The most likely potential red flag for fraud by the internal audit activity in the given scenarios is when monthly payroll reports are not vetted to ensure terminated employees have been removed from the payroll system. This situation can lead to payments to non-existent ("ghost") employees, a common fraud scheme, and represents a significant control weakness that could be exploited for fraudulent purposes.References: Institute of Internal Auditors (IIA) - International Professional Practices Framework (IPPF)

The internal audit charter is a formal document that outlines the purpose, authority, and responsibility of the internal audit activity. It includes the functional and administrative reporting lines for the chief audit executive, which helps define the independence and objectivity of the internal audit function. This charter is crucial as it also establishes the framework within which the internal audit team operates, ensuring alignment with organizational goals and governance frameworks.References: The Institute of Internal Auditors (IIA) - International Professional Practices Framework (IPPF)

According to IIA guidance, the internal audit activity can participate in and provide consulting services that add value and improve an organization's operations. By assisting the committee and consulting with management on the organization's responses and control activities, the internal audit activity utilizes its expertise in risk management while maintaining its advisory role without compromising its independence or objectivity.References: Institute of Internal Auditors (IIA) - International Professional Practices Framework (IPPF)

The most appropriate first step for the board to take when developing an effective system of governance is to identify key stakeholders and their expectations. Understanding stakeholders' expectations is fundamental to defining the governance framework that aligns with these needs and establishing the organization's strategic objectives and policies.References: IIA guidance on effective governance frameworks.

Due professional care requires internal auditors to understand the engagement objectives and scope fully, ensuring their work is thorough and appropriate for the given situation. It involves exercising appropriate diligence and professionalism during audits. References:
* IIA Standard 1220: Due Professional Care.
* IIA Practice Guide: Demonstrating Due Professional Care.