The Impact of an Auditor's Initial

Hypothesis on Subsequent Performance

at Identifying Actual Errors*
VICKY B. HEIMAN-HOFFMAN University of Pittsburgh
DONALD V. MOSER University of Pittsburgh
JERRY A. JOSEPH Indiana University of Pennsylvania

Abstract. Previous work on hypothesis generation demonstrates that auditors tend to gen-
erate frequently occurring financial statement errors as their initial hypotheses to explain
unexpected fluctuations. However, such work does not examine how the initially generat-
ed hypothesis affects subsequent performance at identifying an actual error. We hypothe-
sized that the initially generated hypothesis would interfere with an auditor's ability to
subsequently switch to a different hypothesis. Thus, if the initial hypothesis were incor-
rect, auditors would find it difficult to switch hypotheses in order to identify an actual
error. Moreover, initially generating a frequent error would exacerbate this difficulty.
Auditor-subjects were asked to generate an initial error hypothesis after seeing a pattem
of fluctuations in which sales and accounts receivable were overstated. After they gener-
ated their initial hypothesis, half of the subjects were provided with additional informa-
tion that was consistent with a very frequent error (sales cutoff) and the other half were
provided with information consistent with an infrequent error (sales recorded twice). As
expected, we found that initially generating the very frequent error (i.e., sales cutofO ver-
sus some other less frequent error affected auditors' subsequent performance at identify-
ing actual errors. Specifically, auditors who generated the very frequent error as their ini-
tial hypothesis performed best when it was the actua) error, but performed worst when the
infrequent error was the actual error. In contrast, auditors who generated a less frequent
error as their initial hypothesis performed moderately well (i.e., between best and worst)

* Accepted by Michael Gibbins. We thank both reviewers; Mohammad Abdolmohammadi,

Wendy Bailey, Jake Bimberg, Christine Carlock, Harry Evans, Eric Hirst, Andy Leone. Mark
Nelson, Steve Rau, Ken Trotman; participants of the USC Audit Judgment Symposium; par-
ticipants of the Audit Judgment Session at the 1993 annual meeting of the American
Accounting Association; and participants of workshops at the University of Arizona, Arizona
State University, University Laval, University of Notre Dame, and Michigan State University
for helpful comments on earlier drafts of this paper. This research was partially funded by a
research fellowship from the KPMG Peat Marwick Foundation (Vicky B. Heiman-Hoffman)
and a grant from the Katz Graduate School of Business (Donald V. Moser). We are grateful to
Lisa Koonce, Enc Hirst, and Fred Phillips for their help administering the experiment and to
Christine Carlock and Sherri Williams for their research assistance.

Contemporary Accounting Research Vol. 11 No. 2 (Spring 1995) pp 763-779 ®CAAA

764 Contemporary Accounting Research

both when the actual error was frequent and when it was infrequent. The implications of
these results for audit efficiency and effectiveness are discussed.

Several recent studies (e.g., Libby 1985; Marchant 1989; Libby and
Frederick 1990; Bedard and Biggs 1991a; Church and Schneider 1993)
examine auditors' hypothesis-generation behavior. Hypothesis generation
is considered an important part of auditor decision making because the
currently held hypothesis guides the search for further audit evidence
(Einhom 1976; Libby 1985; Church 1990; Bedard and Biggs 1991a,b).
This study extends ttie previous literature by investigating whether the
type of error hypothesis auditors generate to explain a financial statement
fluctuation affects their subsequent performance at identifying actual
errors. Specifically, we examine whether auditors' subsequent perfor-
mance at identifying frequent versus infrequent actual errors is afifected
by (1) the accuracy of the initially generated error hypothesis (i.e.,
whether the initially generated error is the actual error), and (2) the fre-
quency of the error initially generated as the hypothesized cause.
Libby (1985) and Libby and Frederick (1990) found that experienced
auditors tend to generate frequently occurring errors as hypotheses about
the cause of financial statement fluctuations. However, because the tasks
used in their studies did not have a correct answer, no conclusions could
be drawn regarding the effects of generating a frequent error on subse-
quent performance at identifying an actual error. It is reasonable to
assume that the tendency initially to generate a frequent error helps audi-
tors subsequently identify the actual error when the initially hypothesized
error is the actual error. However, auditors do not always initially gener-
ate the actual error. An auditor could initially generate a very frequent
error when the actual error is some other less frequent error. Also, an
auditor could initially generate a less frequent error when the actual error
is either a very frequent one or a different less frequent error.' Research
in psychology and accounting suggests that performance at identifying
the actual error may differ in predictable ways under each of these
conditions.
This study examines auditors' performance at identifying an actual
error under the various conditions specified above. Auditors were pre-
sented with a pattem of financial statement fluctuations that could be
explained by one of several errors and were then asked to generate an ini-
tial error hypothesis. One of the possible errors that could explain the
fluctuation was a very frequent error (sales cutoff), while the other possi-
ble errors were less frequent ones. Consistent with previous results, many
auditors generated the very frequent error (sales cutoff) as their initial
hypothesis, while other auditors' generated a variety of less frequent
errors. After generating their initial error hypothesis, the auditors were
provided with additional information that was consistent with a single
 Impact of an Auditor's Initial Hypothesis on Subsequent Performance 765

actual error. For half of the subjects, the additional information was con-
sistent with the very frequent error (sales cutoff). For the other half, the
additional information was consistent with a specific infrequent error
(sales recorded twice). This approach allowed us to examine how initial-
ly generating a frequent or infrequent error hypothesis affected subse-
quent performance at identifying the actual error when the initially gen-
erated error was the actual eiror as well as when it was not the actual
eiTor.

Theory and hypotheses

Libby (1985) investigated whether auditors tend to generate frequent
errors as possible explanations for unusual financial statement fluctua-
tions. His results suggest that (1) auditors are aware of the relative
frequency of specific actual errors,^ and (2) auditors tend to generate fre-
quently occurring errors as possible explanations (hypotheses) for unusu-
al financial statement fluctuations.
Auditors' awareness of the relative frequency of specific actual errors
has apparently led audit firms to adopt procedures that routinely test for
very frequent errors even in the absence of any evidence that such errors
may have occurred. For example, auditors are trained to test for sales cut-
off errors even though there may be no evidence suggesting that the
reported sales figure is incorrect. Consequently, all other things being
equal, when the actual error is a very frequent one such as a sales cutoff
error, the auditor is more likely to detect it than when the actual error is
another less frequent eiror (e.g., sales recorded twice). Thus, our first
hypothesis is:
HI: Auditors will detect a very frequent error (sales cutoff error)
more often than a less frequent error (sales recorded twice error).
Initially generating a frequent error could help auditors identify an
actual error if they use an iterative approach when generating and evalu-
ating hypotheses. Under such an approach, the auditor first generates the
most frequently occurring error as a hypothesis for a specific pattem of
fluctuations, and then evaluates whether the hypothesis is correct. If the
initial hypothesis is not correct, the auditor generates the next most fre-
quent eiTor as the next best hypothesis and evaluates it. This process pro-
ceeds until the auditor uncovers the actual error or concludes that there is
no error. Because, by definition, frequent errors occur more often on
audits than less frequent errors, auditors who initially generate a frequent
error hypothesis generally will detect actual errors more quickly than if
they randomly generate error hypotheses irrespective of actual error
frequencies.
As indicated above, auditors do not always initially generate the cor-
rect hypothesis. Initially generating an incorrect hypothesis is not a prob-
766 Contemporary Accounting Research

lem if, when faced with additional information indicating that the actual
error is some other error, the auditor can abandon the initiat hypothesis.^
However, research in psychology (e.g., Koriat, Lichtenstein, and
Fischhoff 1980; Hoch 1985) and accounting (e.g., Heiman 1990) suggests
that auditors may have difficulty doing this. Heiman's (1990) study on
hjT)othesis evaluation in anal5rtical procedures found that when auditors
are initially presented with a plausible error hypothesis, they do not auto-
matically consider altemative explanations.
Similarly, the interference literature demonstrates that the act of
retrieving information from memory inhibits the retrieval of other infor-
mation. For example, Moser (1989) found that investor-subjects who
were told to first generate supporting reasons for a future eamings
increase were inhibited from generating opposing reasons, and those who
were told to first generate opposing reasons were inhibited from generat-
ing supporting reasons. In an auditing study, Frederick (1991) found that
experienced auditors who were provided with some items from a list of
intemat controls recalled fewer items from the complete list than those
who were not provided with any items at all. Similarly, Church and
Schneider (1993) found that auditors who were provided with a superior's
suggestion (i.e., an inherited hypothesis) from a specific transaction cycle
generated fewer additional hypotheses from that cycle than auditors who
were not provided with the superior's suggestion.
Other studies have reported similar or related effects. For example,
the belief perseverance literature (e.g., Ross, tapper, and Hubbard 1975;
Anderson, Lepper, and Ross 1980; Koonce 1992) provides evidence that
individuals tend to maintain their existing beliefs even in the face of dis-
credited evidence. Likewise, the functional fixation literature (e.g.,
Duncker 1945; Ashton 1976; Witner and Bimberg 1986) suggests that
once individuals adopt a perspective for thinking about a problem, they
have difficulty considering other useful perspectives or information. The
common aspect of these studies is that subjects are unable or unwilling to
abandon their currently held hypothesis or belief.
In addition, there is literature that suggests that auditors' tendency to
generate a frequent error as their initial hypothesis is likely to exacerbate
the difficutty in abandoning it. Rundus' (1973) interference model
assumes a re-retrieval process in which "strong" items in memory are
retrieved first. Retrieving an item increases its strength, making it more
likely that tiie initiat item will continue to be re-retrieved at the expense
of otiier items. Thus, if frequent errors represent the strongest hypotheses
in memory, we would expect not only that they woutd tend to be retrieved
first, but atso that retrieving them might inhibit auditors from subse-
quently retrieving other hypotheses.*
The results of Bedard and Biggs' (1991a) verbal protocol study are
consistent with the notion that generating a frequent error can affect sub-
 Impact of an Auditor's Initial Hypothesis on Subsequent Perfonnance 767

sequent perfonnance at identifying an actual error. In that study, only 6 of

21 auditors identified the single correct error. A possible explanation for
this poor perfonnance is that auditors initially generated an incorrect fre-
quently occurring enor as their hypothesis when the actual error (misal-
location of overhead) was an infrequent one (Coakley and Loebbecke
1985). Consistent with this explanation, one of Bedard and Biggs' sub-
jects generated the correct error hypothesis during his or her deliberation,
but then rejected it in favor of an initially generated hypothesis. The rea-
son this subject did not ultimately identify the correct error was because
he or she kept retuming to the very frequent error (purchases cutoff) that
he or she initially generated. This occurred despite having considered
information that could refute the initial hypothesis.
Thus, our second hypothesis has two parts. It predicts that auditors
will have difficulty abandoning an incorrect initial hypothesis and that
this difficulty will be exacerbated by having initially generated a fre-
quent-error hypothesis.
H2a: Because auditors will be reluctant to switch from their initial
hypothesis, auditors who initially generate an incorrect hypothe-
sis will subsequently detect the actual error less often than those
who initially generate the correct hypothesis.
H2b: Because it is more difficult to abandon a frequent error hypothe-
sis, auditors who initially generate a very frequent error as their
incorrect hypothesis will subsequently detect the actual error less
often than auditors who initially generate a less frequent error as
their incorrect initial hypothesis.

Experiment
Subjects
Fifty-four auditors attending a national advanced in-charge training
school of a Big Six public accounting firm provided the data for our
study. These auditors had an average of three years of experience.

Design
The 2x2 between-subjects design of our experiment is depicted in Panel
A of Table 1. The two factors are Initial Hypothesis (Sales Cutoff or
Other) and Actual Error (Frequent or Infrequent). The two levels of Initial
Hypothesis reflect whether subjects initially generated the most frequent
error (Sales Cutoff) or some other less frequent error (Other) when
attempting to explain a specific pattem of financial statement fluctuations
(i.e., accounts receivable and sales were both overstated). The two levels
of Actual Error indicate whether subjects were randomly assigned to a
treatment condition in which, after generating their initial hypothesis,
they were provided with additional infonnation which indicated that the
768 Contemporary Accounting Research

actual error was a sales cutoff error (Frequent Actual Error condition) or
a sales recorded twice error (Infrequent Actual Error condition). Before
describing the materials and procedures used to operatlonalize this
design, we specify how this design relates to our hypotheses.
In this study, performance is defined as the percentage of subjects
who correctly identify the actual error after being provided with addi-
tional information indicating which error actually occurred. As shown in
Panel A of Table 1, HI predicts that subjects in Cells I and III will per-
form better than those in Cells II and FV, because it is easier to detect a
sales cutoff error than a sales recorded twice error. Statistically, this
would result in a main effect of Actual Error.
Panel B of Table 1 shows that H2a and H2b taken together predict
that performance will be best in Cell I and worst in Cell II, with perfor-
mance in Cells III and IV being between these two extremes. This pre-
dicted pattem of performance is based on expectations regarding sub-
jects' switching behavior. In particular, H2a predicts that subjects in Cell
I will perform best because they initially generated the correct error and
thus would not need to switch hypotheses. In contrast, subjects in Cells
III and r v are not expected to perform as well because they initially gen-
erated an incorrect error and thus would need to switch hypotheses.^
Finally, H2b predicts that subjects in Cell II will perform worst of all
because not only is the error they initially generated incorrect, but it is
also a very frequent one. As such, the expectation is that in Cell II it will
be especially difficult to abandon the initially generated error hypothesis.
Statistically, the pattem of performance predicted in Panel B of Table 1
would result in an interaction between Initial Hypothesis and Actual Error
because the difference in performance between Cell I (best performance)
and Cell n (worst performance) is predicted to be greater than the differ-
ence in performance between Cell III and Cell IV.
Panel C of Table 1 combines HI (Panel A) and H2 (Panel B) to yield
the following overall pattem of predicted performance (from best to
worst): (1) Cell I, (2) Cell HI, (3) Cell IV, and (4) Cell II. Statistically, this
overall pattem of performance would result in a main effect of Actual
Error (consistent with HI) and an interaction between Initial Hypothesis
and Actual Error (consistent with H2a and H2b). Notice that a very spe-
cific data pattem underlies the interaction predicted in Panel C. This data
pattem incorporates both the interaction predicted in Panel B (H2a and
H2b only) and the main effect predicted in Panel A (HI only). The inter-
actions predicted in Panels B and C are similar in that in both cases the
difference between Cell I (best performance) and Cell II (worst perfor-
mance) is predicted to be greater than the difference between Cell III and
Cell IV. However, the interaction predicted in Panel C differs from that in
Panel B because subjects in Cell III of Panel C are predicted to perform
better than those in Cell IV. This difference results directly from the fact
 Impact of an Auditor's Initial Hypothesis on Subsequent Performance 769

TABLE 1
Predicted performance at identifying the actual error*

Panel A Actual Error

HI Only Frequent Infrequent

(Main effect of (Sales cutoff) (Sales recorded twice)
Actual Error)

Initial Hypothesis:
Sales Cutoff Cell I Cell II
1 2

Other Cell III Cell IV

1 2

Panel B Actual Error

H2 (a & b) Only Frequent Infrequent

(Interaction of Initial (Sales cutoff) (Sales recorded twice)
Hypothesis & Actual Error)

Initial Hypothesi.s:
Sales Cutoff Cell I Cell II
,1 3

Other Cell III Cell IV

2 2

Panel C Actual Error

BothHlandH2(a&b) Frequent Infrequent

(Main effect and Interaction) (Sales cutoff) (Sales recorded twice)

Initial Hypothesis:
Sales Cutoff Cell I Cell II
1 4

Other Cell m Cell IV

2 3

•Performance is defined as the percentage of .subjects who correctly identified the actual
error after being provided with additional information. Arabic numerals from I (best
performance) to 4 (wot^t performance) mdicate the ordinal relation of performance
among cells.
770 Contemporary Accounting Research

that Panel C includes the main effect of Actual Error hypothesized in HI

while Panel B does not.

Procedures and materials

The experiment consisted of two main parts. In the first part, all subjects
were presented with a page of instmctions which briefly described a
medium-sized manufacturing firm, and were told to act as the in-charge
accountant on the audit. They were also presented with unaudited finan-
cial infonnation about the company and projections that were prepared
during preliminary audit work. Subjects were told to assume that the pro-
jections were correct and that any differences between the projected fig-
ures and the actual figures were due to a single type of error. They also
received financial ratios and selected account balances. From the infor-
mation they were given, subjects could determine that Accounts
Receivable and Sales were each overstated by $1,500,000 and that no
other accounts were misstated. After reviewing the financial information,
the auditors gave their first response by indicating the specific type of
error they believed caused the fluctuation.
In the second part of the experiment there was a between-subjects
experimental manipulation. Half of the subjects received additional infor-
mation indicating that the actual error was a sales cutoff error (Frequent
Actual Error condition) and the other half received information indicating
that the actual error was a sales recorded twice error (Infrequent Actual
Error condition). These two errors were used by Libby and Frederick
(1990) as their typical (frequent error) and atj^ical (infrequent error)
prompts, respectively.
The additional information that all subjects received was a general
joumal, a sales joumal, and a shipment summary (which they were told
was accurate) for the last quarter of the year. The general joumal and the
sales joumal were identical for all subjects, but the shipment summary
was different for the Frequent Actual Error and Infrequent Actual Error
conditions. Among other items, the sales joumal always included two
sales to each of two companies (Smith and Merckel) early in the quarter,
and two sales at the end of the year to each of two companies (Fremont
and Matterson).
The shipment summary for the Frequent Actual Error condition (sales
cutoff error) showed that the last two sales recorded on the sales joumal
(i.e., those to Fremont and Matterson) were not actually shipped in the
current year. The shipment summary for the Infrequent Actual Error con-
dition (sales recorded twice) indicated that the two sales to Smith and the
two sales to Merckel had each only been shipped once. Thus, there was a
single actual error in each treatment condition and subjects in each treat-
ment condition received evidence verifying the existence of the single
actual error in that condition (either sales cutoff or sales recorded twice)
 Impact of an Auditor's Initial Hypothesis on Subsequent Performance 771

and evidence that ruled out the actual enor present in the other condition.
That is, in the Frequent Actual Error condition subjects could mle out the
sales recorded twice error because both sales to Smith and to Merckel
were actuatly shipped. In the Infrequent Actual Error condition they could
mle out the sales cutoff error because the year-end sales to Fremont and
Matterson were, in fact, shipped before the end of the year.
After receiving the additional information, subjects were again asked
to indicate what they thought the specific error was. They were told that
they could either stay with their initially generated error or they could
indicate a different error in light of the additional information they
received.
Subjects were not permitted to talk to each other or to use materials
other than those provided during the experiment. Calculators were dis-
tributed for subjects' use during the experiment. The materials for each of
the two parts of the experiment were distributed separately. The answer
sheets from the first part were collected before the materials for the sec-
ond part were distributed so that it was not possible for subjects to go
back and change their initial responses. However, when responding to the
second part of the task, subjects were permitted to keep and use all other
materials they had received up to that point. It took about 40 minutes to
complete both parts of the experiment.

Results
Each subject's initial response (i.e., their initial hypothesis) was coded as
either a sales cutoff error, a sales recorded twice error, or some other
error.6 This first response was used to classify each subject into one of the
two Initial Hypothesis conditions (Sales Cutoff or Other) as shown in
Table 2.^ Consistent with previous research (Libby 1985; Libby and
Frederick 1990), the sales cutoff error (the very frequent error) was gen-
erated quite often. Thirty-two of the 54 auditors who generated a specif-
ic error (59 percent) generated the sales cutoff error. The other 22 audi-
tors generated a variety of other errors, none of which was generated
more than five times. In addition, consistent with the fact that all subjects
received identical information before generating their initial hypothesis,
the type of initial error hypothesis generated (Sales Cutoff versus Other)
did not differ significantly for the frequent and Infrequent Actual Error
conditions (Pearson's chi-square = .61, p >.43).

Performance
The dependent variable used to test our hypotheses is the proportion of
subjects who correctly identified the actual error after they received the
additional information. We coded each subject's response after they
received the additional information as either correct (identified the actual
error) or incorrect (did not identify the actual error). These performance
772 Contemporary Accounting Research

data are reported in Panel A of Table 3, which shows the proportion and
percentage of subjects who correctly identified the actual error.
The overall pattem of performance at identifying the actual error is as
predicted in Panel C of Table 1 and, as such, provides support for our
hypotheses. That is, performance was best in Cell I (100 percent correct),
second best in Cell III (83 percent correct), third best in Cell IY (40 per-
cent correct) and worst in Cell II (22 percent correct).^ The results of a
loglinear analysis on these performance data are reported in Panel B of
Table 3.' As predicted in Panel C of Table 1, there is a significant main
effect of Actual Error (p <.O1) and a significant interaction between Initial
Hypothesis and Actual Error (p <.O4). Consistent with HI, the main effect
of Actual Error is statistically significant both when auditors initially gen-
erated the sales cutoff error (Cell I versus Cell II, p <.OOO1) and when
they initially generated some other less frequent error (Cell III versus Cell
IV, p = .05). Consistent with H2a and H2b, the significant interaction
reflects the fact that the difference in performance between the two Actual
Error conditions was greater when auditors initially generated the sales
cutoff error (100 percent versus 22 percent) than when they initially gen-
erated some other less frequent error (83 percent versus 40 percent). The
presence of this interaction not only provides support for H2a and H2b,
but also mles out the possibility that the observed pattem of results
reflects only the main effect of Actual Error predicted in HI. That is, as
Panel A of Table 1 shows, HI alone does not predict an interaction, but
rather only a main effect of Actual Error.
The analysis reported above provides joint support for H2a and H2b.
These hypotheses were also tested separately by performing specific
comparisons between individual experimental cells.'*" Considered sepa-
rately, H2a predicts that auditors who initially generate an incorrect

TABLE 2
Initial hypothesis generated before
receiving additional information*

Actual Error

Initial Frequent Infrequent Total

Hypothesis (sales cutoff) (sales recorded twice)

Sales Cutoff 14 18 32

Other (including
sales recorded twice)
12 m 22

Total 26 28 54

* The numbers in this table represent the number of subjects in each of the Actual Error
treatment conditions who generated each type of initial hypothesis as their first
response.
 Impact of an Auditor's Initial Hypothesis on Subsequent Performance 773

hypothesis (those in Cells II, III, and IV) will subsequently detect the
actual error less often than those who initially generate the correct
hypothesis (those in Cell I). Therefore, performance in Cell I (100 per-
cent) was compared to performance in Cells II (22 percent). III (83 per-
cent), and IV (40 percent) separately. All differences were in the predict-
ed direction and two of the three differences (Cell I versus Cell II and Cell
I versus Cell IV) were statistically significant (p .01). Considered sepa-
rately, H2b predicts that auditors who generate the sales cutoff error as
their incorrect initial hypothesis (those in Cell II) will subsequently detect
the actual error less often than auditors who generate a less frequent error
as their incorrect initial hypothesis (those in Cells III and IV). Thus, per-
formance in Cell II (22 percent) was compared to performance in Cells
III (83 percent) and IV (40 percent) separately. Again, both differences
were in the predicted direction, but only one of the two differences (Cell
II versus Cell III) was statistically significant (p <.O1). In summary, all
differences in performance for the comparisons used to test H2a and H2b
separately were in the predicted direction, but not all of the differences
were statistically significant. Thus, the separate tests of H2a and H2b pro-
vide only limited support for these hypotheses.

TABLE 3
Performance at identifying the actual error
after receiving additional information

Panel A Proportioti (percentage) of subjects who correctly identified the Actual Error
Actual Error

Initial Hypothesis Frequent Infrequent

(sales cutoff) (sales recorded twice)

Sales Cutoff I II
14/14(100%) 4/18(22%)

Other III IV
10/12(83%) 4/10(40%)"

Panel B Loglinear analysis of performance data in Panel A

Chi-square P
Main effects:
Initial Hypothesis 0 002 >.96
Actual Error 25.10 <.O1
Interaction:
Initial Hypothesis x Actual Error 4.26 <.O4
774 Contemporary Accounting Research

Switching behavior
Recall that the overall predicted pattem of performance (Panel C of
Table 1) was based on the theoretical argument that auditors' performance
at subsequently identifying the actual error would depend on whether or
not they switched from their initial hypothesis. Specifically, auditors' rel-
ative performance at identifying the actual error in Cells II, III, and IV
(where auditors' initial hypothesis was incorrect) would be expected to
correspond with the degree to which they were able to switch hypotheses.
In Cell I, where subjects initially generated the correct hypothesis, per-
formance would be expected to correspond with the degree to which audi-
tors did not switch hypotheses.
To examine whether performance depends on auditors' switching
behavior, we conducted a second loglinear analysis on the performance
data reported in Panel A of Table 3. Three independent variables were
included: Initial Hypothesis, Actual Error, and Switching Behavior. The
first two of these variables were the same as those used in the first log-
linear analysis reported in Panel B of Table 3. The Switching Behavior
variable reflects whether a subject's second response differed from his or
her initial hypothesis and was included in the analysis as a covariate.
This second loglinear analysis isolates any remaining differences in
performance after statistically controlling for auditors' switching
behavior. It is predicted that, after removing the effect of the Switching
Behavior variable, the only remaining difference in performance will be
due to the relative ease of identifying the sales cutoff error (i.e., the main
effect of Actual Error predicted in HI). Because it was predicted that the
significant interaction found in the first loglinear analysis was due to sub-
jects' ability to switch hypotheses, once this effiect is statistically

TABLE 4
Switching behavior

Actual Error

Initial Hypothesis Frequent Infrequent

(sales cutoff) (salesrecordedtwice)

Sales Cutoff I II
14/14 (100%)* 5/18 (28%)
did not switch switched

Other in rv
10/12 (83%) 6/10 (60%)
switched switched

* In Cell I, it was appropriate not to switch hypotheses because the initial hypothesis
was correct.
In Cells II, in, and IV, it was appropriate to switch hypotheses because the initial
hypothesis was incorrect.
 Impact of an Auditor's Initial Hypothesis on Subsequent Performance 775

removed, the interaction in the first analysis should disappear. Such a

result would be consistent with the hypothesized mediating effect of
Switching Behavior on performance.
Table 4 reports the proportion and percentage of subjects who
switched or did not switch hypotheses as was appropriate to their situa-
tion (i.e., those who stayed with their initial hypothesis in Cell I or
switched hypotheses in Cells II, III, and IV). The high correspondence
between the Switching Behavior data reported in Table 4 and the perfor-
mance data reported in Panel A of Table 3 suggests a significant mediat-
ing effect of subjects' ability to switch hypotheses on their performance
at identifying the actual eiror." Although, consistent with expectations.
Switching Behavior and Performance are highly conelated, a priori this
need not have been the case. These variables could have differed consid-
erably if subjects switched from an incorrect initial hypothesis to another
incorrect response.
The results of the second loglinear analysis, which are reported in
Table 5, are consistent with the hypothesized mediating effect. Switching
Behavior (the hypothesized mediating variable) had a highly significant
effect on performance at identifying the actual error (chi-square = 35.14,
p <.OO1). Moreover, as predicted, when Switching Behavior was includ-
ed in the analysis as a covariate, the previously reported interaction
between Initial Hypothesis and Actual Error (p <.()4, in Table 3) drops to
insignificance (p >.99, in Table 5). These results indicate that auditors'
switching behavior significantly affected their performance at identifying
the actual error, and that once the effect of Switching Behavior is statisti-
cally controlled, all previously observed differences in performance

TABLE 5
Loglinear analysis of performance
Vk-ith switching behavior as a covariate

Chi-square

Main effects:
Initial Hypothesis (IH) 0.84 >.36
Actual Error (AE) 7.47 <.O1
Switching Behavior (SB) 35.14 <.0Ol

Interactions:
IHxAE 0.00 >.99
IHxSB 0.04 >.85
AExSB 0.41 >.52
IH X AE X SB 0.00 >.99
776 Contemporary Accounting Research

except for the main effect of Actual Error disappear. The main effect of
Actuat Error persists because, consistent with HI, the sales cutoff error is
relativety easy to identify. That is, auditors who switched from an incor-
rect error were more likely to switch to the correct error when it was the
sates cutoff error than when it was the sates recorded twice error. This
additional analysis provides evidence consistent with the theoretical argu-
ments underlying our hypotheses.

Discussion
The results of this study demonstrate that generating a very frequent error
versus some other less frequent error as an initial hypothesis can affect
auditors' subsequent performance at identifying actual errors. Auditors
who initially generated the very frequent sales cutoff error subsequently
performed best when the actual error was the frequent error (sales cutoff),
but worst when the actuat enor was an infrequent error (sales recorded
twice). In contrast, auditors who initially generated some other less fre-
quent error as their hypothesis subsequently performed moderately wetl
(i.e., between best and worst) both when the actual error was the frequent
enor and when it was a less frequent error. Although we found the over-
all predicted pattem of performance and an interaction that provides joint
support for H2a and H2b, additional separate tests of H2a and H2b pro-
vide somewhat weaker support for these hypotheses. That is, although all
performance differences were in the predicted direction, not all such dif-
ferences were statistically significant. In addition, the study provides
support for the theoretical arguments underlying our h5rpotheses in that
auditors' perfonnance at identifying an actual error was mediated by their
reluctance to switch from their initial hypothesis.
Because, more often than not, actual enors are frequent errors, ini-
tiatty generating a frequent error hypothesis may hetp auditors detect
such errors relatively easily and quickly. However, infrequent actual
errors are difficult to detect and this study suggests that initially generat-
ing an incorrect frequent error hypothesis may make it even more diffi-
cult to detect such errors. The added difficutty arises because auditors are
reluctant to abandon their initial hypothesis even when faced with evi-
dence that it is not correct.
On actual audits, the tendency to stay with an incorrect hypothesis
despite evidence that it was incorrect could resutt in audit inefficiency or
ineffectiveness. The effect woutd depend upon whether the hypothesis
initially generated was an error or a non-error. If the incorrect initial
hypothesis was an error hypothesis, presumably the auditor ultimately
would determine that the initial hypothesis was incorrect. Nevertheless,
the persistence in searching for the incorrect error would result in audit
inefficiency. If the auditor initialty generated a non-error hypothesis,'^
audit ineffectiveness coutd result if the initial non-enor hypothesis inter-
 Impact of an Auditor's Initial Hypothesis on Subsequent Performance 777

fered with the auditor's ability to identify an actual error (see Kinney
1987; Kinney and Haynes 1990; Anderson, Kaplan, and Reckers 1992;
and Koonce 1992 for related discussions). Ineffectiveness could also arise
when the auditor initially generated an incorrect error hypothesis. This
could occur because auditors who have already mled out one or more fre-
quent error hypotheses then might be especially likely to generate and
accept an incorrect non-error hypothesis.
While it is likely our findings apply to both errors and non-errors, a
limitation of this study is that it examined only the effect of errors. Also,
in our experiment, the frequency of the actual errors was extreme (i.e.,
either a very frequent error or a very infrequent one).. It is unclear how
performance would be affected if the frequency of the actual error were
more moderate.

Endnotes
1 It is also possible that an auditor could initially generate a specific infrequent error
which turns out to be the actual error, but this i.s very unlikely to occur because (1)
the chance that an auditor will initially generate a specific infrequent error is small,
and (2) the chance that a specific infrequent error actually occurred is also small.
Thus, the combined probability of an auditor initially generating a specific infre-
quent error that actually occurred is very low.
2 Ashton (1991), Heiman (1990), and Kaplan. Moeckel, and Williams (1992) also
find that experienced auditors are able to distinguish between the most frequent and
least frequent errors.
3 This paper addresses situations in which the additional infonnation is deterministic.
That is, the additional information rules out the initial hypothesis and verifies the
existence of a diiferent actual error.
4 This is consistent with Libby and Frederick's (1990) finding that cuing with a "typ-
ical" (frequent) error interfered more with subjects' abilities to generate additional
errors from a category than did cuing with an "atypical" (infrequent) error. Their
results suggest that if the initial error generated is a frequent error, it may be espe-
cially difficult to switch from it to an altemative error hypothesis.
5 In Cell IV, the initially generated error could have been either correct or incorrect.
However, as discussed in endnote I, the probability of generating the correct error
(sales recorded twice) in this condition is veiy low. In fact, only one subject in Cell
IV initially generated the correct error and, as explained later, our results are not
affected by this subject. Thus, all future references to Cell IV should be interpreted
with the understanding that subjects in that cell initially generated an incorrect
error.
6 Coding of al! responses was done by an independent coder who was not aware of
the hypotheses being tested and also was done jointly by the authors. The indepen-
dent coder was a Ph.D. student with three years of public accounting experience.
There was 99 percent agreement between the two sets of codings. Of the 87 instru-
ments distributed, 16 were unusable because the subjects did not/could not provide
an initial error hypothesis before receiving the additional information. Another 17
responses were unusable because the initial response provided was too general to
be classified as a specific error. For example, the response "erroneous sales were
recorded" is consistent with several specific errors including sales cutoff and sales
recorded twice. Because our study requires that we distinguish between these spe-
cific errors, we were unable to include these responses in our analysis.
778 Contemporary Accounting Research

7 The sales recorded twice error was generated only three times, twice in the
Frequent Actua! Error condition where it was an incorrect initial hypothesis, and
once in the Infrequent Actual Error condition where it was the correct initial
hypothesis. Consequently, it was included as part of the "Other Initial Hypothesis"
condition.
8 This pattem represents a significant linear trend (p < .OS) in the order predicted.
Also, we note that our conclusions are not affected by the one subject in Cell IV
who initially generated the sales recorded twice error because he or she switched to
an incorrect error when providing the second response. That is, all subjects who
identified the correct error in Cell IV did so by switching from an incorrect initial
hypothesis.
9 The loglinear analyses reported in this study are analogous to ANOVAs. Loglinear
analysis is appropriate when the dependent variable is dichotomous.
10 We report these separate comparisons for completeness in our analysis. A problem
with these separate comparisons is that the data in the individual experimental cells
include effects due to both HI and H2 (a and b). In contrast, the loglinear analysis
reported earlier is able to statistically control for the main effect of Actual Error
(due to HI) when examining the interaction predicted in H2a and H2b. Thus,
although the separate comparisons provide some insight into H2a and H2b consid-
ered one at a time, the results of this additional analysis should be interpreted cau-
tiously.
11 A loglinear analysis on the Switching Behavior data in Table 4 yields results very
similar to the results for the performance data (Panel B of Table 3).
12 In fact, Kaplan et al. (1992) found that experienced auditors selected more non-
errors than errors to explain an unusual fluctuation.

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