Discuss special points involved in carrying out the audit of Hire Purchase and Leasing companies.

Auditing and Assurance Revision Questions and Answers

Hire purchase agreement means an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which:

i. Possession of goods is delivered the owner thereof to a person on condition that such person pays the agreed amount in periodical installments, and

ii. The property in the goods is to pass to such person on the payment of the last of such installments, and

iii. Such person has a right to terminate the agreement at any time before the property so passes.
Thus hirer means the person who obtains or has obtained possession of goods from an owner under a hire-purchase agreement and owner means the person who lets or has let, delivers or has delivered

possession of goods to a hirer under a hire-purchase agreement in order to complete the purchase of ,or the acquisition or property in, the goods of which the agreement relates, and includes any sum payable the hirer under the hire purchase agreement way of a deposit or other initial payment. While checking the hire-purchase transaction, the auditor may examine the following:

i. Hire purchase agreement is in writing and is signed all parties.

ii. Hire purchase agreement specifies clearly;

a. The hire-purchase price of the goods to which the agreement relates;

b. The cash price of the goods, that is to say, the price at which the goods may be purchase the hirer for cash;

c. The date on which the agreement shall be deemed to have commenced;

d. The number of installments which the hire-purchase price is to be paid, the amount of each of those installments, and the date, or the mode of determining the date, upon which it is payable, and the person to whom the place where it is payable: and

e. The goods to which the agreement relates, in manner sufficient to identify them.

iii. Ensure that payments are being received regularly as per the agreement.

In a lease agreement, a party (called „lessee‟) acquires the right to use an asset for an agreed period of time in consideration of payments of rent to another party (called lessor). In certain lease agreement, the legal ownership of the asset remains with the lessor (the leasing company), but in substance, all the risks and rewards of ownership of the assets are transferred to the lessee. In other words, the lease, in effect, a financing arrangement. Such leases are termed as finance leases. An operating lease, on the other, is a simple arrangement where, in return for rent, the lessor allows the lessee to use the asset for a certain period.
A normal financial lease transaction usually goes through the following modality:
The lessee selects the equipment, and satisfy himself about its functional fitness and specifications, the lessor has no participation at this stage.
Having chosen the equipment, the lessee approaches a lessor, either directly or through a lease broking agency.
The lease agreement is broadly negotiated and rates are finalized. The lessor places an order on the manufacturer as chosen lessee.
The manufacturer delivers the equipment at the site of the lessee, and the latter gives notice of acceptance to the lessor. The lease agreement giving detailed terms of contract is signed between the parties. Leases will normally be full pay out, with term varying as per requirements.

During the lease period, the lessee:
 Pays rentals regularly at periods agreed-upon, which are usually each calendar month.
 Keeps the equipment in good repair and working condition, etc.
 Will be entitled to manufacturer‟s warranties or after-sales services.

In respect of leasing transaction entered into the leasing company, the following procedures may be adopted the auditor.
i. The object clause of leasing company to see that the goods like capital goods, consumer durables etc. in respect of which the company can undertake such activities. Further, whether company can undertake financing activities or not.

ii. Whether there exists a procedure to ascertain the credit analysis of lessee like lessee‟s ability to meet the commitment under lease, past credit track, recorded capital strength, availability of collateral security etc.

iii. The lease agreement should be examined and the following points may be noted:

a. The description of the lessor, the lessee, the equipment and the location where the equipment shall not be removed from the described location except for repairs. For the sake of identification, the lessor may also require plates or makings to be attached to the equipment

b. The amount of tenure of lease, dates of payment, late charges, deposits advances etc. should be noted.

c. Whether the equipment shall be returned to the lessor on termination of the agreement and cost shall be borne the lessee.

d. Whether the agreement prohibits the lessee from assigning the subletting the equipment and authorizes the lessor to do so.

iv. Examine the lease proposal form submitted the lessee requesting the lessor to provide him on lease the equipment.

v. Ensure that the invoice is retained safely as the lease is a long-term contract.

vi. Examine the acceptance letter obtained from the lessee indicating that the equipment is received in order and is acceptable to the lessee.

vii. Check the Board resolution authorizing a particular director to execute the lease agreement has been passed the lessee.

See that the copies of the insurance policies have been obtained the lessor for his records.

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