Auditory hallucination, one of the common symptoms of schizophrenia, has been thought to be induced by the failure of corollary discharge. It is consistent with the "dysconnectivity hypothesis" that disrupted interareal interactions among brain regions underlie schizophrenia symptoms. However, the exact mechanisms underlying corollary discharge and its relation to the pathophysiology of schizophrenia remain elusive. In this study we used a computational model of primary auditory cortex (A1) composed of pyramidal cells, fast-spiking (FS) and non-FS inhibitory interneurons to elucidate potential mechanisms by which disrupted corollary discharge generates auditory hallucination. Our simulation results suggest that disrupted cholinergic modulation accounts for abnormal gamma rhythms observed in people with schizophrenia. More importantly, in the model, top-down gamma rhythms suppress A1 responses in normal condition, but when cholinergic modulation is disrupted, they erroneously activate A1 instead of deactivating it. Based on our simulation results, we propose that disrupted cholinergic modulation can underline auditory hallucination.