This paper develops the behavioral hypotheses which underly the design, operation, and audit of internal control systems. The traditional conception of the organizational setting of the internal control system in accounting literature resembles very closely what organization theorists have referred to as the formal organization. When the traditional behavioral hypotheses are examined in the light of current thinking in organization theory, however, some doubt is cast on the validity of the traditional hypotheses. Although the traditional hypotheses are not conclusively invalidated in this paper, enough doubt should exist to stimulate formulation of hypotheses more in agreement with organizational reality.

The article focuses on the issues related to the predictability of investor cash return from historical income trends of common stocks. If a prospective shareholder is to utilize past income trends as an indicator of things to come, he must be able to do three things. The first is to predict the rankings of available investment alternatives with respect to future earnings. The second is to qualify this prediction by investment cost and be able to predict future earnings per dollar of investment cost. And, finally, he must be able to predict the rankings of available investment alternatives in terms of actual cash return. Of the hundreds of stocks included in Moody's Industrial Manual, three hundred and fifty are treated in comprehensive detail. Of these stocks, one hundred ninety-eight were reported in sufficient detail to allow appropriate adjustments for valid computational and statistical purposes. The sample, therefore, will represent a fairly good cross section of American industry, although it will not include all major stocks. The large sample size suggests some compensation for the lack of strict randomness in sampling technique.

Decision tree, critical path or logical fan notations are becoming more and more recognized as useful tools for communicating complex issues. This is particularly true as the current generation of students matures with some introduction to these techniques, as well as to computer flow-charting and programming, which is but another notation of the same logical approach. Taxation, of course, offers numerous complex concepts, the teaching of which can be greatly aided by logical diagrams. One wonders why complex sections of the law itself are not defined in such a manner instead of in the traditional legalistic gobbledygook. The use of such diagrams for, as one example, child and disabled dependent care expense deductions either as a transparency projection or as a mimeographed handout can greatly improve the communication problems in taxation lectures. The diagram in this article has been used successfully in presenting this complex personal deduction. According to the diagram as represented in the article, a man is a widower if his wife has died and he has not remarried, he is divorced and has not remarried, or he is legally separated from his wife under separation decree. A wife is incapacitated if she is either mentally or physically incapable of taking care of herself or institutionalized for at least 90 consecutive days or until her death, if earlier.