Equipment Leasing

The Company enters into equipment leasing agreements with various companies when economic analysis indicates it is in the Company's best interest to do so.  These arrangements generally provide for certain equipment to be leased at a negotiated rate for a specified term.  At the end of the term, the equipment may be purchased, returned to the lessor, replaced by new equipment, or the original lease arrangement maintained, depending on the terms of the original lease agreement.  The auditor should determine that adequate procedures and controls are in place and working effectively to ensure that all leasing arrangements are economically established and efficiently administered.  

1. 	General
	
                Test

A.	Determine that lease agreements adequately protect The Company's interest 
	and are properly executed and administered.  

		Steps

	1.	Identify all vendors with which The Company has executed equipment 	
		lease agreements.  

	2.	Review master agreements and determine that they were 		
		properly approved and address payment of any taxes, insurance 
		requirements and include audit clauses.  

	3.	From the list of master leases determine which vendors received 	
		the highest cash disbursements from The Company, for review 		
		purposes.  

	4.	Review the lease arrangements with local management and 		
		ensure that they understand the lease process including 
		obtaining assistance from appropriate staff groups within the 		
		Company (IT, Accounting) when needed.  

Lease Activity and Administration

Typically, The Company makes arrangements and negotiates prices directly with manufacturers or distributors of equipment to be purchased by a third party leasing company (lessor) and leased to the Company.  A Company purchase order (PO) will be sent both to the vendor and lessor to ensure that the best price The Company can negotiate is utilized by the lessor to establish the lease rates.  

	Test

A.	Ensure that the best prices were obtained by the lessor for leased 		
	equipment.  

	For Acquisitions:	
		
                                Steps

	Select a sample of lease agreements and perform the following:  

	1.	Determine that prices paid by the lessor to the vendor included 	
		The Company negotiated discounts and that these prices were 		
		used to calculate the lease payments.  

		a.	Trace base price per lessor to acquisition invoice and 	
			The Company Purchase Order for agreement of equipment and 
			prices.  

		b.	Review prices paid to vendors to ensure that The Company 		
			discounts were used for the purchase price.  

		c.	Verify with manufacturers that no price adjustments or 	
			other discounts were made after the PO was issued.  
	
	For Administration:

	1.	Determine that competitive bidding was utilized in awarding 		
		leases.  

	2.	Review the lease basis and terms.  

		a.	For invoices issued by the lessor to The Company, trace to 		
			documentation confirming equipment was installed at 		
			The Company facilities and is still in The Company's possession at 	
			the location specified.  

		b.	Trace lessors' invoices to leases for agreement of 		
			amounts and terms.  

		c.	Ensure that provisions to determine the value of leased 	
			equipment in the event of a casualty loss was included in 
			the lease agreement.  

	3.	Review lease expiration dates and determine if any leases have 	
		exceeded the initial term.  If so, review the master lease and 		
		determine if The Company should have maintained the current lease, 
		purchased the equipment, received a reduced lease payment, or 
		terminated the lease and obtained new equipment.  
	
	For Economic Analysis:

	Test

B.	Ensure that an economic analysis was prepared for the more significant 	
	leases to determine if the equipment should have been leased or 		
	purchased.  The Company debt equivalent interest rates which are 		
	published quarterly by the Finance Department should be the starting 		
	point for lease/purchase calculations.  These rates as well as IT 		
	negotiated lease rates and other related information are available on their 	
	system.  Instructions for lease versus buy decisions are contained in Accounting
	Policy.  

		Steps

	1.	Review documentation of economic analysis of lease versus buy decisions.  

	2.	Recalculate the present value (PV) of the lease and compare it to 
		the purchase price to determine if the equipment should have 	
		been purchased or leased.  Be sure to include the effects of 		
		Federal Income Tax, Local Sales Tax, Depreciation and residual 
		value of the equipment in the calculation.  

	3.	For any analysis that identifies equipment which should have 	
		been purchased, determine why it was leased.  

	4.	Lease rates are a factor of equipment cost, residual value and 	
		interest rates.  For example, lease rates should not rise in a 		
		period of declining interest rates or equipment costs.  Review 	
		lease rates and determine that they are reasonable.