As far as I understand, it is - look at it like this: 'letade' is looked, 'efter' is for (in this instance) :)
I translated this as "det" and not "dig"...anyone else struggle to hear the difference? Would "vi letade efter det" be the correct translation for "we were looking for it"?
Yes, 'det' would be it. It's hard for many learners to hear the difference, but as a native speaker I think the difference is pretty clear. The voice says it really clearly here.