Preparing for Lease Audit Procedures under ASC 842

The best accounting and finance professionals will want to ensure that their books are in order for when the auditors come around. Any delay or slip-up is something that is generally frowned upon, and having everything ready for the auditors puts the onus on them to get their job done quickly, and efficiently.

This means less headache and interruption for the accounting and finance teams, and a smooth audit for the external auditors. 

With a new lease accounting standard – ASC 842 – in place, accounting and finance teams know that this area is one that is likely to get more attention than usual from the auditors. It’s therefore critical to ensure that this section of the books is fully audit-ready, and that you are prepared for the audit procedures likely under ASC 842.

Challenges in preparing lease audit procedures under ASC 842

First, it’s important to understand the context of the auditing procedures under ASC 842. With the change from ASC 840 to ASC 842, different risk factors have become relevant, and thus a differentiated audit approach will likely be required.

You can bet that in any planning meeting involving the external auditors, the client organization’s compliance with ASC 842 – or lack thereof – will be identified as a key risk factor. 

The Journal of Accountancy outlines a number of challenges for auditors when approaching the leases section of the audit. Gaining a broader understanding of these challenges is an excellent first step in preparing for lease audit procedures under ASC 842.

One of the main challenges identified by the authors is the identification of leases.

Identification

Part of the test of “completeness” that auditors will be assessing is the challenge of ensuring that all leases are identified. This is especially relevant given the changes brought about by ASC 842 regarding the definition of a lease.

For example, many contracts might have a lease agreement implicit within them, under the new definition, while not explicitly mentioning the term “lease.” These embedded leases can be found almost anywhere, and will be a key focus for auditors when going through this audit section.

Tips to reduce risk around identification of leases

Some tips that will assist in this regard include:

  • Have all contracts on-hand to provide the auditors with source documentation
  • To ensure completeness internally, identify the departments and key personnel who are able and/or likely to enter into lease-types of contracts
  • Go through general ledger accounts looking for regular, standardized payments
  • Look out for high-risk areas where leases are likely to be present, especially when it comes to big ticket items; machinery, vehicles, the IT department
  • Go over controls once again to ensure that you’re happy with the processes in place to correctly identify and account for any leases present 
  • Ensure the calculations and rationale behind the discount rate chosen is consistent with the lease accounting standard i.e. ASC 842 – any enforced changes here can have a massive knock-on effect across the lease function, and there’s no doubt that the external auditors are going to be looking at this number as it is so pivotal to so many areas
  • Showing the external auditors that you not only have an understanding of the requirements of ASC 842 but have also implemented the necessary controls (and these are functioning effectively) goes a long way towards ensuring a smooth audit
  • With efficient controls in place, the risk of leases not being included (completeness) is minimized

Also important to keep in mind is how lease modifications are dealt with. In some cases, a lease modification can result in a new lease according to ASC 842, and therefore this comes within the purview of the identification and completeness of leases. 

The Journal authors add that “Many organizations have looked to outside service providers to perform the needed lease accounting calculations, provide the required accounting entries, and generate the necessary disclosures.” This is something that should be carefully considered by any organization looking to comply fully with ASC 842 while also ensuring that they are adequately prepared for lease audit procedures under ASC 842. 

The effective way to prepare for lease audit procedures under ASC 842

Other areas that are going to be key for auditors are the accuracy of amounts, and the correct presentation and disclosures

For all these areas – namely identification and completeness, accuracy, and presentation and disclosure – using a specific lease accounting software solution is the way to ensure a smooth audit, both for the internal teams and the external auditors.

Trullion’s AI-enhanced lease accounting software for example can scan lease agreements for pertinent information (dates, amounts and so on,) and then automatically suggest audit-ready journal entries and disclosures. 

All of this is within a framework of full visibility for all stakeholders, and makes preparing for lease audit procedures under ASC 842 a cinch. 

To get set up for your organization, get in touch with a Trullion representative now. It could be the most important call you make all year. 

 

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