Developing Expectations for Analytical Procedures Northwest Bank

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Developing Expectations for Analytical Procedures Northwest Bank

Case 8.2A

We are planning for the 4th year audit of Northwest Bank. According to our preliminary analysis, we agree that:
1. We will accept the Bank’s interest income from loans reported at December 31, 2011 as fairly stated. The difference of $154 thousand between computed interest income ($35183 thousand) and reported interest income ($35337 thousand) is less than the threshold of $525 thousand and thus is immaterial.
2. Based on the result of the analytical procedure, it is about 20% likely that 2011 interest income is materially misstated since there is no strong evidence indicating the existence of material misstatement.
3. The strength of evidence provided by the interest income analytical procedure is relatively low. Our assessment of the strength is about 3. The quality of the evidence is low because all the data is internally generated and thus required to be tested. We need to assure that the average loan volume agrees to numbers in other 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. We should also take into consideration of the management assertion, such as existence (whether the loans is true), completeness (whether include all loans), and valuation. In addition, the evidence is not sufficient and additional detailed testing is required. Because the errors in each individual category may offset each other and then arrive to an aggregate number which appears fairly stated, a breakdown to smaller scales will reduce this risk. For instance, the interest income could be examined by loan category on a quarter-by quarter basis to have a deeper insight and better understanding of the bank’s operation and its business situation. Interest income is a major income for…...

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