EVALUATION OF COMPETING HYPOTHESES IN AUDITING

This paper presents the results of an experiment that examines how aud itors evaluate competing hypotheses. Various audit tasks require audit ors to evaluate competing hypotheses. For instance, an auditor must de termine whether an unexpected fluctuation in a client's account balanc e was caused by an error, an irregularity or a change in economic cond itions. The manner in which auditors evaluate competing hypotheses can affect evidence gathering, decision defensibility and cognitive effor t. Yet, there is limited evidence on this issue. Two alternative evalu ation strategies are examined: a complementary approach (wherein hypot heses are treated as related entities) and an independent approach (wh erein hypotheses are treated as separate entities). Auditors conducted an analytical procedure investigation entailing hypothesis generation and enumeration of initial prior probabilities. Participants also rev ised probabilities as they gathered additional evidence. The results s uggest that auditors evaluate competing hypotheses as if the hypothese s are independent. This evaluation strategy is conservative and appear s to represent a trade-off among efficiency, defensibility and cogniti ve strain. Since this independent strategy fosters additional testing, firms may want to investigate the conditions under which the addition al testing leads to increased effectiveness and defensibility. The res ults also raise questions about the prescription that encouraging audi tors to consider alternative hypotheses will reduce their confidence i n a target hypothesis.