## Auditing Finance Lease Agreements

When auditing a leasing and hire purchase company, the auditor examines individual finance lease agreements to verify the accuracy, completeness, and enforceability of lease transactions.

### Key Points to Note When Examining a Finance Lease Agreement

1. Description of Parties and Asset

Identity of lessor, lessee, equipment description, and the location where equipment is to be installed.
Whether equipment has identification plates/markings for the lessor's benefit.
Restriction that equipment shall not be removed from the specified location (except for repairs).

2. Financial Terms

Tenure (duration) of the lease.
Dates and amounts of lease payments.
Late charges, deposits, and advances.

3. Return of Equipment

Whether the equipment is to be returned to the lessor on termination.
Who bears the cost of return (typically the lessee).

4. Subletting Restrictions

Whether the agreement prohibits the lessee from subletting the equipment.
Whether the lessor retains the right to sublet (in certain structures).

> Audit objective: To ensure lease agreements are genuine, properly documented, and that the terms protect the company's (lessor's) interests and assets.

Worked example

### Example 1

You are auditing P Financial Services Ltd. (PFSL), a leasing and hire purchase company. You are examining a specific finance lease agreement for industrial equipment.

Key points to note:

1. Check the description of lessor (PFSL), lessee name, equipment specifications, and confirmed installation location. Look for identification plates/markings on the equipment.

2. Verify that lease tenure, payment schedule, late payment clauses, and any advance/deposit amounts are clearly stated and match the company's records.

3. Confirm the agreement stipulates that equipment must be returned to PFSL on lease termination, with return cost borne by the lessee.

4. Check whether the lessee is contractually prohibited from subletting or transferring use of the equipment to a third party.

⚠️ Common exam mistakes

Focusing only on financial terms (rent and tenure) and ignoring physical asset-related clauses like location restrictions and identification markings.
Forgetting to check who bears the cost of returning equipment at termination — this is a key risk for the lessor.
Not verifying subletting restrictions — an unrestricted right of the lessee to sublet exposes the lessor to unknown counterparty risk.
Treating finance lease audit as identical to operating lease audit — finance leases have more complex ownership and risk-transfer implications.

Reference:

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Audit of Finance Lease Agreements

Worked example

⚠️ Common exam mistakes