Case Study: Audit Procedures for Lease Accounting

Background:

XYZ Corporation, a multinational company operating in various industries, leases a significant portion of its equipment, vehicles, and office space. The adoption of the new lease accounting standard $($ASC $842)$ has brought increased scrutiny to leaserelated disclosures and financial reporting. As part of the annual audit, the external auditors are tasked with conducting comprehensive audit procedures to ensure compliance with lease accounting standards and the accuracy of lease$-$related disclosures.

Audit Procedures:

Identification and Classification of Leases:

The audit team begins by identifying all leases within XYZ Corporation's operations, including operating leases and finance leases.

They review lease agreements and assess whether leases meet the criteria for classification as either operating or finance leases under ASC $842.$

Validation of Lease Terms and Payments:

Auditors validate lease terms, including lease commencement dates, lease payments, lease incentives, and lease renewal options.

They compare lease terms documented in lease agreements with lease schedules and payments recorded in the financial statements.

Assessment of Lease Liability and Right$-$of$-$Use Asset Recognition:

Auditors verify the calculation of lease liabilities and right$-$of$-$use assets for finance leases.

They ensure that lease liabilities are recognized at the present value of lease payments and that right$-$of$-$use assets are measured appropriately based on lease liability, initial direct costs, and lease incentives.

Testing of Lease Disclosures:

The audit team tests the completeness and accuracy of lease disclosures in the financial statements and footnotes.

They verify that lease disclosures include relevant information such as lease terms, lease payments, lease maturities, and significant leasing arrangements.

Evaluation of Lease Modification and Termination Accounting:

Auditors assess the accounting treatment for lease modifications and terminations to ensure compliance with ASC $842$ requirements.

They review documentation supporting lease modifications or terminations and verify the appropriate recognition and measurement of any resulting changes in lease liabilities and right$-$of$-$use assets.

Review of Internal Controls:

The audit team evaluates the effectiveness of internal controls related to lease accounting processes, including lease identification, classification, measurement, and disclosure.

They test key controls to ensure the integrity and reliability of lease$-$related financial information.

Objective Type Question:

Based on the case study, which audit procedure involves verifying that lease liabilities are recognized at the present value of lease payments and that right$-$of$-$use assets are measured appropriately?

A$)$ Validation of Lease Terms and Payments

B$)$ Assessment of Lease Liability and Right$-$of$-$Use Asset Recognition

C$)$ Testing of Lease Disclosures

D$)$ Evaluation of Lease Modification and Termination Accounting