Leasing

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Leasing under IFRS for SMEs Audit Case Example: ABC Manufacturing Company

Context

ABC Manufacturing Company enters into various leasing agreements for equipment and facilities crucial to its operations. Under IFRS for SMEs, leasing transactions must be classified as either finance leases or operating leases based on specific criteria, which affects how they are recognized and reported in the financial statements.

Audit Objective

To obtain reasonable assurance that leasing transactions are correctly classified, recognized, measured, and disclosed in accordance with IFRS for SMEs Section 20, ensuring the financial statements reflect the true nature of the company’s leasing arrangements.

Types of Audit Evidence and Documentation for Leasing Assertions

1. Rights and Obligations

• Case: Verify the company’s rights to use leased assets and obligations to make lease payments.

• Documentation: Document the review of lease agreements to identify and assess the rights granted to the company and obligations incurred under both finance and operating leases.

2. Completeness

• Case: Ensure all leasing arrangements entered into or modified during the period are included in the financial statements.

• Documentation: Outline procedures for reconciling the lease agreements listing to lease payments recorded in the financial accounts and disclosures in the financial statements to verify completeness.

3. Accuracy

• Case: Confirm the accurate calculation of lease payments, including initial recognition of finance lease assets and liabilities, subsequent measurement, and recognition of expenses for operating leases.

• Documentation: Summarize the testing of calculations for a sample of lease agreements, including the initial recognition of assets and liabilities for finance leases and expense recognition for operating leases.

4. Classification

• Case: Assess whether leases are correctly classified as either finance leases or operating leases according to IFRS for SMEs criteria.

• Documentation: Document the assessment of lease classification for significant leasing arrangements, noting the criteria applied and conclusions reached regarding classification.

5. Occurrence

• Case: Verify that recorded lease transactions have occurred and pertain to the company.

• Documentation: Prepare a record of procedures performed to validate the occurrence of leasing transactions, such as matching payments to lease agreements and confirming leased assets are being used in operations.

6. Disclosure

• Case: Review the financial statement disclosures related to leases to ensure they meet the requirements of IFRS for SMEs Section 20, including disclosures of the amount, timing, and uncertainty of future lease payments.

• Documentation: Document the review of lease disclosures in the financial statements, ensuring disclosures provide sufficient detail on the nature of leasing arrangements, the classification of leases, and the amounts recognized in the financial statements.

7. Assessment of Internal Controls over Leasing

• Case: Evaluate the design and operating effectiveness of internal controls over the recognition, measurement, presentation, and disclosure of leasing transactions.

• Documentation: Note the evaluation of controls related to leasing, including controls over the classification of leases, the accuracy of lease payment calculations, and the completeness and accuracy of disclosures.

8. Communication with Management and Those Charged with Governance

• Case: Discuss significant findings related to leasing transactions with management and those charged with governance, particularly any classification issues, measurement inaccuracies, or disclosure deficiencies.

• Documentation: Summarize communications with management and those charged with governance regarding leasing arrangements, including any disagreements over lease classification, measurement, or disclosures and how such disagreements were resolved.

Conclusion

The audit of leasing under IFRS for SMEs requires careful consideration of the leasing arrangements’ classification, recognition, measurement, and disclosure. By documenting the audit procedures and findings related to each relevant assertion, auditors provide a basis for their opinion on how well the financial statements reflect the company’s leasing activities in accordance with IFRS for SMEs. This thorough approach ensures that stakeholders can rely on the financial statements for accurate information about the company’s leasing obligations and assets.