The internal auditor of a bank has developed a multiple regression model that 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.
Which of the following conclusions is justified by the change?
- Changing to a cross-sectional regression analysis should cause r2to increase.
- Regression analysis is no longer an appropriate technique to estimate interest income.
- Some new factors not included in the model are causing interest income to change.
- A linear regression analysis would increase the model's reliability.
Answer(s): C
Explanation:
The coefficient of determination (r2) is the amount of variation in the dependent variable (interest income) that is explained by the independent variables. In this case, less of the change in interest income is explained by the model. Thus, some other factor must be causing interest income to change. This change merits audit investigation.