Audit of Hire Purchase and Leasing Companies

# Audit of Hire Purchase and Leasing Companies

## Part A - Hire Purchase

### Definition

Hire-Purchase is an agreement under which goods are let on hire & the hirer has an option to purchase them as per the terms of the agreement, and includes an agreement under which:

1. Possession of goods is delivered by owner to a person on condition that such person pays the agreed amount in periodical instalments

2. Property in goods is to pass to such person on payment of the last of such instalments

3. Such person has the right to terminate agreement at any time before the property passes

### Audit of Hire-Purchase Transactions

While checking hire-purchase transactions, the auditor may examine:

Existence of Written Agreement:

• Hire purchase agreement is in writing and signed by all parties

Contents of Agreement:

The agreement must clearly specify:

• Hire-purchase price of goods
• Cash price of goods
• Date on which agreement commenced
• Number, amount and date of instalments
• Description of goods (sufficient to identify them)

Operational Verification:

• Ensure that instalment payments are received regularly as per agreement

## Part B - Leasing

### Procedures for Audit of Leasing Transactions

1. Object Clause Check

• Check object clause of leasing company to confirm that goods leased fall within objects clause

2. Credit Analysis Procedure

• Whether there exists procedure to ascertain credit analysis of lessee

3. Examine Lease Agreement - note:

• Description of lessor, lessee, equipment and location where equipment is installed
• Amount and tenure of lease, dates of payment, late charges
• Whether equipment shall be returned to lessor on termination of agreement
• Whether agreement prohibits lessee from assigning/subletting equipment and authorises lessor to do so

4. Lease Proposal Form

• Examine lease proposal form submitted by lessee requesting equipment on lease

5. Invoice Custody

• Ensure that invoice is retained safely as lease is a long-term contract

6. Acceptance Letter

• Examine acceptance letter from lessee indicating equipment has been received in order and is acceptable

## Part C - Types of Lease

Lease arrangements are of 2 types:

### 1. Finance Lease

An arrangement qualifies as Finance Lease if it has ANY of these attributes:

• Transfer of ownership at end of lease term
• Bargain purchase option - lessee has option to buy asset at price sufficiently lower than fair value at exercise date (reasonably certain at inception that option will be exercised)
• Lease term covers major part of economic life of asset (even if title not transferred)
• Present value of minimum lease payments at inception amounts to at least substantially the fair value of leased asset
• Specialised nature - leased assets are of such specialised nature that only lessee can use them without major modifications

### 2. Operating Lease

• An arrangement that does NOT transfer substantially all risks and rewards incidental to ownership
• In other words: leasing arrangement OTHER than finance lease

## Comparison: Operating Lease vs Finance Lease