Audits are stressful enough without having to scramble for documents. One way to streamline the process and reduce stress, at least for the lease accounting portion of your audit, is to ensure all your lease information is readily available and organized. That’s where lease accounting software with a cloud-based central repository, like LeaseQuery, comes in. In this blog post, we’ll explore the benefits of uploading your leases into a central repository, particularly how it streamlines audit preparation and the audit itself.
How Auditors Use Lease Data
Your leases are the source documentation for your lease accounting, offering auditors the evidence needed to verify its accuracy and completeness. At a minimum, the original lease document proves to your auditors that a lease exists and is legally binding. Beyond that, making the original lease documents available helps your auditors:
Verify accuracy and completeness of data
The lease document serves as the primary source for verifying the accuracy of the lease data used in accounting. Auditors will compare the inputs used to calculate the lease liabilities, assets, and expenses against the original lease agreement to ensure they are correct. In addition, auditors can use the lease document to identify key provisions like lease term, payment schedules, renewal options, and termination clauses in order to check whether they are properly accounted for.
Ensure the timeliness of data changes
When auditors are viewing your lease documents, they’ll check the execution date of the lease and compare it to the date the lease was processed in your lease accounting software. This ensures all financial changes are being accounted for in a timely manner. Failure to enter lease or lease changes could lead to material misstatement in your financial statements.
Assess lease classification
Auditors use the details within lease documents to determine whether a lease is correctly classified as finance lease or operating lease under ASC 842. Factors such as ownership transfer, purchase options, and specific lease terms play a significant role in this assessment. With organized lease data, auditors can quickly review these criteria within the original documents, ensuring your lease classifications align with regulatory requirements.
Review key assumptions
The initial lease term and any renewal options are outlined in lease documents. Auditors use this information when assessing the lessee’s intentions regarding renewals to ensure that the lease term used in accounting reflects the most likely outcome. Additionally, the lease document may specify the implicit rate to be used in lease calculations. Auditors will verify the use of the implicit rate and its application.
Track lease modifications
Lease agreements are dynamic and amendments, extensions, or modifications that occur in the normal course of business can affect the financial reporting of leases. For a complete history of the lease agreement, auditors need the original lease document, along with any subsequent amendments or modifications. With these documents, they can track changes in lease terms and ensure that modifications are accounted for correctly. Without them, they will have lots of questions for you and your team.
Evaluate disclosures
Financial statements require detailed disclosures regarding lease liabilities, assets, and expenses. Auditors turn to lease documents to support these disclosures, ensuring they are complete and accurate.
How organized lease data makes life easier for you
Most auditors won’t read through every lease in order to audit your lease accounting, but they will want to see some. It’s unlikely they will let you pick which ones they view based on what you have easily at hand. Having your leases uploaded in a central repository, preferably one connected to your lease accounting software, will make life much easier for you and your team at audit time. In addition, proactively uploading your leases into a central repository ensures you have ample time to address any discrepancies or concerns so you avoid unnecessary stress and complications during an audit.
Having your lease documents in a central repository enables your auditors to review a random sampling of leases, and provides them:
- Easy Access: No requests from the auditor that require your team to dig through file cabinets or email stakeholders across the business! With all your leases digitized and centralized, you can quickly provide auditors with the information they need. Even better, if your software has read only auditor access, they can provide themselves with the information they need.
- Streamlined Communication: Having a centralized repository for lease information facilitates better communication and collaboration between your team and the auditors.
- Confidence in Internal Controls: Proof of internal controls is an important part of the audit. Maintaining an organized collection of original lease documents is part of demonstrating a culture of compliance and sound internal controls over lease accounting.
Summary
Organizing your lease documents in a central repository is a strategic move that transforms the audit process. The lease documents provide auditors with the necessary evidence to verify the accuracy, completeness, and compliance of lease accounting, reducing the risk of audit adjustments and findings. Providing auditors with easy access to accurate and comprehensive lease data will streamline audits, enhance compliance, and reduce stress. Spending the time and effort now to upload your leases to a central repository will save your team major time and headaches when audit time comes and position your organization for long-term success.
