Auditing Leases from Lessee's Perspective

Introduction

• Focus: Auditing leases from the lessee's perspective.
• IFRS 16 changes (2019): Recognition of leased assets and liabilities on balance sheets.
• Not covering accounting details, but auditing perspective.

Understanding the Process

• ASA/ISA 315: Importance of understanding processes.
  • Automated vs. manual processes.
  • Testing internal controls.

Process for Leasing an Asset

1. Request for a leased asset - requires approval.
2. Obtain quotes from suppliers.
3. Contract review by legal personnel.
4. Signing of the contract.
5. Handle accounting processes.
   • Add asset to the Fixed Asset Register (FAR).
   • Create lease liability (LL).
   • Regular journal entries for payments and depreciation.

Audit Strategy

• Decision Factors:
  • Volume and value of leased assets.
  • Strategy: Test internal controls vs. substantive testing.
  • Large companies: Mix of tests of controls and substantive tests.

Testing Internal Controls

• Approval Process:
  • Sample leased assets to verify contract review and signing.
• Accounting Procedures:
  • Review documentation for asset and liability creation.
  • Check journal entries review process.
  • Examine segregation of duties.

Substantive Procedures

Lease Assets and Liabilities

• Assertions:
  • Existence: Vouch from records to physical asset and contract.
  • Completeness: Trace from physical asset to contract and records.
  • Accuracy and Valuation: Recalculate present value and leased asset value.
  • Rights and Obligations: Review lease contracts for control and responsibilities.

Payments

• Assertions:
  • Occurrence: Vouch lease payment journals to contracts and proof of payment.
  • Completeness: Trace from lease contracts to payments and journal entries.
  • Accuracy: Match payment amounts to journal entries and contracts.
  • Classification: Ensure journal entries use correct account codes.
  • Cut-off: Verify journal entry recorded in correct period.
  • Presentation: Review note disclosures against IFRS 16.

Conclusion

• The audit process involves a combination of control testing and substantive testing.
• Engage with audit community for shared ideas on testing procedures.
• Use firm specialists for guidance on lease reporting.

These notes provide a structured overview of auditing leases from the lessee's perspective, focusing on key processes, strategies, and substantive testing procedures. For further depth, engaging with additional resources and specialists is recommended.