As budgeting ramps up, audit prep should too. Use this practical checklist to get classification right, support your discount rates, capture modifications, and tie out disclosures—so your audit finishes early with fewer adjustments.
Why audit readiness matters this fall
Private companies with December year-ends typically begin audit prep in the fall while they finalize budgets. Auditors increasingly expect clean documentation, consistent judgments, and software-backed outputs. Preparing now reduces audit risk and speeds fieldwork once year-end closes.
1) Lease classification testing
What auditors want: Evidence that each lease’s classification (operating vs. finance) was determined using ASC 842 criteria and applied consistently.
Common pitfalls
- Not reassessing classification when a lease is modified.
- Inconsistent application across asset classes (real estate vs. equipment).
- Missing documentation for judgment calls on reasonably certain renewal options.
Checklist
- Classification memo or system report for every active lease.
- Documented rationale for options considered reasonably certain.
- Controls to trigger reassessment on amendments.
Deep dive: Passing Your ASC 842 Audit
2) Discount rates & incremental borrowing rate (IBR)
What auditors want: A repeatable methodology that explains the source and selection of discount rates, including the IBR (by currency, term, collateral) or rate implicit in the lease when determinable.
Common pitfalls
- Using stale IBRs across new leases without support.
- One-size-fits-all rates that ignore term, collateral, or entity-level credit.
- Missing backup for treasury/credit curves or lender quotes.
Checklist
- IBR methodology memo with data sources and calculation steps.
- Evidence of rate selection per lease (or portfolio practical expedient, if used).
- Governance on when to refresh rates (e.g., quarterly, material change in credit).
3) Modifications & remeasurements
What auditors want: A complete record of amendments (renewals, expansions, partial terminations) and how each triggered remeasurement or separate contract accounting.
Common pitfalls
- Amendments not captured in the lease system (email-only approvals).
- Missing identification of embedded leases in broader service arrangements.
- Incorrect CPI/variable payment handling post-modification.
Checklist
- Central repository of executed contracts and amendments.
- Remeasurement logs with effective dates and drivers.
- Evidence supporting separate-contract vs. modification conclusions.
Backgrounder: Demystifying Lease Audits
4) Disclosure tie-outs
What auditors want: Clear tie-outs from quantitative disclosures to subledgers and the GL—maturity analysis, lease cost, weighted-average term and discount rate, and cash flow amounts.
Common pitfalls
- Maturity schedules that don’t foot to the lease liability.
- Weighted-average calculations not reproducible from detail files.
- Disclosure drafts that don’t match period-end cutoffs.
Checklist
- Disclosure package with GL tie-outs and footnotes.
- Archived queries/extracts supporting weighted averages.
- Reviewer sign-off and version history.
5) Communicating with your auditors
Share population files, classification support, and sample calculations early. Transparency around judgments (renewal options, IBR, variable payments) reduces rework and speeds testing.
- PBC list mapped to owners and due dates.
- Secure data room with organized folders (contracts, memos, reports).
- Weekly check-in cadence during fieldwork.
Guide: Engaging With Your Auditor
6) Leveraging technology & AI
Auditors value accuracy, consistency, and traceable audit trails. Lease accounting software reduces manual error and produces disclosure-ready outputs. AI can scan contracts for embedded leases and unusual terms to strengthen completeness and risk assessments.
- System-generated amortization schedules and journal entries.
- Exportable disclosure reports that reconcile to the GL.
- AI-assisted contract review for embedded leases and anomalies.
Explore: Leveraging AI in Audits
Make this your easiest audit season
iLeasePro centralizes contracts and amendments, automates ASC 842 schedules and journal entries, and produces disclosure-ready reports with audit trails your auditors will appreciate.
