Risk Assessment Audit Checklist For Lease Classification

Make Sure Lease Data Is Accurate: Review payment processes and controls, such as aligning capital expenditures with lease terms or validating CAM charges on invoices.

Classification/Presentation and Disclosure is an area of audit focus due to its effect on income statement impacts.

1. Identify all leases
Once you have completed the problem-formulation stage, it’s time to identify risks and collect data. Again, setting clear goals and planning out how to administer your assessment effectively are key in order to collect accurate and timely information.

For instance, qualitative risk analysis requires gathering insights from subject matter experts and collecting anecdotes; by contrast, quantitative assessments focus more on numbers and statistics.

An effective lease classification audit starts by identifying all of your leases and reviewing their contracts, before assessing each one to identify whether it meets or contains lease components at its commencement date. ComplianceBridge can assist in administering assessments through questionnaires that collect responses using multiple choice, short answer, fill-in-the-blank, yes/no and fill-in-the-blank questions to weight responses accordingly and score or rank them.

2. Review the contract language
Many departments may enter contracts containing lease-like language without explicitly using the word “lease.” This implicit contract, commonly referred to as an embedded lease, is often an area of emphasis for auditors during testing procedures; they want to make sure all property additions are being properly recorded and that amounts added are properly reflected in their general ledger accounts.

Risk analysis involves identifying, assessing and then mitigating or eliminating risks to your company’s operations. Therefore it’s crucial that a risk assessment checklist be created in order to help identify what risks your organization is exposed to as well as ways of mitigating them or eliminating them entirely. Creating this list will make future risk evaluations simpler as you can compare results against others who have done similar assessments; furthermore it should include resources required both internal and external resources that can assist you with this effort.

3. Review the lease agreement
A lease agreement provides the terms and conditions governing the relationship between tenant and landlord, including their respective responsibilities and liabilities. Review its language to ascertain if a lease exists as well as identify any additional issues which need to be addressed during auditing.

Accumulating comprehensive lease data requires mining for leases across your company – which can be difficult for many organizations. Different departments may use equipment leasing contracts with little impact or input from other groups; thus making the collection process difficult.

Audit teams should verify that payment processes and controls comply with lease terms. They should also validate that capital expenditures are recorded and depreciated according to contract terms – this helps ensure complete and accurate lease accounting data while mitigating risks related to mismanagement or fraud.

4. Review the lease payments
Many dates that impact lease accounting also impact property impairment testing, so it is crucial that you fully comprehend all applicable dates to your leasing portfolio.

Dates may include, but are not limited to:

Furthermore, when leasing assets it’s important to take into account when payments will be made and whether these payments fall on time or late. If your contracts include contingent payment obligations such as consumer price index (CPI) increases or percentage-based payments, review their terms and conditions to make sure these payments are being appropriately recorded. Validate calculation methodologies and documentation for common area maintenance charges (CAM charges) in order to avoid overcharging. Also be sure that any significant property additions are noted accurately on invoices as well as recorded correctly within financial statements. Automating these procedures with lease accounting software can reduce your risk of incorrectly recording property and breaching loan covenants. Establishing processes, controls and documentation early will expedite audit processes while showing your dedication to transparency and accuracy.