International Journal of Auditing 1(3), 187204 (1997)

Auditors' Use of Inconsistent

Evidence
James J. Maroney* and Jean C. Bedard
Accounting Group, College of Business Administration, 404 Hayden Hall,
Northeastern University, Boston, MA 02115, USA

Analytical procedures are an important audit tool worldwide (ISA

520, SAS 56). Auditors use analytical procedures to develop
explanations for unexpected changes in accounts, and evaluate
those explanations on the basis of further audit evidence. Research
has found that people have difculty using evidence inconsistent
with proposed explanations, and thus may accept explanations that
are false. The purpose of this paper is to study how auditors treat
evidence inconsistent with analytical procedures explanations.
Practising auditors at three levels of experience completed a two-
stage task, generating explanations for an initial set of nancial
information and then revising their explanation list after receiving
an expanded information set. Decision processes were captured
through verbal protocols. Process analysis showed that the ability
to evaluate evidence varied by experience level. Managers and
seniors were better than assistants at recognizing inconsistent
evidence, while managers outperformed other experience levels in
integrating inconsistent evidence. Further, managers generated
more and better explanations than other ranks after encountering
new information. The implications for auditing research and
practice are discussed. # 1997 John Wiley & Sons, Ltd.

Int. J. Audit. 1, 187204 (1997)

No. of Figures: 1 No. of Tables: 3 No. of References: 43
Key words: analytical procedures; explanation testing; auditor
performance; verbal protocols.

SUMMARY company's products or inappropriate recognition

Audit quality depends on appropriate evaluation
of all relevant evidence. As auditors gather and
evaluate evidence to form an opinion on a client's
nancial statements, they often consider possible
explanations for client conditions. For instance, a
substantial increase in revenues from the prior year
may be explained by expanding markets for the
*Correspondence to: J. J. Maroney, Accounting Group, College
of Business Administration, 404 Hayden Hall, Northeastern
University, Boston MA 02115, USA.
of revenue. Evidence must be gathered to distin-
guish these explanations. Once the evidence is
gathered, the auditor must determine if it is
consistent, inconsistent, or not relevant to the
explanations being considered. Research in psy-
chology has found that people tend to have
difculty seeking and evaluating inconsistent
evidence, which may lead to accepting explana-
tions that are not true (e.g. Anderson et al. 1980;
Lord et al. 1979; Ross et al. 1975). Because profes-
sional standards of auditors worldwide emphasize

CCC 10906738/97/030187-18 $17.50 Received March 1996

# 1997 John Wiley & Sons, Ltd. Revised June 1997
Accepted August 1997
188
the importance of professional scepticism (ISA 200,
SAS 53, SAS 82), it may be that auditors overcome
this natural human tendency while working in their
professional domain. If not, auditors may need
assistance in dealing with inconsistent evidence in
order to reduce the possibility of accepting false
explanations, which may lead to audit failure.
While prior research related to this topic has
primarily been performed in the US, its implications
are universal. Investigating explanations for
changes in client accounts is a critical step in the
attest function worldwide.
Prior research in analytical procedures has found
some evidence that auditors have difculty rejecting
explanations they are considering and generating
new ones (e.g. Bedard and Biggs 1991a; Heiman-
Hoffman et al. 1995). However, insufcient attention
has been focused on the mental processes used by
auditors in testing their explanations. By tracking
auditors' decision processes while they generate
and evaluate explanations for audit ndings,
detailed data can be obtained on which explana-
tions are considered and how evidence is used to
decide whether or not an explanation is acceptable.
The purpose of the current study is to examine how
auditors deal with inconsistent evidence, because of
the risk to audit quality of accepting incorrect
explanations.
To accomplish this purpose, practising auditors at
three levels of experience (assistant, senior and
manager) performed an analytical procedures task
in which they were asked to propose explanations
for unexpected discrepancies in nancial statement
data. A particular nancial statement error was
PRIOR RESEARCH ON USE OF
INCONSISTENT EVIDENCE
The process of using audit evidence to evaluate
explanations is a primary means of support for the
audit opinion. If an explanation is maintained in the
presence of evidence that is inconsistent, audit
efciency and effectiveness may be affected. For
example, if an auditor's explanation is that a
material nancial statement error exists, when in
fact it does not, failure to use inconsistent evidence
may lead to excessive audit testing. On the other
hand, if the explanation is that a material error does
not exist, when in fact it does, failure to use
inconsistent evidence will reduce audit effectiveness
if planned audit tests fail to detect the error. Thus, a
more complete understanding of the processes
Int. J. Audit. 1, 187204 (1997)
J. J. Maroney and J. C. Bedard
seeded in the nancial data to enable identication
of items that were inconsistent with proposed
explanations. Because the research purpose is to
observe how auditors evaluate inconsistent evi-
dence, several steps were taken to encourage
formation of an initial explanation that would need
to be revised. These include use of a complex set of
nancial balances and ratios, and a two-stage
process (proposal of initial explanations from a
subset of data, followed by an opportunity to revise
or propose new explanations in response to the full
data set).
We found that managers generated more, and
better quality, explanations for client nancial
discrepancies. Further, once the expanded infor-
mation set was available, assistants and seniors
had more difculty than managers in thinking
of explanations beyond their initial list. Concern-
ing evaluation processes, managers and seniors
performed better than assistants in recognizing
that evidence was inconsistent with an explan-
ation being evaluated. Some auditors who were
unsuccessful in revising explanations ignored or
`explained away' inconsistencies to make them
t with a currently held explanation. Our results
suggest that skills in generating explanations
in the presence of new information, and in evalua-
ting those explanations, develop with experience.
Further, seniors' similarity to managers in
recognizing inconsistent evidence may indicate
that evaluation skills develop prior to gene-
ration skills. In this paper's concluding section,
these results are related to prior research and
some implications for audit practice are discussed.
auditors use in evaluating evidence, particularly
inconsistent evidence, may suggest ways to im-
prove audit quality. These processes affect a number
of crucial audit tasks, including risk assessment,
analytical procedures, internal control evaluation,
and going concern decisions.1 This study concerns
analytical procedures, as have other studies of
1
Although the research cited in this section indicates that
auditors have difculty using inconsistent evidence in
analytical procedures, studies of other audit tasks have not
found strong evidence of this tendency. Examples include
Kida (1984) and Trotman and Sng (1989) for going concern
evaluation, and Butt and Campbell (1989) for internal control
evaluation. In a review of this research, Smith and Kida (1991)
concluded that auditors' tendency to seek negative informa-
tion about the client is stronger than their tendency to seek
consistent information.
# 1997 John Wiley & Sons, Ltd.
Auditor's Use of Inconsistent Evidence
Figure 1. Process stages for testing of explanations and use of inconsistent information.
auditors' proposal of explanations (e.g. Libby, 1985;
Bedard and Biggs, 1991a).
As an auditor performs analytical procedures,
unexpected discrepancies may be found between
expected and actual client nancial results (ISA 520,
SAS 56). Because the discrepancies may be due to
material error, further investigation to determine
their cause is warranted. To direct the investigation,
an auditor may propose one or more explanations
that could explain the discrepancies. As evidence is
gathered, the explanation may be maintained,
rejected or revised into a new (presumably more
accurate) explanation. Research in psychology and
some limited evidence in auditing suggest that this
process may not often proceed smoothly (e.g.
Anderson et al., 1980; Lord et al., 1979; Bedard and
Biggs, 1991a; Heiman-Hoffman et al., 1995). In
particular, people have difculty in moving away
from initial views of problems and proposed
solutions to problems. The following is a review
# 1997 John Wiley & Sons, Ltd.
189
of related research in auditing and psychology,
which concentrates on those phases of the process
important to this study (evaluation of evidence
following generation of an initial explanation).
Research in Auditing
Several studies of audit analytical procedures have
found that people tend to favour explanations
already considered, and have difculty thinking of
others. Heiman-Hoffman et al. (1995) and Bedard
and Biggs (1991a) found that once auditors propose
a particular explanation for an unexpected differ-
ence in the client's accounts, they have difculty
proposing other types of explanations. One reason
for this difculty may be that auditors do not fully
consider inconsistent information, so that their
explanations appear to be true. Further evidence
comes from Heiman (1990), who found that many
auditors did not consider reasons why their
Int. J. Audit. 1, 187204 (1997)
190
explanations might be wrong unless explicitly
instructed to do so. Similarly, Koonce (1992) found
that asking auditors to provide reasons against an
explanation lowered their belief in that explanation.
Johnson et al. (1991) and Bierstaker et al. (1996)
found that auditors have difculty shifting their
ideas about audit problems. The latter study noted
that unless auditors had direct experience with the
particular accounting error in the research task, they
had difculty adapting their views of the problem
even when given hints to help them solve it. These
studies suggest that once auditors have proposed
an explanation for analytical procedures ndings,
they tend to continue that line of thinking. Evidence
that does not t with the currently held explanation
may not be sought unless the auditor is urged to do
so. This is important because auditors in practice
may get their initial explanations from clients or on
the basis of incomplete evidence (Hirst and Koonce,
1996). Because these explanations guide further
testing (ISA 520, SAS 56), audit inefciency or
ineffectiveness may result.
Why does this tendency to favour consistent
evidence occur in analytical procedures? For in-
stance, is it that the inconsistent evidence is not
noticed? Or is it noticed, but not recognized as
inconsistent? Depending on the source of the
difculty, audit rms might adopt very different
means to help their staff overcome the tendency.
The following section presents a model of stages of
the evidence evaluation process at which the
difculty might lie, developed from research in
psychology.
Processes of Interpretation and Integration of
Inconsistent Evidence
Psychologists have suggested that people tend to
adopt a `conrmatory' approach when evaluating
evidence. For example, Lord et al. (1979) asked
people whose views on capital punishment varied,
to evaluate two studies about the deterrent effect of
the death penalty. One study supported, and the
other did not support, the effectiveness of the death
penalty in deterring crime. Each group of subjects
rated as more convincing the study that conrmed
their initial attitude about capital punishment.
Thus, although the evidence was balanced, subjects
selected that part which supported their prior
beliefs, and attitudes were further polarized. Other
studies of belief perseverance (e.g. Ross et al., 1975;
Anderson et al., 1980) provide similar evidence that
people maintain their existing beliefs, even after
Int. J. Audit. 1, 187204 (1997)
J. J. Maroney and J. C. Bedard
examining evidence that is inconsistent with that
belief.2
To study how physicians use inconsistent evi-
dence, Johnson et al. (1982) collected think-aloud
verbal protocols as expert and novice physicians
evaluated disease possibilities. Johnson et al. identi-
ed three ways that the physicians recognized and
attempted to resolve potentially inconsistent symp-
toms: (1) the inconsistency was recognized but
ignored; (2) the inconsistency was `explained away'
as the physicians thought of ways to rationalize the
inconsistent evidence with the explanation; (3) the
inconsistency would be accepted and the physician
would work toward understanding its presence.
The latter strategy is a `disconrming' approach.
The physician recognizes that there are symptoms
inconsistent with the explanation being tested and
therefore will be more likely to revise or reject the
current diagnosis. Johnson et al. (1982) found that
expert physicians were more likely to use a
disconrming approach than novices.
Analytical procedures involve `diagnosis' of
client problems that underlie nancial results (Libby
1985). Thus, the mental processes that Johnson et al.
observed for physicians are also likely to apply to
analytical procedures. The model in Fig. 1, based on
Johnson et al., presents steps in the process of
evaluating inconsistent evidence.3 Deviations from
these steps, indicated by the `No' paths in the gure,
may result in acceptance of an incorrect explanation
and a corresponding decline in audit efciency
and/or effectiveness. The model begins at the point
in the analytical procedures process when client
information is encountered and an initial explana-
tion is generated, prompting further search for
information to evaluate the explanation. Next, the
auditor must attend to (note the presence of) client
information that may be inconsistent with the
currently held explanation. Further cognitive pro-
cessing, comparing the explanation to actual client
ndings, is needed to determine that the evidence is
in fact inconsistent. Finally, the inconsistency must
2
One reason that may underlie people's natural preference
for consistent information is mental effort: `Inconsistent
information requires more elaboration to integrate it with
existing knowledge and therefore it takes longer to process
(Brewer et al., 1981; Hastie, 1980)' (Fiske et al., 1983, 384). Also,
if information is recognized as inconsistent, a new explanation
may have to be proposed, resulting in further effort. Bedard
and Biggs (1991a) stress the difculty of this step in analytical
procedures.
3
The specic focus of the model used here is toward
evaluation of information inconsistent with an explanation.
More complete models of the analytical procedures process
are given in Biggs et al. (1988) and Koonce (1993).
# 1997 John Wiley & Sons, Ltd.
Auditor's Use of Inconsistent Evidence
be incorporated into the evaluation process, by
revising the currently held explanation or rejecting
it and generating a new one.
The following exploratory research questions,
developed from the model, guide the study's
analysis of decision processes used by auditors to
incorporate inconsistent evidence in analytical
procedures.4
RQ1. Did participants (a) attend to informa-
tion inconsistent with a proposed explanation,
and (b) explicitly recognize the information as
inconsistent?
RQ2. If the inconsistency was recognized, did
participants attempt to revise the current explana-
tion on the basis of that inconsistency?
RQ3. If the revision of the current explanation was
not attempted, what decision processes inhibited
incorporation of the inconsistent information?
Impact of Experience and Expertise on
Explanation Evaluation
Studies in psychology and auditing suggest that
the ability to use inconsistent information may be
affected by experience. Johnson et al. (1982) found
that experience enhances physicians' ability to
process inconsistent evidence. Borgida and DeBono
(1989) found that experts who had tested explana-
tions within their domain of expertise were less
likely than novices to remember consistent evidence
preferentially. However, when testing explanations
outside that domain, those experts were similar to
novices in their tendency to remember information
consistent with their explanations. Fiske et al. (1983)
found similar differences between novices and
experts in politics. A hypothetical third-world
country was described as communist or democratic.
When presented with a set of facts equally balanced
in support of one or the other description, novices
focused on consistent information, while experts
used a more balanced approach. Differences in
organization and content of knowledge may explain
these results. Experts usually have more knowledge
in their domain and known facts may be better
connected, enabling them to process inconsistent
evidence more easily (Borgida and DeBono, 1989).
Within auditing, Kaplan and Reckers (1989)
studied how experience affects information search
in initial audit planning based on analytical
procedures. Their subjects included auditors with
4
Research questions instead of formal hypotheses are used
due to the limited prior evidence on this topic in the auditing
literature.
# 1997 John Wiley & Sons, Ltd.
191
experience ranging from two years, to 15 years or
more. Similar to Borgida and DeBono (1989) and
Fiske et al. (1983), they found that less experienced
auditors searched for information consistent with
their initial beliefs, while more experienced auditors
followed a more balanced search strategy. Choo and
Trotman (1991) examined differences in recall
for typical (consistent) and atypical (inconsistent)
information between seniors (average experi-
ence 4.4 years) and assistants (average experi-
ence 3.3 months) in going concern evaluation.
They hypothesized that having a more complete
schema for going concern issues would enable
experienced auditors to allocate more mental effort
to atypical items. Increased mental effort would
produce stronger linkages in memory for atypical
items and increase likelihood of recall. Their
ndings were consistent with that prediction. In
analytical procedures, Bedard and Biggs (1991a)
found that more seniors than managers failed to
disconrm incorrect explanations, implying that
disconrming evidence was not as well used by
seniors.
The results of studies cited in this section suggest
that there may be experience-related differences in
processing inconsistent information. Most studies
support the theory that more and better organized
knowledge developed through experience permits
additional memory capacity to handle inconsisten-
cies. This should facilitate recognition of inconsis-
tencies and access to alternative explanations that
incorporate inconsistent information (Church,
1990). These ndings motivate studying experience
effects at each stage of the Fig. 1 model.
METHODS
Participants
The participants were 14 professional auditors
from the Big Six accounting rms. Since varying
levels of auditing experience were desired, ve
assistants (A1 through A5), ve seniors (S1 through
S5) and four audit managers (M1 through M4)
were used. The average experience was 10 months
for the assistants, 3.2 years for the seniors and 14
years for the managers.5
5
The experience for the assistants (A1 through A5) was 9, 8,
10, 10 and 12 months respectively. The experience for the
seniors (S1 through S5) was 4, 2.6, 2.8, 4.5 and 2 years
respectively; with the experience for the audit managers (M1
through M4) 13, 19, 15 and 9 years respectively.
Int. J. Audit. 1, 187204 (1997)
192 J. J. Maroney and J. C. Bedard

Task Materials and Procedures initial three ratios plus projected and actual
amounts for six additional ratios and balances.
The research task provides the opportunity for
Instructions requested the participants to identify
auditors to develop and evaluate possible explana-
their most likely hypothesis about an error that
tions for observations made during analytical
might explain the discrepancies in the ratios and
procedures. Similar to Libby (1985) and Bedard
balances, and to list up to two alternative explana-
and Biggs (1991a), auditors were given `projected'
tions. Participants could either use the explanations
and `actual' client accounts and ratios, which
from their initial list or generate new ones on the
differed by the presence of a seeded error.6 The
basis of the expanded information. The decision
numerical information in the task was developed
processes used by the auditors in evaluating and
from actual nancial statements of a manufacturing
revising their initial list in light of the new
company. The task was developed with the
information are the focus of this study.8 Decision
assistance of a senior manager at a Big Six auditing
processes were captured through think-aloud ver-
rm, and pretested with practising auditors. The
bal protocols, enabling analysis of all explanations
pretesting auditors indicated that the information
generated throughout the task as well as decision
included in the case was similar to information
processes used to evaluate them. Thus, there was no
they might encounter in practice. The seeded error
restriction on the number of explanations consid-
was an understatement of the income tax accrual,
ered during the decision process leading to selection
causing net income to be higher (and current
of up to three explanations as most likely.
liabilities to be lower) than expected. Because we
were interested in how auditors evaluate and
revise their proposed explanations, the auditors Procedures for Data Collection and Analysis
were presented with client nancial information in
Verbal protocols were collected and analysed fol-
two stages.
lowing the procedures recommended by Ericsson
In the rst stage, an initial set of client nancial
and Simon (1984). Participants performed the task
information (see Appendix A for task and instruc-
individually, in a conference room at their workplace
tions) was presented. While this initial information
that was free from noise and distraction. They were
is consistent with the actual seeded error, many
guaranteed anonymity and were identied only by a
other errors are also consistent with the pattern of
code number on the tapes and written materials. The
client data shown. Task instructions noted that a
verbal protocols were coded independently by one
single error caused all observed discrepancies,
of the authors and a graduate student with public
consistent with Libby (1985) and Bedard and Biggs
accounting experience (with differences reconciled
(1991a). Participants were requested to list up to
by a third coder when necessary). Following Fig. 1,
four error hypotheses (explanations) that might
Research Questions 1 through 3 address whether
have caused the differences between projected and
auditors realize that information is inconsistent with
actual amounts, including which accounts would be
their explanations, and whether they adapt their
affected.7 The second stage of the task contained an
explanations after realizing the inconsistency. Rules
expanded set of client information, including the
for coding the verbal protocols to address each
6
In order to focus attention on the discrepancies, participants
research question are as follows.
were told that projections should be considered very reliable. Preliminary: Identication of explanations. An `explana-
7
Participants of this decision process study performed the tion' was coded when the auditor named an error that
same task as those of a larger study examining the impact of
knowledge content and structure on auditors' revision of may have caused the differences between projected
explanations (Maroney, 1994). Following the design of the and actual nancial information.9
larger study, two recall tasks designed to measure knowledge
content and structure preceded the tasks analysed here. These 8
prior tasks were related to recall of risk factors and inventory The two-stage task is consistent with audit practice, in that
and accounts receivable errors, and thus may have increased auditors often view part of a client's nancial results (perhaps
the proportion of accounts receivable and inventory errors on an interim basis, or for a particular transaction cycle only),
proposed from the initial information set. However, a to be followed by review of more complete nancial data at a
concentration of initial explanations in accounts receivable later time. Explanations generated from analytical procedures
and inventory might have been expected regardless, due to: must then be updated according to the new information.
9
(1) high error frequencies in those accounts in practice; (2) the Although participants were asked to generate error
importance of the accounts; and (3) the fact that many errors explanations only, protocols were examined for generation
are consistent with the initial set of nancial data. These tasks of non-error explanations. Only one was found, and was
would not affect comparisons among experience levels included in the analysis. The explanations generated by
because all participants completed them. participants are listed in Appendix B.

Int. J. Audit. 1, 187204 (1997) # 1997 John Wiley & Sons, Ltd.
Auditor's Use of Inconsistent Evidence 193

Table 1. Explanations proposed during the second stage

Participant Column A: Column B: Attend to Column C: Recognize Column D: Attempt revision
Explanation inconsistent cue? as inconsistent? due to the inconsistency?

A1 11 Y
2* Y
A2 1* Y Y
2 Y
33
A3 1 Y Y Y
2
A4 11
2* Y Y
3
A5 11 Y Y Y
22 C C C
33 Y
4*
5*
6*
S1 1* Y Y Y
S2 1* Y Y
S3 1 Y Y Y
2
2* Y Y Y
S4 1 Y Y Y
2* Y Y Y
S5 11
2*
3 Y
M1 1*
1* Y Y Y
22 Y
3*
3* C C C
44 C C C
M2 1 Y Y Y
22 C C C
33 Y Y Y
44 Y
55 Y Y Y
6*
6* Y Y Y
77 Y Y Y
M3 1 Y Y Y
2 Y Y Y
3 Y Y Y
44
5*
5* Y Y Y
66 C C C
M4 1 Y Y Y
22 Y Y
33 Y Y
44 C C C
55 Y Y Y
66
7* C C C
Explanations not from initial list are shaded. Most likely explanations are indicated by an asterisk. `C' indicates a correct explanation (i.e. no
information was inconsistent). For incorrect explanations, achievement of each step of inconsistency evaluation (attention to the inconsistent
cue, recognition of the inconsistency and attempted revision) is indicated by a `Y' in the respective column.
# 1997 John Wiley & Sons, Ltd. Int. J. Audit. 1, 187204 (1997)
194 J. J. Maroney and J. C. Bedard

Table 2. Number and quality of explanations generated (in total and from the expanded data set) by experience level

Experience level Number of explanations generated Number from expanded set Number of correct explanations

Assistants 16 A 7 1A
Seniors 9A 2 0A
Managers 24 19 6
Total 49 28 7
Explanations generated were determined through analysis of verbal protocols collected during the second stage of the task, in which
nancial information was available beyond that contained in the rst stage. `From Expanded Set' refers to explanations generated
during this phase that were not considered during the initial phase. `Correct' explanations are those for which there is no inconsistent
information, i.e. the explanation ts all nancial cues in the task. Experience levels not different from each other (Mann-Whitney U Test,
p < 0.10) are identied by a common letter (A) in the respective columns.

Preliminary: Determination of cues inconsistent with each
explanation. A cue (one of the nancial statement items)
was coded as inconsistent with an explanation if it: (1)
would cause a discrepancy opposite in direction to the
case (e.g. would cause a decrease in Return on
Investment instead of an increase); (2) does not explain
a discrepancy contained in the case; or (3) would
produce a discrepancy not contained in the case. If an
explanation did not have any inconsistent cues, it was
coded as a correct explanation.
RQ1(a): Attention to inconsistent cues. After inconsistent
cues were identied, attention to those cues was coded if
the cue was mentioned by the participant during the
explanation testing period. The explanation testing
period begins after an explanation has been generated
and ends either when that explanation has been explicitly
rejected, or when a new explanation has been generated.
(b): Recognition of inconsistent cues. Explicit recognition
of a cue as being inconsistent was coded when the
participant indicated that the cue did not t with an
explanation in mind.
RQ2: Revision of current explanations. Following recog-
nition of inconsistent cues, an attempt to revise was
coded if the participant explicitly rejected an explana-
tion, proposed a revised explanation, or noted that the
explanation was incomplete due to the inconsistent
cue.
RQ3: Reasoning when current explanation was not revised.
If the current explanation was not revised, verbal
protocols were examined for evidence that cues
recognized as inconsistent were:
(i) ignored (no processing of the recognized cue was
evident);
(ii) explained away (the validity of the cue was
questioned, or an explanation was offered that
attempted to make the cue t the explanation).
The independent codings of cue consistency
using the preliminary coding rules and the treat-
ment of those cues according to the model were
highly reliable. Agreements of the codings were
98% (Kappa 0.954, p < 0.0001) for cue consistency
and 87% (Kappa 0.81, p < 0.0001) for cue treat-
ment, respectively.
RESULTS
Number and Nature of Explanations Generated
The number and nature of explanations gener-
ated by an individual during the task determines
the size and quality of the set being evaluated. Thus,
analysis of explanations generated provides a
background for discussion of the evaluation pro-
cesses that are the main focus of the study. Table 1
presents data on each explanation generated by
individual participants during the second stage of
the task, in which they evaluated the expanded set
of client information. Column A of Table 1 lists each
explanation considered by the participants. Column
A also indicates whether each explanation was
carried over from the initial list (not shaded) or
based on the expanded information set (shaded).
Columns B, C and D show whether an explanation
is correct (indicated by `C'). For the remaining
(incorrect) explanations, achievement of each step of
inconsistency evaluation (attention to the inconsis-
tent cue, recognition of the inconsistency and
attempted revision) is indicated by a `Y' in the
respective column. If the participant did not achieve
a particular step for an explanation, the relevant
column is blank.
Table 2 summarizes this information by experi-
ence level, showing that the study's 14 participants
proposed 49 explanations during this stage, of

Int. J. Audit. 1, 187204 (1997) # 1997 John Wiley & Sons, Ltd.
Auditor's Use of Inconsistent Evidence 195

Table 3. Use of inconsistent information in evaluating explanations, by experience level

RQ1(a) RQ1(b) RQ2

Attend to Recognize Attempt
inconsistencies inconsistencies to revise
Number of
Experience incorrect Mean Mean Mean
level explanations Number percentage Number percentage Number percentage

Assistants 15 8 58.0 A 4 27.2 2 14.0 A

Seniors 9 7 86.6 A 6 80.0 A 5 60.0 A B
Managers 18 16 90.0 A 14 73.3 A 12 63.3 B
Total 42 31 24 19
This table concerns how inconsistent evidence was used in evaluating explanations; therefore, only incorrect explanations are included.
Information was considered inconsistent with an explanation when the explanation, if true, would have caused a nancial cue to vary
in a way other than that contained in the case. `Attention to inconsistencies' was coded if the cue was mentioned by a participant.
`Recognition' of an inconsistency was coded if the participant explicitly noted that the cue was inconsistent with the explanation.
`Attempt to revise' was coded if the participant explicitly rejected an explanation, proposed a revised explanation, or noted that the
explanation was incomplete due to the inconsistent cue. The percentage of explanations for which each step was achieved was
calculated for each individual participant. An average of these percentages was then computed to arrive at the `Mean Percentage'
shown in the table. Groups not different from each other (Mann-Whitney U Test, p < 0.10) are identied by common letters (A or B) in
the respective columns.

which seven had no inconsistent information and
are therefore correct. The number of explanations
generated differs across experience levels. Managers
considered more explanations than either assistants
(Mann-Whitney U Test, p 0.032) or seniors
(p 0.016).10 While assistants generated somewhat
more explanations than seniors, this difference was
not signicant (p 0.151).
Table 2 shows that 28 new explanations were
proposed in response to the expanded set of client
data, and thus 21 explanations were carried over
from the initial set. The mean number of new
explanations proposed in the second stage was 1.4
for assistants, 0.4 for seniors, and 4.8 for managers.
Managers proposed more new explanations from
the expanded information than assistants (p 0.016)
and seniors (p 0.016). Also, assistants developed
more new explanations from the expanded infor-
mation set than did seniors (p 0.095). Thus,
relative to managers, both assistants and seniors
had difculty in going beyond their initial explana-
tion set in light of new information, but assistants
were slightly better than seniors in this regard.
In addition to the number of explanations
generated, the quality of those explanations is also
an important indicator of performance in the task.
Each explanation was evaluated using the preli-
minary coding rules to determine if any nancial
cues were inconsistent with that explanation. There
were seven explanations with no inconsistent
information, which were deemed correct. Table 2
shows that one assistant and no seniors generated a
correct explanation, while each of the four audit
managers generated at least one correct explanation
(totalling six correct explanations). This perfor-
mance difference is signicant for the managers
versus assistants (p 0.032) and managers versus
seniors (p 0.016), but assistants and seniors did
not differ (p 0.691).
Taken as a whole, the results summarized in
Table 2 suggest that audit experience plays a role in
the ability to generate more, higher quality explana-
tions from the expanded information set. Managers
developed a broader set of explanations to evaluate
than either seniors or assistants, and were less
conned to their initial lists. This result conrms
and extends ndings of previous studies of hypoth-
esis generation, and will be discussed further in the
concluding section. The following sections discuss
how participants evaluated the explanations they
generated, in particular how they dealt with
information inconsistent with those explanations.

10
Differences across experience levels are compared using
the Mann-Whitney U Test (two-tailed). Statistical tests are
included to support conclusions drawn from process analysis.
Non-parametric methods are used becaase they are conserva-
tive, and small sample sizes make use of parametric models
inappropriate.
Research Question 1: Attending To And
Recognizing Inconsistent Evidence
Of the 49 explanations generated during the second
stage, 42 explanations had at least one inconsistent
cue, indicating that the auditors could have

# 1997 John Wiley & Sons, Ltd. Int. J. Audit. 1, 187204 (1997)
196
recognized inconsistencies and revised these ex-
planations. The rst step in successfully handling
inconsistent evidence is to develop awareness of
the inconsistency. The inconsistent evidence must
be noticed and recognized as not supporting the
explanation. Table 1 shows whether participants
attended to (Column B) and recognized (Column
C) inconsistent cues for each explanation consid-
ered, and Table 3 summarizes this information by
experience level. Table 3 indicates that for 31 of the
42 explanations, the auditor proposing the expla-
nation attended to at least one inconsistent cue
while evaluating the explanation (RQ1(a)). For the
remaining 11 explanations, no evidence of attention
to inconsistent information while evaluating the
explanation was found. Either these explanations
were not evaluated, or only consistent evidence was
used to evaluate them. For managers, the mean
percentage of explanations for which participants
attended to at least one inconsistent cue was 90%,
while seniors attended to inconsistent cues for an
average of 86.6% of their explanations. The percen-
tage for assistants was lower (58.0%), but differ-
ences by experience level were not signicant (none
of the comparisons between ranks yielded p < 0.10).
This result implies that experience did not signi-
cantly affect auditors' attention to cues that were
inconsistent with explanations under consideration.
In order to be used effectively in the evaluation
process, inconsistent cues must not only be noticed
but also recognized as inconsistent (RQ1(b)). Over-
all, at least one cue was recognized as inconsistent
for 24 of the 42 incorrect explanations. The
experience levels differ on this dimension of the
evaluation process. For managers, the mean percen-
tage of explanations for which inconsistencies were
explicitly recognized was 73.3%. This percentage is
similar to the seniors' mean recognition perfor-
mance of 80.0 percent (p 0.191). Both managers
and seniors outperformed assistants, who recog-
nized inconsistent information for 27.2% of the
explanations they generated (p 0.016 and
p 0.095, respectively).
Research Question 2: Revision On The Basis Of
Inconsistent Evidence
Once information is recognized as inconsistent
with an explanation, the next step in successfully
incorporating the inconsistency is to reject and/or
revise the current explanation. For example, M4
was testing an overstatement of sales explanation
when he noted that the actual value of sales was
similar to the projected amount, and stated, `Sales
Int. J. Audit. 1, 187204 (1997)
J. J. Maroney and J. C. Bedard
is consistent. So it's telling me that we probably
didn't make any, book any sales that we shouldn't
have.' S3 was testing a similar explanation when he
acquired the sales cue and said, `Well, sales were
the same, so that blows that theory.'
Table 3 shows that overall, revision was at-
tempted for 19 of the 42 incorrect explanations.
Managers attempted revision for 63.3% of their
explanations, seniors 60.0% and assistants 14.0%.
Managers outperformed assistants on this dimen-
sion (p 0.032), while managers and seniors per-
formed equally well (p 0.730). Although the
seniors' mean of 60% appears higher than the
assistants' 14.0%, the difference between seniors
and assistants was not signicant (p 0.310). In
contrast to the managers, all of whom attempted to
revise some explanations that were known to be
inconsistent with client information, the seniors
were more variable in performing this step in the
process. Three of ve seniors, who were the most
experienced in terms of time on the job, attempted
revision of all explanations being considered, while
the remaining two did not attempt to revise any
explanation in their set.
In summary, the auditors in this study attended to
inconsistent cues at a fairly high level, and attention
did not signicantly differ across experience levels.
However, the auditors varied in further steps of the
evaluation process. While most seniors and managers
explicitly noted that cues were inconsistent, the
assistants recognized the inconsistency in relatively
few instances. As a group, managers were more adept
at moving beyond inconsistency recognition to reject
or revise the current explanation. In the following
section, quotes from the verbal protocols provide
evidence of decision processes associated with failure
to incorporate inconsistent information in the expla-
nation evaluation process.
Research Question 3: Decision Processes
Inhibiting Incorporation Of Inconsistent
Information
The ndings discussed above indicate that for
some auditors, incorporating inconsistent informa-
tion is difcult. Schank (1986) proposes that
reasoning processes concerning explanation beha-
viour can be best understood by studying instances
in which decision makers have difculty. To
investigate processes underlying the numerical
results, we examined verbal protocols of auditors
who recognized inconsistent cues, but did not
revise currently held explanations to develop a
correct solution for the case (A2, A4 and S2).
# 1997 John Wiley & Sons, Ltd.
Auditor's Use of Inconsistent Evidence
Protocols were coded for evidence of the interpreta-
tion biases proposed by Johnson et al. (1982):
ignoring inconsistencies and explaining them away.
In addition to the biases identied by Johnson et al.,
we found that the performance of some auditors was
reduced because they failed to elaborate on incon-
sistent cues (i.e. they noted them, but applied little
effort to understanding their role in the problem).
Examples from the protocols illustrating each beha-
viour are given in the following paragraphs.
Ignoring the evidence
A4 ignored inconsistent evidence that had been
recognized as inconsistent. His explanation was that
`sales were recorded that don't exist.' Both Recei-
vables Turnover and Sales were inconsistent with
this explanation, as neither showed a difference
between projected and actual. He noted that:
`Sales hasn't changed.
Well, projected met the actual.
That's kind of interesting that your sales would be
right on the mark.'
A4 did not try to reconcile the lack of a discrepancy in
Sales with the `overstatement of sales' explanation,
and accepted that explanation as most likely. Thus,
the inconsistent evidence was ignored, and not
incorporated into revising the current explanation.
Explaining away
Two other auditors who recognized inconsistent
information explained away the inconsistency, and
maintained their current incorrect explanations.
While evaluating the explanation that Sales were
overstated, A2 recognized that Sales should have
increased, but explained away the inconsistency as
follows:
`Even though sales do agree with the projected
amount,
maybe there is an autocratic type of management,
which would strive to meet the projected and thus it
shows that they met the projected,
so therefore they wanted to increase their sales to
reach that projected amount.
Our quick ratio is off, since our accounts receivable is
overstated.
So, I'm still going to say that sales being overstated is
our most likely error.'
Even though Sales being the same was incon-
sistent with an overstatement of Sales explanation,
A2 attempted to rationalize his selection of this
explanation.
S2 also explained away inconsistent evidence
while testing the following explanation:
# 1997 John Wiley & Sons, Ltd.
197
`Maybe there's some type of error.
There is an adjustment that's hitting,
a debit to inventory, and a credit to cost of sales.'
Cues inconsistent with this explanation were that
the Inventory Turnover remained constant and the
Quick Ratio increased from projected to actual. S2
recognized the inconsistency of the quick ratio, but
reasoned as follows:
`That would cause the quick . . .
Inventory I think is considered a quick asset. So that
would cause.
No, it's not considered a quick asset. That didn't
increase that much anyway.'
Thus, S2 accepted an error in adjusting
Inventory and Cost of Sales as his most likely
explanation by `explaining away' the size of the
change. While his explanation did address both the
change in the Current Ratio (11.5%) and Debt To
Equity (7.7%), the amount of the quick ratio
discrepancy (13.4%) was relatively larger than those
discrepancies.
Extent of elaboration
Another important decision process factor affecting
success in the task was elaboration. Recognizing
and processing inconsistent information is cog-
nitively difcult. Inconsistent infor-mation requires
greater mental effort to integrate with existing
knowledge than consistent information (Fiske et al.,
1983; Choo and Trotman, 1991), and this effort
shows in the protocols in the amount and type of
reasoning applied to the problem. The amount of
elaboration on inconsistent cues seems related to
aspects of the decision process, including recogni-
tion of cues as inconsistent and integration of
inconsistent cues in explanation revision. Examples
of each follow. First, to illustrate the role of
elaboration in recognition of inconsistencies, the
protocol of A2 shows this auditor testing the
explanation that Sales were overstated. Early in
the decision process, A2 had acquired both Sales
and Receivable Turnover cues, which were incon-
sistent with an overstatement of Sales (neither had
changed from projected to actual). A2's protocol,
quoted below, shows this assistant acquiring cues
but not analysing their relationship to the current
explanation:
`Net sales over ending accounts receivable.
Receivable turnover.
Inventory turnover. Cost of goods sold over ending
inventory.'
Int. J. Audit. 1, 187204 (1997)
198
Thus, while attention to these cues is evident,
there was little effort put into analysing them. The
inconsistencies of these cues and a Sales over-
statement were not recognized, and eventually an
incorrect explanation was accepted. Other assistants
also had little elaboration on inconsistent cues and
therefore did not recognize inconsistencies. Failure
to elaborate is consistent with ndings of other
studies that relatively inexperienced professionals
use `surface reasoning' rather than more in-depth
analysis (e.g. Biggs et al., 1989).
The second aspect in which elaboration was
important was in integrating inconsistent informa-
tion that had been recognized. In particular, the
assistants and seniors who attempted to integrate
inconsistent evidence tended to devote more effort
to the inconsistencies than those who explained
them away. For example, S4 was testing the
explanation that `something happened in terms of
the recording of inventory.' S4 recognized that
Inventory Turnover and the Quick Ratio were
inconsistent with this explanation and elaborated
on these cues for over 400 words of protocol. This
contrasts with A2 and S2, who explained away
inconsistencies in less than 50 words. This tendency
to less elaboration when explaining away incon-
sistencies addresses an issue raised in prior
research. Church (1991), studying auditors with less
than ve years of experience, supposed that
explaining away inconsistent cues would result in
extensive mental effort. In contrast, verbal protocols
in this study suggest that the attempt at integration
requires more cognitive effort than explaining away
inconsistencies for auditors at that level.
CONCLUSIONS, LIMITATIONS AND
IMPLICATIONS
This study concerns auditors' evaluation of evi-
dence inconsistent with proposed explanations for
analytical procedures discrepancies. Our design
builds on prior research by focusing specically on
evidence evaluation, in a two-stage process. This
setting is important because in practice, explana-
tions are developed from a set of client information
and then evaluated using expanded information
sets as additional evidence is gathered. Audit
quality will be enhanced if auditors are able to
abandon quickly explanations that do not t
currently available information, and generate new
explanations for further testing. While there have
been a number of studies of explanation genera-
tion, few have focused specically on how gener-
Int. J. Audit. 1, 187204 (1997)
J. J. Maroney and J. C. Bedard
ated explanations are evaluated. We nd that
auditors at different experience levels (manager,
senior and assistant) do not differ in attention to
inconsistent evidence. However, good performance
in recognizing evidence as inconsistent with an
explanation is apparent among managers and
seniors only. Managers were better at incorporating
recognized inconsistencies and continuing on with
the process of rejecting/revising explanations on
that basis. Further, managers generated more
explanations in response to the expanded informa-
tion set, and were more likely to develop explana-
tions that t client information. Thus overall,
managers clearly outperformed assistants, while
the seniors occupy an intermediate position, per-
forming some steps of the process better than other
steps.
Verbal protocols indicate that decision processes
associated with difculty in integrating inconsistent
evidence include interpretation biases, such as
ignoring inconsistencies or explaining them away.
Thus, incorrect explanations were accepted because
auditors either did not look deeply enough to see
that their explanations were incorrect, or they were
satised because most of the cues that they saw
were accounted for by their explanations (even if all
were not). Similarly, Johnson et al. (1991) found that
auditors who explained away inconsistent nancial
information in concurring partner review did not
uncover the client's fraud.
Overall, these ndings suggest that the more
complex aspects of evidence evaluation (recognition
and revision) develop with audit experience. The
most difcult step appears to be integrating
recognized inconsistencies into the revision of
currently held explanations. We nd that some
seniors perform this step well, while others do not.
Previous research has not directly addressed this
issue. For instance, Choo and Trotman (1991) found
that seniors were more likely than assistants to
recall atypical cues, suggesting (in terms of the
model used here) better recognition of inconsisten-
cies. However, participants in that study were not
asked to incorporate the recognition of inconsisten-
cies into subsequent judgements through further
cognitive processing, as would be the case in audit
practice. Our results show this as the step in which
seniors have difculty, and that managers are more
consistent in their ability to proceed through all
stages of the model.
Although seniors' performance was similar to
managers' in some aspects of explanation evalua-
tion, they were clearly less procient at explanation
generation. Managers developed a better set of
# 1997 John Wiley & Sons, Ltd.
Auditor's Use of Inconsistent Evidence
explanations than both seniors and assistants, in
terms of quantity and quality. Differences between
managers and seniors in the quality of explanations
generated are consistent with Bedard and Biggs
(1991a), who studied analytical procedures using case
materials with a different seeded error. In addition to
overall ndings on quantity and quality of explana-
tions, the current study's two-stage design also
showed that fewer new explanations were proposed
by assistants and seniors after they received the
expanded set of client nancial data. Similarly, Hei-
man-Hoffman et al. (1995) found that seniors with
about three years' experience had difculty in
generating new explanations beyond an initial set.
A possible explanation for difculty experienced
by assistants and seniors in generating new explana-
tions is `output interference', which means that
whatever people think about rst inhibits later
thoughts about an issue (e.g. Moser, 1989; Frederick,
1991; Anderson et al., 1992). Output interference
predicts that as people attempt to propose additional
explanations, explanations already proposed will
interfere with this process. As Kinney and Haynes
(1990) point out, the inability to propose new
explanations about client conditions is especially
risky when auditors seek initial explanations from
client management. Thus, further investigation of the
factors affecting this tendency, and ways of mitigating
it, is called for. This is especially important given our
result that seniors proposed fewer new explanations.
Why do seniors underperform managers in
explanation generation and not in recognition of
inconsistent evidence? When evaluating an expla-
nation, the auditor is determining whether it
adequately explains observed discrepancies. Gen-
eration of a new explanation requires further mental
processing in order to retrieve from memory
another explanation that may t the data. Research
in psychology and auditing indicates that retrieval
from memory is a more difcult cognitive process
than recognition of t with data (e.g., Gillund and
Schiffrin 1984; Bedard and Biggs, 1991b). Thus,
facility in retrieval may develop later than facility in
recognizing inconsistencies. Further, retrieval of
explanations may be related to how error knowl-
edge is organized in memory. Several studies have
found that the structure of error knowledge
becomes more multidimensional with experience,
with categorization by audit objective becoming
more developed at manager rank (e.g. Frederick et
al., 1994; Bonner et al., 1996). More developed
associations among errors may be necessary for
generating additional explanations, but not as
necessary for comparing available explanations with
# 1997 John Wiley & Sons, Ltd.
199
client data. The implications of these results for
audit practice are considered following discussion
of the study's limitations.
Limitations
There are several limitations of this study. First, as
with all studies of auditor judgement, the task did
not contain as much client information as would be
encountered in practice. For instance, in practice
the auditors would have a detailed knowledge of
their audit clients, including prior years' nancial
statement errors, the client's control systems, its
industry and risk factors specic to that industry.
Also, options for further action such as consulta-
tion with colleagues were limited. These limitations
were mitigated by making the case information as
realistic as possible, consulting experienced practi-
tioners on task design, and by pretesting with
practising auditors. A second limitation is that the
verbal protocols may not be a complete trace of all
thoughts during the task. Procedures suggested by
Ericsson and Simon (1984) were followed to ensure
that the protocols were valid and as complete as
possible. Also, coding of the verbal protocols
involves some subjectivity, but reliability was
enhanced by the use of multiple coders. Verbal
protocol research concentrates on the depth of the
decision process with small numbers of subjects,
reducing the power of statistical tests. Thus,
additional research using larger numbers of audi-
tors will help validate our conclusions.
Implications for Audit Practice
These ndings have implications for audit practice,
in terms of training and workpaper documentation
practices. For auditor training, this study's results
show that as audit experience is gained, better use
of inconsistent evidence occurs. However, some
auditors at the senior level still exhibit interpreta-
tion biases (underweighting or explain away
inconsistent information) and have difculty over-
coming initial explanations. Audit rms may need
to address these problems in their assistant and
senior training programs to mitigate their detri-
mental effects. Also, decision aids may be devel-
oped for assistants and seniors that prompt
consideration of alternative explanations and pro-
mote questioning of why some evidence might be
inconsistent.
In addition to issues of processing inconsistent
evidence, the issue of how auditors document
inconsistent evidence in the audit workpapers is
important. It is likely that inconsistent evidence that is
Int. J. Audit. 1, 187204 (1997)
200 J. J. Maroney and J. C. Bedard

not acquired, not recognized, or ignored in processing
will not be included in workpaper documentation.
But if inconsistent information is explained away, is
that explanation documented in the workpapers or
omitted? If this inconsistent evidence is omitted, a
reviewer will have a biased information set on which
to evaluate the subordinate's judgement. Gibbins
(1984, 117) reports that, during interviews with public
accountants, the assertion was made that the audit
working papers `do not tell the real story of why
decisions are made, and stories about selecting, or
excluding, information from any explanations so as to
create a desired portrayal of what happened.' If
auditors do exclude inconsistent information from the
audit workpapers, the benet of the review process as
a quality control procedure is reduced.
An additional issue regarding workpaper doc-
umentation is raised by the recent trend of some of
the major audit rms to conduct some of their
reviews by interview/discussion, with only the
signicant issues being documented after consulta-
11
Our thanks to an anonymous reviewer for identifying this
recent trend and its potential implications.
tion with a more experienced auditor.11 Our results
suggest that if this review by interview/discussion
occurs at the assistant and senior level, some
information may be explained away and not docu-
mented in the workpapers. Audit rms should be
aware of potential weaknesses of this practice, being
particularly careful that any such consultation be
conducted by auditors with extensive experience (e.g.
audit managers). Further research should examine
potential benets and costs of this review practice.
ACKNOWLEDGEMENTS
The authors thank Brenda Anderson, Stan Biggs,
Len Katz, Tim Rupert, Marjorie Shelley, participants
of the 1995 Northeast Regional and 1995 National
Meeting of the American Accounting Association,
and participants of the accounting workshops at
Northeastern University and the University of
Connecticut, for helpful comments on earlier ver-
sions of this paper. Please address correspondence
to the rst author. Data used in this study are
available from the authors upon request.

APPENDIX A
Initial Analytical Task
Below is information related to an audit analytical procedure. Your task is to list below up to four (4)
specic errors which may have led to the changes in the ratios, in the order in which they come to mind.
You can assume that one single error caused all the changes between the projected and actual amounts. In
your answers, be specic about the accounts that are affected (indicate both debits and credits). After you
list up to 4 errors below, please select the one error that you consider the most likely error by writing MLE
to the right of that specic error. In addition, assign weights to all of the hypotheses you have selected,
based on your estimate it is the one error that has caused all the changes between the projected and actual
amounts. Assign a total of 100 points.
1991 1991
Ratio Projected Actual
Return on Investment (net income 24.3% 29.2%
over stockholders' equity)
Current Ratio (current assets over 1.82 2.03
current liabilities)
Debt to Equity Ratio (long-term debt .13 .12
over stockholders' equity)

Description of Error Accounts Affected Assigned Weight

1.

2.

3.

4.

Int. J. Audit. 1, 187204 (1997) # 1997 John Wiley & Sons, Ltd.
Auditor's Use of Inconsistent Evidence 201

Final Analytical Task

In addition to return on investment, current ratio and the debt to equity ratio, you are now provided
with several other ratios and balances. Remember that you can assume that one single error has caused all
the changes between the projected and actual amounts. Your task is to list on the next page what you
consider to be the most likely error that may have led to the changes in the ratios or balances. You may
select one of the hypotheses you listed previously or you may list a new hypothesis. If you have difculty
in selecting a single most likely error hypothesis, you may list up to two alternative hypotheses.
1991 1991
Ratio or Balance Projected Actual
Return on Investment (net income 24.3% 29.2%
over stockholders' equity)
Current Ratio (current assets over 1.82 2.03
current liabilities)
Debt to Equity Ratio (long-term debt .13 .12
over stockholders' equity)
Sales $51,000,000 $51,000,000
Operating Expenses
(S, G & A and R & D expenses) $15,200,000 $15,200,000
Other Income (Expenses), net
(includes Interest Income and Expense) ($116,000) ($116,000)
Quick Ratio (Cash, accounts receivable .97 1.1
& marketable securities over
current liabilities)
Receivable Turnover (Net Sales 5.2 5.2
over ending accounts receivable)
Inventory Turnover (Cost of goods 3.5 3.5
sold over ending inventory)
Additional Information:

There were no discontinued operations, extraordinary items, or the cumulative effect of an

accounting change during 1991.
Most Likely Error Hypothesis1 Assigned Weight2

100 points
1
If you have difculty in selecting a single most likely error hypothesis, you may list up to two alternative hypotheses.
2
Please complete this section only if you have listed more than one hypothesis.

# 1997 John Wiley & Sons, Ltd. Int. J. Audit. 1, 187204 (1997)
202 J. J. Maroney and J. C. Bedard

APPENDIX B

Explanations Proposed During The Second Stage

A1 1. I'm trying to think if the long term debt could have been misclassied, as into a current liability.
2. It could have to do with accounts receivable. So if accounts receivable were somehow overstated.
A2 1. So if the sales, you overstate the sales.
2. I'm still looking at this, purchases being overstated.
3. So I'll say our allowance as an additional possible error, that our allowance for accounts receivable is understated
A3 1. Overstatement of sales revenue.
2. They probably increased their stockholders' equity. They sold more stock.
A4 1. It looks like it's a, could be cash or marketable securities.
2. Sales recorded that don't exist.
3. Stockholders' equity is understated.
A5 1. An error in stockholder's equity.
2. So it could be an error in current liabilities, declined.
3. Maybe it had something to do with inventory or prepaids.
4. Overstating income (sales, interest income, investment income).
5. Overstated receivables.
6. Short-term investment error in recording interest income, current assets.

S1 1. I'm going to go with receivables being overstated and sales being overstated.
S2 1. Maybe there's some type of error. There is an adjustment that is hitting, a debit to inventory and a credit to cost
of sales.
S3 1. Sales are overstated.
2. If we incorrectly recorded the issuance of debt, like the current portion and long term portion of debt.
S4 1. My guess would be that accounts receivable for some reason is higher than projected.
2. The area where I have the most question now is really in the cost of sales area, in the gross margin area. I was
kind of thinking that maybe something happened in terms of the recording of inventory that was throwing off
this difference.
S5 1. Marketable securities are overstated.
2. Incorrect early extinguishment of debt.
3. Sales are overstated.
M1 1. Error in stockholders' equity.
2. Current asset has an error.
3. I would look at the components of the quick asset ratio.
4. It would be in one of their non-standard operations.
M2 1. Interest expense was perhaps not accrued on the debt.
2. Liabilities were understated (we didn't accrue something).
3. Cash and so forth was overstated.
4. Unless they forgot to record an equity transaction. They could have purchased treasury stock.
5. They could have issued stock and forgot to record the issuance of stock.
6. The error impacts the balance sheet, but not the P & L.
7. It has something to do with investments, maybe market value adjustments.
M3 1. It appears to be in inventory
2. So it's pointing more towards it being in receivables
3. A change in the write-off policy for accounts receivable
4. A misapplication of cash. An error of cash application.
5. It can be in the other expense area and prepaids
6. A tax error.
M4 1. Book sales that we shouldn't have
2. An error in cost of sales, I probably understated my cost of sales.
3. Made the same change in cost of goods sold as inventory.
4. Nothing in equity other than income would have changed
5. Overcapitalized something within inventory. It could be material, labor or overhead.
6. An underaccrued material purchase.
7. Underaccrued liability or unrecognized payable.

Int. J. Audit. 1, 187204 (1997) # 1997 John Wiley & Sons, Ltd.
Auditor's Use of Inconsistent Evidence
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J. J. Maroney and J. C. Bedard
AUTHOR PROFILES
Jean C. Bedard, is the Josephe M. Golemme
Research Professor in the College of Business at
Northeastern University, and holds degrees from
Brown University, the University of Cincinnati, and
the University of Wisconsin-Madison. Her current
research concentrates on how decision quality is
affected by ways in which accounting information is
acquired and used, particularly in the contexts of
auditing and lending. She has been published in
such journals as Management Science, The Accounting
Review, Auditing: A Journal of Practice and Theory,
Contemporary Accounting Research, and Behavioral
Research in Accounting.
James J. Maroney, is an Assistant Professor at
Northeastern University, and holds BS and PhD
degrees from the University of Connecticut and an
MBA from New York University. His research
explores behavioural issues in the contexts of
auditing and tax. He has an article forthcoming in
The Journal of the American Taxation Association.
# 1997 John Wiley & Sons, Ltd.