Lease accounting audit season is a trying time for in-house accounting teams, CPA firms and commercial real estate teams. Look no further – Occupier is here to help. In this blog post, we will delve into the nuances of lease accounting audit, from preparation to the auditing process and the final reporting stage.

Why is Lease Accounting Audit Important?

Lease accounting can be complex, with ever-changing regulations and requirements. Ensuring compliance and accuracy in lease accounting including proper classification of ROU Assets and lease liabilities is vital for businesses, as it directly impacts financial statements, reporting, and decision-making. Lease accounting audits provide an independent and objective examination of a company's lease accounting practices, helping to identify any errors, inconsistencies, or non-compliance issues. By conducting thorough lease accounting audits, businesses can mitigate financial risks, maintain transparency, and enhance accountability especially during the first post-transition audit.

Lease Accounting Audit Readiness

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Lease Accounting Audit: Preparation

Before diving into the lease accounting audit process, it is crucial to adequately prepare your lease assets and lease portfolio. Here are some key steps to consider:

Perform a Departmental Lease Survey

To ensure no lease goes unnoticed during the audit, it is essential to perform a departmental lease survey. This survey helps capture all leases, including embedded leases, that were active during the audit period. Collaborate with different departments and teams to gather accurate and comprehensive lease data into a centralized database.

Obtain and Review Lease Documents

To have a clear understanding of the leases involved, gather and review all lease documents for both new and amended leases during the audit period. Thoroughly examine the terms, conditions, lease agreements, and any amendments to ensure accuracy and consistency. Pay attention to renewal dates, lease expenses, ROU Assets and lease liabilities.

Perform an Annual Impairment Review

As part of the lease accounting audit, an annual impairment review of the leased right-of-use assets should be conducted. This review helps assess whether any impairment or deterioration in value has occurred. Proper evaluation of the assets ensures that the financial statements reflect their true value according to the new FASB requirements.

Conduct Necessary Internal Controls Procedures

Internal controls play a significant role in lease accounting. During the preparation phase, perform all necessary annual internal controls procedures specific to lease accounting. These procedures help ensure the accuracy and reliability of lease data, financial records, and reporting based on the Accounting Standards Codification.

Update Lease Accounting Memo or Policies

If any changes were made to lease accounting guidelines or policies during the audit period, update the lease accounting memo or policies accordingly. This step ensures that all relevant stakeholders are aware of any adjustments and the impact they may have on reporting.

Lease Accounting Audit Checklist

Lease Accounting Audit Checklist

To help commercial tenants prepare for their lease accounting audit efficiently under the new standards, we’ve created a comprehensive Lease Accounting Audit Checklist. This checklist contains the key audit procedures, internal controls, and documentation needed to audit your lease transactions, journal entries, and financial data at your year-end.

Using a solid lease accounting audit checklist is essential for effectively auditing leases under the new standards. Our checklist summarizes the key procedures and documentation auditors need. Download our free checklist to improve your lease accounting audits.

Lease Accounting Audit: The Process

Once the necessary preparation is complete, it's time to embark on the lease accounting audit process. This involves working closely with auditors and following specific steps to ensure a comprehensive and effective audit.

Prepare Common Audit Requests

To facilitate the audit process, be prepared to provide common audit requests. These requests commonly include a roll-forward report, which presents lease data changes over the audit period. Additionally, financial statement lease disclosures should be prepared, outlining all lease-related information essential for reporting. Lastly, a significant assumptions report detailing assumptions made for leases, such as the discount rate and lease termination date, should be prepared.

Review Recent SOC 1 Report

If your business utilizes lease accounting software from a third-party provider, request and review the recent SOC (Service Organization Control) report from the software provider. The SOC report ensures that the software provider has taken necessary measures to maintain data security and integrity.

Provide Access to Lease Accounting Software

To enable auditors to conduct a thorough examination, give them access to your lease accounting software. This access allows auditors to review lease data, calculations, required accounting entries and any system-generated reports relevant to the audit. Providing transparent access ensures a collaborative and efficient auditing process.

Lease Accounting Audit: Reporting

After the audit is complete, it's time to compile the findings and prepare the final audit report. The reporting stage is crucial as it helps communicate the results of the audit to internal stakeholders, shareholders, and regulatory authorities especially for public business entities.

Prepare Audit Findings and Recommendations

Compile the audit findings and recommendations based on the results of the lease accounting audit. Clearly outline any errors, inconsistencies, non-compliance issues, or areas for improvement. Include recommendations for remedial actions and steps to enhance lease accounting practices.

Communicate Audit Results

Share the final audit report with relevant stakeholders, including management, board members, and other key decision-makers. Present the findings and recommendations in a clear and concise manner, emphasizing the impact on financial statements and the overall business.

Implement Remedial Actions

Address any identified issues promptly by implementing the recommended remedial actions. This step is crucial for enhancing lease accounting practices, ensuring compliance, and mitigating future financial risks. Regularly review progress and monitor the effectiveness of the implemented actions.

Accounting Audit Summarized

Lease accounting audits are essential for businesses to maintain compliance, accuracy, and transparency in their lease accounting practices especially for their real estate portfolio. By properly preparing for the audit, conducting thorough assessments, and implementing necessary improvements, the accounting team can ensure robust lease management and accounting processes. Occupier provides a user-friendly and collaborative solution to simplify lease management and streamline lease accounting processes, making lease accounting audits more efficient and effective. Embrace the power of Occupier to stay ahead in lease accounting and maximize your business's potential.