Question: Dag Nilsson, Auktoriserad Revisor (AR), considers the audit risk at the financial statement level in the planning of the audit of the financial statements of Lycksele Lappmark Bank (LLB) in Storuman, Sweden, for the year ended December 31, 20X5. Audit risk at the financial statement level is influenced by the risk of material misstatements, which may be indicated by a combination of factors related to management, the industry, and the entity. In assessing such factors, Nilsson has gathered the following information concerning LLB's environment.
LLB is a nationally insured bank and has been consistently more profitable than the industry average by making mortgages on properties in a prosperous rural area, which has experienced considerable growth in recent years. LLB packages its mortgages and sells them to large mortgage investment trusts. Despite recent volatility of interest rates, LLB has been able to continue selling its mortgages as a source of new lendable funds.
LLB's board of directors is controlled by Kjell Stensaker, the majority stockholder, who is also the chief executive officer (CEO). Management at the bank's branch offices has authority for directing and controlling LLB's operations and is compensated based on branch profitability. The internal auditor reports directly to Hakon Helvik, a minority stockholder, who is chairman of the board's audit committee.
The accounting department has experienced little turnover in personnel during the five years Nilsson has audited LLB. LLB's formula consistently underestimates the allowance for loan losses, but its controller has always been receptive to Nilsson's suggestions to increase the allowance during each engagement.
During 20X5, LLB opened a branch office in Ostersund, 300km from its principal place of business. Although this branch is not yet profitable due to competition from several wellestablished regional banks, management believes that the branch will be profitable by 20X7.
Also during 20X5 LLB increased the efficiency of its accounting operations by installing a new computer system.