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Question: Northwest Bank (NWB) has banking operations in


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 substantive analytical procedures. Additional detailed testing will only be performed if analytical procedures suggest interest income is materially misstated. Total reported interest income for 2018 is $35,337,204, and reported net income for the bank is $12,484,000. A misstatement of $525,000 is considered material.
Last year, in addition to comparing the 2017 interest income to 2016 interest income, the 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.
PART A
The following computation was performed last year.



Northwest Bank (NWB) has banking operations in 35 communities in -1

The following information was available for an analysis of the current audit year.



Northwest Bank (NWB) has banking operations in 35 communities in -2

REQUIRED – PART A
[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, 2018 appears fairly stated. Do the results of the analytical procedure indicate that you accept 2018 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 2018 interest income is materially misstated?



Northwest Bank (NWB) has banking operations in 35 communities in -3

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



Northwest Bank (NWB) has banking operations in 35 communities in -4


PART B Do NOT begin this part of the case until instructed to do so
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, 2017 and December 31, 2018. Recall that materiality for this area is $525,000.



Northwest Bank (NWB) has banking operations in 35 communities in -5




Northwest Bank (NWB) has banking operations in 35 communities in -6




Northwest Bank (NWB) has banking operations in 35 communities in -7

REQUIRED – PART B
[1] 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, 2018 appears fairly stated. Can you accept 2018 interest income as reported?
Yes No Please briefly explain your answer.
[2] Based on the results of the analytical procedure preformed in Part B, how likely do you think it is that 2018 interest income is materially misstated?



Northwest Bank (NWB) has banking operations in 35 communities in -8

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



Northwest Bank (NWB) has banking operations in 35 communities in -9

[4] 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:



Northwest Bank (NWB) has banking operations in 35 communities in -10

[5] Most auditors and students who complete Part A and Part B have a lower assessment in Part B question 4 than they do for Part A question 3.
[a] Considering common judgment tendencies and traps, what might explain the difference?
[b] Assuming the difference is evidence of judgment bias(es), what steps may help to mitigate the bias(es)?

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