative form, is as follows:
H^. 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 setting.^ Going back to the
example, if the auditor believes, in general, that the unexpected fiuctuation 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 fiuctuation is likely to be caused by a purchases problem, the
relative strength assodated 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.

Research methods
Participants
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.^
Experienced staff and audit seniors 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 Abdohnohammadi 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 leamed 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 fiuctuation 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 fiuctuation. 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 Ouctuation. 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).

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 fiuctuation in the client's
gross margin ratio. Participants were told to assume that the unexpected fiuc-
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 tum, 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 fiuctuation involved either sales or purchases, they
were made aware of the set of altemative 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 in
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 fiuctuation 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

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 conceming 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.^''
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,^^ 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 wiU be generated. Any significant result would be driven by
the smaU 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.
Main findings
The problems (generated hypotheses) listed by participants were classified as

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), how-
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 Vp 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. TTiey 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.*** Hence, the present study excluded inherited problems
(i.e., cutoff errors) in its main analysis.^^ 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 Vp transfor-
mation to the data) are presented solely for descriptive purposes.^^
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

TABLE 1
ANOVA results: The effects of inheriting a superior's suggestion on partidpants'
generation of additional hypotheses
Panel A: Inherited hypotheses are not counted.
Source df Sum of squares
Between groups
Within groups
Total
Panel B: Group means
Group
Sales
Purchases
Control
2
44
46
Count
16
15
16
.859
5.148
6.006
Mean square
.429
.117
Transformed mean*
.455 A*
.727 B
.751 B
F-test
3.67
p = .O336
Raw mean'f
.26
.461
.468
^Transformed means are the proportion of problems listed affecting sales after applying
the arcsin Vp transformation, which is used in the ANOVA.
^Raw means are the proportion of problems listed affecting sales without applying the
arcsin V p transformation. The raw means are presented for descriptive purposes.
transformed means that do not share the same letter are significantly different
(p < .05).
TABLE 2
Contingency table for general beliefs as to the cause of an overstatement in the gross
margin ratio'
Response
Probably sales
Probably purchases
Don't know
Totals
Sales
group
4
10
1
11
Purchases
group
3
12
0
11
Control
group
8
4
3
15
Totals
17
24
4
45*
*Two partidpants did not respond to this question. Therefore, n = 45 instead of « = 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.^'
A casual inspection of Table 2 suggests that the general beliefs of partid-
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

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 errors 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
Error affecting sales
Error affecting purchases
Totals
first error listed
Sales
group
1
15
F^irchases
group
9
6
15
Control
group
12
4
16
Totals
22
25
47
Chi-square = 16.727 and p = .0002.

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 ptu-chases. 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 fmdings
The authors conducted an additional experiment to investigate whether the
TABLE4
Contingency table for the
First error listed
Error affecting sales
Error affecting purchases
Totals
first error listed excluding cutoff errors
Sales
group
2
14
16
Purchases
group
9
6
15
Control
group
12
4
16
Totals
23
24
47
Chi-square = 13.585 andp = .0011.

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
al. 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.
Discussion
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 altemative categories. Other dif-
ferences also are apparent between this study and that of Libby and

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.
Endnotes
1 Using this procedure, 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) while otheis are not. Frederick (1991) has applied this procedure to an intemal
control setting using auditors and found evidence of an interference effect.

2 Libby and Frederick used an experimental setting in which hypotheses from many
altemative categories could be considered: partidpants' responses were coded into
one of seven categories.
3 Preexisting or general beliefs may reflect domain-spedfic knowledge possessed by
partidpants. The importance of such knowledge has been discussed elsewhere
(Bonner 1990; Bonner and Lewis 1990; Bonner and Pennington 1991; Bedard and
Biggs 1991b).
4 The authors also conducted a pilot study using nine partidpants provided by a
national accountingfirm.The procedures, discussed in the next subsection, were
modified slightly based on the findings of the pilot study.
5 In general, the results are unchanged if the two partidpants with less than one year
of experience are excluded from the analysis.
6 As in Ubby's study (1985,654, n. 6), the effect of the partidpant's relations with his
or her superior is an omitted variable in the present design. This study assumes that
the effect of this variable randomizes across partidpants 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. Partidpants were debriefed following the
experimental task and informed that their superiors 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 Assodation, as well as the Canadian
Psychological Assodation. See Dopuch (1992) and Gibbins (1992) for a general dis-
cussion about the value of deception in complex experimental designs.
9 Asking for a large number of additional problems would be inappropriate because
auditors, in general, have limited experience with finandal statement errors (Ashton
1991) and irregularities (Loebbecke et al. 1989). The results of the pilot study indi-
cated that partidpants who inherited a problem could generate three additional
problems without too much difficulty.
10 Although some treatment partidpants were not presently working on the same
engagement as their experimental superior, most had worked with 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 discrepandes, and these were resolved after discussion.
Subsequently, 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-
pose of the study. The recoded data were virtually identical to the original codings.
12 Although treatment partidpants were instructed to list three additional problems
and control partidpants were instructed to list four problems, some subjects listed
more than three or four problems. All problems listed were classified.
13 Two partidpants listed one problem that could not be classified as affecting either
sales or purchases. One partidpant listed two problems that could not be classified
as affecting either sales or purchases. These problems were not counted in the
analysis because partidpants were spedfically instructed to list problems that
affected either sales or purchases.
14 For example, a partidpant who inherits a sales cutoff error may list a purchases cut-
off error, a purchases recording error (transaction recorded at an incorrect amount),
and a sales recording error. If inherited problems are not counted, the proportion of
problems listed affecting sales is 1/2 (i.c., the purchases cutoff error is not counted).
If inherited problems are counted, on the other hand, the proportion of problems

listed affecting 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 affecting sales is greater (i.e., 1/2 > 1/3).
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 partidpants were also asked, in an open-ended manner, the following: "In gen-
eral, what problem do you think is the most Ukely cause of an overstatement in the
gross margin ratio?" The responses were classified as affecting sales, purchases, or
neither. The results were virtually identical to those reported in Table 2.
18 A total of four partidpants was substituted into the control group. The analyses
were repeated excluding these partidpants and, in general, the results were unaf-
fected.
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