A lease is a contract between the “Lessor’ who is the legal owner of the asset and the “Lessee” who acquires the right to use the specific asset on payment of fixed rentals Lessor retains ownership of assets and only grants the exclusive right to the party (lessee) to use the asset, for an agreed period of time, in return for payment of specified rental. Thus, lease finance is as alternative whereproject costs could be met taking in assets and equipment on hire rather than buying.
In respect of leasing transactions entered into a leasing company involved in the leasing capital goods, the auditor should check/verify the following:
a. The object clause of the leasing company to see that the company can undertake financing activities or not.
b. Whether there exists. a procedure to ascertain the credit analysis of lessee like lessee’s ability to meet the commitment under lease, past credit record, capital strength, availability of collateral security etc.
c. The lease agreement should be examined and the following points may be noted:
i. The description of the lessor, the lessee the equipment and the location where the equipment is to be installed (The stipulation that 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 markings to be attached to the equipment.)
ii. The tenure of lease, dates of payment lease charges, deposits or advance etc. should be noted.
iii. Whether the equipment shall be returned to the lessor on termination of the agreement and the cost shall be borne the lessee.
iv. Whether the agreement prohibits the lessee from assigning or subletting the equipment and authorises the lessor to do so.
d. Examine the lease proposal form submitted the lessee requesting the lessor to provide him on lease the equipment.
e. Ensure that the invoice is retained safely as the lease is a long-term contract.
f. Examine the acceptance letter detained from the lessee indicating that the equipment has been received in order and is acceptable to the lessee.
g. See the Board resolution authorizing a particular director to execute the lease agreement has been passed the lessee.
h. See that the copies of the insurance policies have been obtained the lessor for his records