An improved hierarchical testing algorithm for combinational circuits with repetitive sub-circuits using the bus fault model has been proposed. This model exploits the regularity of a circuit by grouping together identical gate-level sub-circuits into high-level sub-circuits. Though the existing test generation techniques using this model reduces the required time substantially in many cases, it fails on encountering incompatibility between the inputs and outputs of high-level modules. The algorithm proposed helps in resolving high level incompatibility. The concept of a state transition graph has been used and it has been shown that resolving incompatibility at the high level is equivalent to finding a loop in the state transition graph. The technique is hierarchical in the sense that the original modeled high-level circuit is sub-divided into a number of components as soon as an incompatibility is encountered. The results of implementation of the algorithm for a class of combinational circuits indicate a significant reduction in the test generation time and complete fault coverage thus validating our technique.