## Leases — Concept and Audit
### What is a Lease?
In a lease agreement:
- The lessee acquires the right to use an asset for an agreed period.
- In consideration, the lessee pays rent to the lessor.
### Types of Leases
| Type | Description |
|---|---|
| Finance Lease | Legal ownership stays with lessor, but substantially all risks and rewards of ownership transfer to the lessee. |
| Operating Lease | Simple arrangement — lessor allows use of asset for a period in return for rent; risks and rewards remain with lessor. |
### Auditor's Procedures for Leasing Companies
1. Object Clause
- Examine the leasing company's object clause to confirm it authorises leasing of the specific goods (capital goods, consumer durables, etc.).
2. Credit Analysis of Lessee
- Verify whether a procedure exists to assess the lessee's creditworthiness:
- Ability to meet lease commitments
- Past credit record
- Capital strength
- Availability of collateral security
3. Lease Agreement — Key Points to Note
- (i) Description of lessor, lessee, equipment, and installation location.
- (ii) Amount of lease, tenure, payment dates, late charges, deposits, and advances.
- (iii) Whether equipment must be returned to the lessor on termination, and who bears the return cost.
- (iv) Whether the agreement prohibits the lessee from sub-letting/assigning and authorises the lessor to do so.
4. Invoice Retention
- Ensure the invoice is retained safely — since a lease is a long-term contract, the invoice serves as evidence of the asset.
5. Acceptance Letter
- Examine the acceptance letter from the lessee confirming equipment was received in good order.
6. Board Resolution
- Confirm the lessee's Board has passed a resolution authorising a specific director to execute the lease agreement.
7. Insurance Policies
- Verify the lessor has obtained and kept copies of insurance policies for the leased equipment.