The lease accounting audit readiness checklist

Lease accounting audits under ASC 842 are more involved than they were under the old standard. Auditors are no longer just checking that operating lease payments match the rent roll. They are testing right-of-use asset valuations, lease liability measurements, discount rate selections, modification accounting, and disclosure completeness.

For many organizations, the lease audit has gone from a routine check to one of the more time-consuming areas of the annual examination.

The teams that move through it smoothly are the ones that prepare proactively, not reactively. This checklist covers the areas auditors focus on most - and the documentation you should have ready before they arrive.

Documentation and data integrity

The foundation of a clean lease audit is complete, well-organized documentation. Auditors will want to trace balances back to source documents and verify that the data in your system matches the terms in your agreements.

Make sure the following are in order:

• Complete lease inventory. A current listing of all leases - including short-term leases and leases below your capitalization threshold - with documentation of the policy elections applied to each.
• Source documents on file. Original executed agreements, amendments, extensions, and side letters for every lease in the portfolio.
• Data reconciliation. Verified match between key terms in your agreements and the data in your system: commencement dates, payment amounts, escalation terms, option periods.
• Modification log. A chronological record of every modification processed during the audit period - original terms, modified terms, and the accounting treatment applied.
• Discount rate documentation. Support for every rate used, whether incremental borrowing rate with methodology and inputs, or risk-free rate with documentation of the practical expedient election.

Controls and process documentation

Beyond the data itself, auditors evaluate the controls surrounding your lease accounting process. This is where many organizations are underprepared - particularly those that adopted ASC 842 without formalizing their ongoing procedures.

• Lease identification process. A documented procedure for identifying new leases and embedded leases in contracts, including who is responsible and how frequently the review occurs.
• Review and approval workflow. Evidence that lease data entry and journal entries are reviewed by someone other than the preparer before posting.
• Change management controls. Documentation of how modifications are identified, communicated to accounting, and processed in the system.
• Reconciliation procedures. Monthly or quarterly reconciliation between the lease sub-ledger and general ledger, with sign-off and resolution of variances.
• System access controls. Appropriate user permissions with segregation of duties between data entry, approval, and posting.

Common findings to address proactively

Knowing what auditors typically find helps you fix issues before they become findings:

• Incomplete lease populations. Agreements missed during initial identification - particularly embedded leases in service contracts.
• Inconsistent short-term lease treatment. The exemption applied to some leases but not similar ones, without documented reasoning.
• Discount rates lacking support. Rates used without sufficient documentation of methodology, inputs, or market data.
• Untimely modification processing. Changes identified by operations but not communicated to accounting until after the close period.
• Disclosure reconciliation gaps. Schedules that do not tie to sub-ledger balances, often due to manual aggregation errors.

Review each of these areas against your current state and remediate gaps before the audit begins. The cost of proactive preparation is a fraction of the cost of responding to findings after the fact - and the difference in your auditor relationship is significant.