The Internal Auditor of a Bank Has Developed a Multiple

question 322

Multiple Choice

The internal auditor of a bank has developed a multiple regression model which has been used for a number of years to estimate the amount of interest income from commercial loans. During the current year, the auditor applies the model and discovers that the R2 value has decreased dramatically, but that the model otherwise seems to be working correctly. Which of the following conclusions is justified by the change?

• A) Changing to a cross-sectional regression analysis should cause the R2 to increase.
• B) Regression analysis is no longer an appropriate technique to estimate interest income.
• C) Some new factors, not included in the model, are causing interest income to change.
• D) A linear regression analysis would increase the model's reliability.

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Definitions:

Tenancy for Years

A lease agreement that lasts for a specific and fixed period, after which it automatically ends without the need for notice.

Duration

The time period for which something lasts or is intended to last.

Notice to Terminate

A formal notification, often in writing, informing one party of the other party's intention to end an agreement or contract at a specified time.

License

A permit or authorization granted by an authority to engage in a particular activity or to use a particular property.