Question

Eider Equipment Leasing Limited is in the financing lease business. It uses a service organization to compute lease payment schedules. Eider’s customers sign standard equipment leases ranging from 3 to 15 years. The details of the leases are summarized and sent to the service organization for generating the schedules. Hard copy reports from the service organization are delivered to Eider monthly and used by its bookkeeper to generate entries in the company’s general ledger system, which is run on a popular accounting software package.

Required:
a. Design two or more appropriate audit approaches for verifying leasing revenues in this auditee.
b. List factors that would indicate which approach will be most efficient and effective.

Answer 1

The case involves a service organization that produces accounting data, and determining how to obtain audit evidence for leasing revenues in this situation. One possible response:

 

a)         Re-performance of the lease calculations manually, analysis based on standard lease terms (if they are reasonably consistent from lease to lease), obtain assurance from the service organization’s auditor over the processing validity and completeness (accuracy) of lease schedules and controls,

 

b)         Availability of relevant and reliable data for analytical procedures, availability of service organizations audit report, materiality, audit risk, history of errors, etc.