Lease Accounting Audit Evidence Checklist

The evidence required for lease accounting audits falls into eleven categories. Finance teams that prepare this evidence in advance — rather than reconstructing it under audit pressure — experience significantly smoother reviews.

1. Lease register

Auditors will check that the lease register is complete. This means the register captures all arrangements that meet the definition of a lease, not just formal tenancy agreements.

The lease register should include:

• Every lease subject to the on-balance-sheet requirement
• Clear identification of the underlying asset for each lease
• Commencement date, lease term and end date
• Payment amounts and frequency
• Currency
• Status — active, modified, expired, terminated
• Notes on any exemptions applied

Auditors will often test completeness by sampling supplier payments and checking whether any recurring payments represent unrecognised leases. Contracts with suppliers should also be reviewed for embedded leases.

2. Source lease agreements

For every lease in the register, the original signed agreement and any amendments, rent reviews, side letters or extension notices should be held on file.

Where original agreements are unavailable, the auditor will need to understand why and may require alternative evidence — such as correspondence with the lessor, invoices, or a management representation on the lease terms.

Source documents should be accessible by lease reference. Searching for documents during the audit wastes time and creates uncertainty.

3. Lease term judgements

The lease term is one of the most significant judgements in lease accounting. It must include optional extension periods that are reasonably certain to be exercised, and must exclude termination options that are reasonably certain to be exercised.

For each lease with options, auditors will want to see:

• A clear statement of which periods have been included in the lease term and why
• The specific economic factors considered — such as asset dependency, relocation costs, customisation, or strategic importance
• Who made the judgement and when
• Whether the judgement has been reviewed or updated since commencement

Undocumented lease term judgements are one of the most common lease accounting audit issues. They must be documented at the time the judgement is made, not reconstructed afterwards.

4. Discount rate documentation

The discount rate used — whether the rate implicit in the lease or the incremental borrowing rate — must be documented and supportable. For the incremental borrowing rate, auditors will typically expect:

• An explanation of how the rate was determined
• Reference to any comparable borrowing facilities or market data used
• How the rate was adjusted for lease-specific factors (term, collateral, currency)
• Who approved the rate
• Confirmation that the rate reflects the lessee's credit quality at the relevant date

Using a single rate for all leases without justification is likely to be challenged. Where a portfolio approach is used, the basis for grouping leases must also be documented.

5. Exemption assessments

For any lease treated as a short-term lease or a low-value asset lease, there should be documentation confirming that the exemption conditions were met.

For short-term leases, this means evidence that the lease term (including any reasonably certain renewal options) was 12 months or less at commencement.

For low-value leases, this means evidence of the value of the underlying asset when new — not its current value — and confirmation that it falls below the threshold used by the business.

The accounting policy for both exemptions should be documented and applied consistently.

6. Calculation of the initial lease liability

For each recognised lease, auditors will want to see the present value calculation that produced the opening lease liability. This should include:

• The lease payments used — with reference to the source agreement
• The lease term applied
• The discount rate used
• The present value calculation, ideally showing each payment individually
• The resulting lease liability amount

The calculation must be traceable back to the source documents and judgements above. A calculation that cannot be traced raises completeness and accuracy concerns.

7. Amortisation schedules

An amortisation schedule showing how the lease liability reduces over the lease term should be retained for each lease. This schedule should show, period by period:

• Opening lease liability
• Interest charge for the period (effective interest method)
• Lease payment made
• Closing lease liability

Auditors will agree the closing liability per the schedule to the balance sheet figure, and will check that the interest charge method is applied correctly.

8. Depreciation schedules

A separate schedule showing the depreciation of the right-of-use asset should be retained. This should show:

• The initial cost of the right-of-use asset
• The depreciation method (usually straight-line over the lease term)
• The annual depreciation charge
• Accumulated depreciation
• Net book value at each period end

Where a lease has a purchase option that is reasonably certain to be exercised, the depreciation period extends to the end of the asset's useful life rather than the lease term.

9. Journal entries and approval evidence

All journals relating to lease accounting should be in the accounting system and should be traceable to the calculations above. At a minimum, auditors will want to see:

• Initial recognition journal (right-of-use asset and lease liability)
• Periodic interest journals
• Periodic depreciation journals
• Lease payment journals
• Any modification or remeasurement journals

Journals should carry a clear reference linking them to the relevant lease and calculation. Evidence of review or approval — whether a sign-off in the accounting system or a separate review record — demonstrates that the process is controlled.

10. Statutory disclosure support

The notes to the financial statements must disclose specific information about leases. Finance teams should prepare a draft disclosure note that can be reviewed and challenged, rather than drafting it for the first time at year-end.

Required disclosures vary by standard, but generally include:

• Carrying amounts of right-of-use assets by asset class
• Depreciation charge for the period by asset class
• Additions to right-of-use assets
• Interest expense on lease liabilities
• Total cash outflow for leases
• Maturity analysis of lease liabilities
• Short-term and low-value lease expenses

11. Review and approval evidence

A well-controlled lease accounting process will have evidence of review at each stage. This is not just good practice — it is part of what gives auditors comfort that the numbers can be relied upon.

Finance teams should retain evidence of:

• Management review of the lease register for completeness
• Sign-off on lease term and discount rate judgements
• Review of calculation workings
• Approval of journals
• Review of the statutory disclosure draft

Common audit findings

• Incomplete lease register. Not all qualifying leases captured, particularly embedded leases in supplier contracts.
• Missing source documents. Lease agreements cannot be located, or amendments have not been retained.
• Undocumented lease term judgements. Options were included or excluded without written rationale.
• Unsupported discount rate. The rate used cannot be linked to any external reference or internal borrowing rate.
• Calculation errors in the present value. Payments were discounted using the wrong periodicity or rate.
• Missing modification accounting. Lease changes were not identified or remeasured.

Frequently asked questions

This guide is for general information only and does not constitute accounting or audit advice. Specific requirements may vary depending on the applicable standard, the entity's circumstances and the auditor's assessment.