If your company is dealing with the complexities of lease accounting, you understand how crucial it is to stay accurate and compliant. Part of this process involves undergoing lease audits, a task that might seem daunting but is an integral part of your financial health. In this blog post, we’ll guide you through preparing for a lease accounting audit using a detailed checklist to streamline the process and ensure a smooth audit experience.
Understanding the Significance of Lease Audits
Before diving into the checklist, let’s briefly discuss why lease audits are crucial. A lease audit is not just about verifying financial accuracy – it’s a comprehensive evaluation of your lease agreements, expenditures, controls, and compliance measures. Auditors assess whether your financial transactions align with the terms of your leases and identify any potential risks of fraud or mismanagement.
Lease Audit Checklist
- Set Clear Boundaries: Determine which leases are subject to the audit. This ensures that your audit scope is defined and complete.
- Gather Complete Information: Compile all relevant information, including lease abstracts and underlying lease documents. Auditors need to verify that you’re adhering to lease terms and performing as required.
- Ensure Up-to-Date Lease Data: Leases evolve over time, so ensure your data is current. Auditors will review your most recent lease information to verify accuracy.
- Review Payment Processes and Controls: Examine your payment processes and controls. This involves ensuring that your payment methods align with lease terms and that you’re accurately disbursing funds.
- Document Expenditures: Document and maintain supporting documentation for all expenditures. This documentation might include lease schedules, invoices, and any variable payment calculations.
- Validate CAM Charges: If you’re responsible for common area maintenance (CAM) charges, ensure that these charges are reconciled against actual expenses. Validate supporting documentation to prevent overcharges.
- Track Capital Expenditures: Properly depreciate capital expenditures as per lease requirements. Ensure that these expenditures are accounted for accurately.
- Verify CPI Increases: If your lease involves Consumer Price Index (CPI) increases, verify that these calculations are accurate and performed at the appropriate times.
- Check Percentage-Based Payments: If your payments are based on a percentage of sales, validate reported sales numbers, exclusions, and calculations.
- Ensure Compliance for Financial Statements: Review your compliance procedures for submitting financial statements and any contingent obligations outlined in your lease. Ensure all documentation aligns.
- Review Contingent Payments: Scrutinize any contingent payments mentioned in the lease agreement. Verify that these contingencies are appropriately met before payments are made.
- Validate Controls: Assess your internal controls for their effectiveness in preventing fraud and ensuring accurate financial reporting.
- Audit the Full Scope: Remember that an audit goes beyond mathematical accuracy. It involves validating documentation, controls, and compliance measures.
Benefits of Lease Accounting Audit Preparation
A well-prepared audit expedites the process and instills confidence in auditors and stakeholders. Properly documenting your lease transactions, ensuring compliance with accounting standards, and validating payments demonstrate your commitment to transparency and accuracy.
While it might seem like a complex ordeal, proper preparation simplifies the lease audit process. Use our comprehensive lease audit checklist as a guide to ensure that your lease accounting audit is efficient, effective, and successful. By proactively addressing potential issues and maintaining impeccable records, you’re well on your way to navigating lease audits with confidence and ease. Consider using a lease management system and see how a lease management system can help simplify the lease auditing process.