As a preliminary step in the selection of variables to use in a statistical-forecasting model,the management accountant has calculated the coefficient of correlation between the firm's sales and three economic indexes.The results were as follows:
Which of the following statements indicates the best course of action for the auditor to take in the development of a forecasting model?
A)Drop all three indexes from further consideration because a coefficient of correlation of + 1.0 is necessary for a statistically significant relationship.
B)Include only indexes B and C in the model because they have the only negative coefficients of correlation.
C)Include only index C in the model because its coefficient of correlation is relatively high and therefore probably statistically significant,while the coefficients of indexes A and B are likely to be insignificant.
D)Include only index A in the model because it has the only positive coefficient of correlation.

Question

As a preliminary step in the selection of variables to use in a statistical-forecasting model,the management accountant has calculated the coefficient of correlation between the firm's sales and three economic indexes.The results were as follows: 
Which of the following statements indicates the best course of action for the auditor to take in the development of a forecasting model?
A)Drop all three indexes from further consideration because a coefficient of correlation of + 1.0 is necessary for a statistically significant relationship. 
B)Include only indexes B and C in the model because they have the only negative coefficients of correlation. 
C)Include only index C in the model because its coefficient of correlation is relatively high and therefore probably statistically significant,while the coefficients of indexes A and B are likely to be insignificant. 
D)Include only index A in the model because it has the only positive coefficient of correlation.

Quizplus · Accepted Answer

A coefficient of correlation of +1.0 is not necessary for a statistically significant relationship. Additionally, the negative coefficients of correlation do not necessarily indicate that the indexes should be excluded from the model. Index C has the highest coefficient of correlation and is therefore the most likely to be statistically significant. The coefficients of indexes A and B may or may not be significant, but excluding them from the model without further analysis would be premature. Therefore, the best course of action is to include index C in the model and continue to evaluate the significance of the coefficients for all three indexes.

As a Preliminary Step in the Selection of Variables to Use