Final answer:
The CAE should develop a risk-based plan by considering organizational goals and aligning audit activities with significant risks, utilizing information from various sources to identify and evaluate risks, and prioritizing areas of highest risk.
Step-by-step explanation:
In developing a risk-based plan to determine the priorities of the internal audit activity, the chief audit executive (CAE) should consider the organization's goals, the risks posing the greatest threat to achieving those goals, and align audit activities with the risks that could have significant impact on financial statements, compliance, operations, and reputation. The CAE should gather information from a variety of sources including past audits, management, and external events to identify and evaluate risk factors affecting the organization. Then, they should prioritize audit efforts on areas of highest risk and ensure that the resources available to the internal audit function are employed in the most effective manner to monitor, control, and mitigate those risks.