Northwest Bank (NWB) has banking operations in 35 communities in the states of Washington, Oregon, and Idaho. Flea quarters for the bank are in Walla Walla, Washington. NWB’s loan portfolio consists primarily of agricultural loans, commercial loans, real estate loans, and loans to individuals. Credit-granting authority is primarily centralized in Walla Walla; however, certain seasoned loan officers have decision authority for small loans in their local area. Loan portfolio performance, monitoring, and ongoing credit quality assessments are performed in Walla Walla for all loans.

NWB has been an audit client for three years. Because of NWB’s strong controls over bank loans, the audit team places high reliance on controls (he., control risk is assessed as low). The audit approach calls for the audit team to gain assurance on the fairness of loan interest income primarily through the performance of analytical procedures. Additional detailed testing will only be performed if analytical procedures suggest interest income is materially misstated. Total reported interest income for 2008 is $35,337,204, and reported net income for the bank is $12,484,000. A misstatement of $525,000 is considered material.

In addition to comparing the 2007 interest income to 2006 interest income, last year’s audit team also developed an expectation for loan interest income using the average loan volume multiplied by the weighted average interest rate. Last year’s audit file indicates that the average loan volume agrees to numbers tested elsewhere in the audit file and that the interest rates used to compute the weighted average rate were comparable to rates published in a Washington State Banking Commission publication.

In an effort to develop a more precise (i.e., higher quality) expectation, you asked an associate to collect more detailed information, which is provided below. The quarterly rates are comparable to those reported in a Washington State Bank Commission publication. The quarterly loan volumes have been tied to audit work in other areas of the audit file. You decided not to have the associate track down detailed information for the “Individual and Other Loans” category because it is relatively small and is made up of heterogeneous loans. However, for the loans in the Individual and Other Loans category you do have the loan volume and weighted average interest rate as of December 31, 2007 and December 31, 2008. Recall that materiality for this area is $525,000.

[1] As part of the year-end audit and using the analytical-procedure approach similar to last year’s audit (average loan volume multiplied by weighted-average interest rate), determine if Northwest Bank’s interest income from loans reported at December 31, 2008 appears fairly stated. Do the results of the analytical procedure indicate that you accept 2008 interest income as reported?
Yes_ No_ Please briefly explain your answer.
[2] Based on the results of the analytical procedure, how likely is it that 2008 interest income is materially misstated?

[3] Please indicate on the scale below your assessment of the strength (quality and sufficiency) of evidence provided by the interest income analytical procedure:

[4] Given the additional information provided in Part B (i.e., quarterly information by loan type), please determine if Northwest Bank’s interest income from loans reported at December 31, 2008 appears fairly stated. Can you accept 2008 interest income as reported?
Yes __________ No __________ Please briefly explain your answer.
[5] Based on the results of the analytical procedure preformed in Part B, how likely do you think it is that 2008 interest income is materially misstated?

[6] Please indicate on the scale below your assessment of the strength (quality and sufficiency) of evidence provided by the interest income analytical procedure:

[7] Nowreevaluate the first analytical procedure you performed (i.e., based only on average aggregate loan and interest averages). Using hindsight, please indicate on the scale below your assessment of the strength (quality and sufficiency) of evidence provided by that high-level interest income analytical procedure:

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The following computation was performed last year. NWB's Loan Interest Analytical Procedure 2007 (in thousands) Average Loan Volume (or balance) 2007 Multiplied by Weighted Average Annual Interest Rate (2007) Computed 2007 Loan Interest Income per Audit 2007 Loan Interest Income per NWB Difference $361,225 Difference x 8.65% $ 31,246 $31,435 $ 189 The following information was available for an analysis of the current audit year. NWB's Loan Interest Analytical Procedure Updated for 2008 (in thousands) Aggregate Loan Volume (or balance) as of Dec. 31, 2007 Aggregate Loan Volume as of December 31, 2008 Average Loan Volume (or balance) for 2008 Multiplied by Weighted Average Annual Interest Rate (2008) Computed 2008 Loan Interest Income 2008 Loan Interest Income per NWB $ 388,110 $ 383,860 $385,985 x 9.115% $ 35,183 $ 35,337 $ 154