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 the model
otherwise seems to be working okay. Which of the following
conclusions are justified by the change?
(c) The requirement is to provide an explanation for a
drop in r2. The coefficient of determination (r2) provides a
measure of amount of variation in the dependent variable (interest
income) explained by the independent variables. If there is a
dramatic decrease in the coefficient of determination, the implication
is that there are some new factors that are causing interest
income to change. Therefore, answer (c) is correct. Answer (a)
is incorrect because cross-sectional regression is not appropriate.
Management is attempting to estimate interest income over time.
Answer (b) is incorrect because regression analysis may still be
appropriate. Answer (d) is incorrect because multiple regression
is a linear model. Management may want to try other models
such as nonlinear multiple regression.
All of the following are useful for forecasting the needed
level of inventory except:
(b) The requirement is to identify the factor that is not
relevant to forecasting the needed level of inventory. Answer (b)
is correct because knowledge of the internal accounting allocations
is not relevant to determining the demand for the product.
Answers (a), (c), and (d) are incorrect because they are all relevant
to determining demand for the product and, therefore, the
needed level of inventory.
Which of the following is a quantitative approach used to
develop sales forecasts based on analysis of consumer behavior?
(a) The requirement is to identify the sales forecasting
technique that involves estimating sales based on analysis of consumer
behavior. Answer (a) is correct because Markov techniques
attempt to forecast consumer purchasing by considering
factors such as brand loyalty and brand switching behavior. Answer
(b) is incorrect because regression analysis forecasts sales
based on the relationship between sales and one or more predictors.
Answer (c) is incorrect because econometric models forecast
sales based on the relationship between sales and economic
data. Answer (d) is incorrect because exponential smoothing is
used to forecast sales based on historical data.
Which of the following is a quantitative approach to developing
a sales forecast?
(c) The requirement is to identify the quantitative technique
to developing a sales forecast. Answer (c) is correct because
the moving average technique uses the average of sales for
the most recent periods to predict next period’s sales. Answer (a)
is incorrect because the Delphi technique is simply a structured
approach to developing a subjective estimate from a group of
people. Answers (b) and (d) are incorrect because they involve
qualitative approaches to developing a sales forecast.