Northwest Bank (NWB) has banking operations in 35 communities in the states of Washington, Oregon, and Idaho. Headquarters 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 (i.e., 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 2002 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 2001 interest income to 2000 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. The computation performed last year is provided below.

REQUIREMENTS
1. As part of the year-end audit, use the analytical-procedure approach from last year's audit (average loan volume by weighted-average interest rate) to determine if Northwest Bank's interest income from loans reported at \(12 / 31 / 02\) appears fairly stated. Based on the results of the analytical review procedure, can you accept 2002 interest income as reported?

2. Based on the results of the analytical procedure, how likely is it that 2002 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:

REQUIREMENTS - PART B 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 12/31/02 appears fairly stated. Can you accept 2002 interest income as reported?

5. Based on the results of the analytical procedure preformed in Part B, how likely do you think it is that 2002 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. Now reevaluate 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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NWB's Loan Interest Analytics 2001 (in thousands) Average loan volume (or balance) 2001 multiplied by Weighted Average Annual Interest Rate Computed 2001 Loan Interest Income per Audit 2001 Loan Interest Income per NWB Difference $ 361,225 X 8.65% $ 31,246 $ 31,435 $ 189 The following information was readily available for this year's (2002) analysis: Aggregate Loan Volume (or balance) as of 12/31/01 Aggregate Loan Volume as of 12/31/02 Weighted Average Portfolio Interest Rate for 2002 $ 388,110 $ 383,860 9.115%