Auditors have long evaluated risk and conducted audit procedures at the assertion level. To prepare for your external audit, it’s essential to grasp how auditors assess risk and employ procedures to mitigate these risks. In today’s digital age, auditors heavily rely on clients’ systems for audit evidence. For leases, auditors seek detailed descriptions of their clients’ leasing systems and processes. This insight informs their audit procedures. Here, we’ll outline the audit procedures our firm utilizes to assess risk.
Completeness, a critical audit area for leases, ensures that all leases are properly captured and capitalized on the balance sheet. With ASC 842, lessees must recognize a right-of-use asset and a lease liability for operating leases. To streamline this assertion, prepare completeness evidence before your auditors arrive. Reconciling rent expense to lease agreements and cross-referencing with lease accounting software or spreadsheets is a best practice. Additionally, validate procedures used to evaluate all leases, including embedded leases and equipment leases.
Existence/Occurrence assesses the actual existence of leases. While this isn’t a high-risk area for leases, auditors confirm the presence of physical assets and contracts to ensure accuracy.
Valuation/Allocation ensures accurate present value calculations of leases. This involves verifying payment streams, lease terms, and discount rates against contract terms.
Cut-off ensures proper lease recording within the correct accounting period. Auditors review leases before and after the transition date to guarantee accurate recognition.
Rights/Obligations ensures that assets are owned, and liabilities are owed. While lease-related risks often balance out, auditors consider potential misalignments between incentives and assertions.
6. Classification/Presentation & Disclosure
Classification/Presentation & Disclosure guarantees accurate classification in financial statements. Auditors verify proper classification of leases, avoiding misclassification of operating leases as finance leases or short-term leases.