Auditing and Assurance Specialized
Industries p6
Auditing Lease
Types of Lease
1. Operating Lease
2. Finance lease
PROCESSES ASSOCIATED WITH LEASE
Leases

Request a lease asset
 Approval
 Quotations
-
Contract <- received
Signed the contract
Record event in accounting (books)
1. Add the asset to fixed asset register
2. Create the lease liability
3. Regular normal entries
->Payments
->Depreciation
AUDIT STRATEGY CONSIDERATIONS
Deciding on what audit strategy to implement
TEST OF CONTROLS
a. Test of design and implementation
b. Test of operating effectiveness
SUBSTANTIVE TESTING
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Analytical (compare the item with other things such as prior year, industry average)
Inquiry task directors or better a 3rd party, to conduct information in writings.
Inspection look at a document or asset or the ledgers books of prime entry
Observations (of an asset in use)
Recalculation (e.g. of depreciation)
TEST OF CONTROL FOR LEASES
Understanding the entity’s Business process for leases
I.
II.
III.
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IV.
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Identify the approval process
Select a sample of leased assets and check is there a reviewed contract that was later
signed.
Record the Accounting Event
Review a sample of documentation to at the LA and LL
Assess whether the documentation was reviewed before the LA and LL was created
Assessment of Regular Journal entries
identify whether it is automated or manual
Identify the controls
a. Automated
o Who sets up automated entries and approves
b. Manual
o Are proposed entries reviewed before posting?
Examine the Segregation of Duties
Who can do that tasks?
What can they do?
SUBSTANTIVE TESTS
Components
1. Leased asset and Leased liability
2. Payments and depreciation
SUBSTANTIVE TEST- ASSET AND LIABILITIES
Assertions:
Existence
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Vouching (Select a sample of LA from FAR and vouch to physical asset, also match to the
lease contract)
Completeness
- Verification (Select a sample of Physical LA and trace to lease contract and records in FAR)
- Analyze payments for lease exemptions and review the lease contracts to make sure it is an
exempt item and should not be recorded (e.g. Operating Lease)
Accuracy and Valuation and Allocation
- Depreciation and accumulated depreciation (Accuracy and Valuation)
Valuation- LL -> PV of future payments and interest rates from contracts
Recomputation- recalculate the PV of LL and reconcile to value recorded in the accounts
Leased Asset=LL + Initial set up cost + cost to dismantle
- Recalculate the value using the contract- reconcile to FAR
- Check the accuracy of depreciation is being recorded appropriately
Rights and Obligations
- Reviewing lease contracts
 Control
 Benefits
 Responsibilities