## Leasing & Hire Purchase Company Audit — Examining Finance Lease Agreements

### Why Lease Agreement Examination is Critical

In a leasing company, the lease agreement is the primary legal document establishing rights, obligations, and revenue recognition. The auditor must read and note specific provisions to verify transactions.

### Key Points to Note from a Finance Lease Agreement

#	Point to Note
1	Identity details — description of lessor, lessee, the equipment, and its installation location; stipulation that equipment shall not be moved without lessor's consent; identification plates/markings on equipment
2	Financial terms — lease amount, tenure, payment dates, late payment charges, deposits/advances
3	Return clause — whether equipment is to be returned to the lessor on termination; responsibility for return costs (borne by lessee)
4	Subletting restrictions — whether lessee is prohibited from subletting; whether the lessor is authorised to sublet

### Relationship to Audit Objectives

Existence: Physical identification markings verify the leased asset exists at the stated location
Rights and Obligations: Agreement confirms ownership remains with lessor
Completeness: Payment schedules verify all receivables are recorded
Valuation: Tenure and amounts support lease receivable/asset valuation

Worked example

### Example 1

MTP 3 Scenario: P Financial Services Ltd. (PFSL) is a leasing & hire purchase company. While examining a finance lease agreement for equipment, what points should you note?

Answer: (i) Identity — lessor, lessee, equipment description, installation location, prohibition on removal except for repairs, identification markings; (ii) Financial terms — amount, tenure, payment dates, late charges, deposits/advances; (iii) Return clause — whether equipment returns to lessor on termination; return costs borne by lessee; (iv) Subletting — whether lessee is prohibited from subletting; whether lessor can sublet the equipment.

⚠️ Common exam mistakes

Treating lease agreement review as a formality — it is the foundation for verifying all lease receivables and assets
Missing the physical identification/marking requirement — this supports the existence assertion
Forgetting to check the subletting clause — unauthorised subletting transfers risk without lessor consent
Omitting late charges and advance/deposit terms which affect revenue recognition

Reference:

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Leasing & Hire Purchase Company Audit – Examination of Finance Lease Agreements

Worked example

⚠️ Common exam mistakes