Preparing for an IFRS 16 audit requires four things: a complete and current lease register, a modification log showing the history of every lease change, documentation supporting discount rate choices, and reconciled journals that tie back to financial statements. The earlier you start, the fewer surprises you'll face when auditors arrive.
If your auditors have already raised questions about your lease accounting workings, you are not alone. IFRS 16 (and its Australian equivalent AASB 16) remains one of the most complex standards for finance teams to manage under audit scrutiny. The modifications are frequent, the calculations are sensitive, and the documentation requirements are exacting. What follows is a practical guide based on what CA-qualified lease accounting specialists at LOIS see consistently when helping organisations prepare for external audit.
When auditors review IFRS 16 workings, they are testing five specific areas: completeness of the lease register, evidence of lease identification decisions, discount rate documentation, modification and reassessment evidence, and the reconciliation of journals to financial statements. Each area has a distinct evidentiary standard.
Completeness of the lease register. Auditors will not simply accept the register you hand them. They will look for evidence that you have a systematic process for identifying leases across the organisation, including contracts that contain embedded leases. This means they want to see a policy, not just a list.
Evidence of lease identification decisions. For any contract you excluded from the register, there needs to be a documented rationale. Short-term exemptions and low-value exemptions both require supporting evidence. Auditors will sample contracts outside the register to test whether anything was missed.
Discount rate documentation. The incremental borrowing rate (IBR) applied at each lease commencement and at each modification must be documented, not just applied. Auditors will test whether the rate is reasonable, whether it was determined at the correct date, and whether it has been updated when required.
Modification and reassessment evidence. Every change to a lease, whether a formal modification or a contractual reassessment (such as a CPI adjustment), must have supporting documentation: the trigger, the effective date, the new terms, the recalculation, and the resulting journal entries. Auditors will trace each modification from the source document through to the financial statements.
Journal reconciliation to financial statements. Auditors will reconcile the right-of-use (ROU) asset balance and the lease liability balance to the financial statements. They will test whether the movements during the year, additions, depreciation, interest, modifications, and terminations, are all supported and tied back to individual lease calculations.
Based on what LOIS's CA-qualified team sees when reviewing client portfolios ahead of audit, the same deficiencies appear with regularity. None of them are conceptually difficult. Most are process failures, not technical misunderstandings.
Undisclosed leases embedded in service contracts. IFRS 16 applies to any contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. That definition catches many arrangements that are classified internally as service agreements, IT contracts, or outsourced operations. Finance teams often haven't screened these contracts, and auditors know to look.
Unsupported IBR choices. The incremental borrowing rate must reflect the rate at which the lessee could borrow funds at the commencement date, for a similar term, with similar security, and in a similar economic environment. "We used our bank's base rate" is not sufficient. Auditors will ask for a documented methodology, and organisations that cannot produce one face adjustment risk.
Missing modification documentation. A common audit finding is companies failing to identify and document every instance of a lease extension, partial termination, or change in payment terms, even when they appear minor. Lease extensions are particularly common. When a lease runs past its original end date without a formal modification being processed, the ROU asset and lease liability figures are wrong, and the error compounds over time.
General ledger journals that don't reconcile. Many organisations prepare their IFRS 16 calculations correctly but then post journals in a way that doesn't preserve the link between the lease register and the GL. When auditors try to reconcile the movement in the ROU asset or lease liability from the subledger to the GL, the numbers don't tie. This is almost always a process problem, not a calculation error, but it creates significant audit friction.
Incomplete or absent disclosure workings. IFRS 16 requires extensive quantitative disclosures, including a maturity analysis of lease liabilities, disclosure of total cash outflows, and a rollforward of ROU assets. Many finance teams assemble these disclosures manually from multiple sources late in the reporting cycle. Auditors will test each figure back to the underlying data.
An audit-ready lease register is not simply a list of all your leases. It is a structured, evidenced record that gives auditors confidence in its completeness, accuracy, and currency. Building one requires a deliberate process, not just a spreadsheet update.
Step 1: Identify all leases across the organisation, including embedded leases. Start with a systematic review of all contracts, not just those held by the property or fleet team. Finance, IT, operations, and procurement all enter contracts that may contain leases. Send a structured questionnaire to each department head. Look specifically for contracts involving dedicated assets, whether property, equipment, vehicles, or technology infrastructure.
Step 2: Apply and document exemption decisions. For every contract that might be a lease, decide whether it qualifies for the short-term exemption (lease term of 12 months or less at commencement) or the low-value exemption. The low-value exemption requires careful documentation. IFRS 16 does not specify a hard monetary threshold, but the standard's Basis for Conclusions notes that the IASB had in mind assets with a value of approximately USD 5,000 or less when new, such as small IT equipment (laptops, tablets, mobile phones, individual printers) and some office furniture. The exemption is not intended for assets like cars or most photocopiers. For every contract excluded under the low-value exemption, document the asset type, its approximate new value, and the rationale for concluding it qualifies as a low-value asset under the standard's intent.
Step 3: Confirm all lease terms and payment schedules. Each lease in the register must have an accurate commencement date, lease term, payment schedule, and renewal or extension options clearly documented. Where lease terms involve judgement, particularly around whether extension options are "reasonably certain" to be exercised, document the rationale for the position taken.
Step 4: Record IBR for each lease at commencement and at each modification. The register should capture not just the rate applied but the methodology used to determine it, the date it was determined, and who approved it. This is the documentation that auditors request most often and organisations most frequently cannot produce.
Step 5: Keep the register current. A lease register that was accurate at 1 January but hasn't been updated for the six modifications that occurred since is not audit-ready. The register must reflect every event, every month, throughout the year.
A proper IFRS 16 audit trail must record every modification to a lease, who made it, when they made it, what the trigger was, and what the financial impact was. It must be generated automatically by the system, not reconstructed manually after the fact.
For each modification event, auditors expect to see:
This is where spreadsheets fundamentally fail the audit trail test. A spreadsheet shows the current state of a calculation. It does not record who changed a cell, when they changed it, what it said before, or why the change was made. When an auditor asks "show me the modification log for your Parramatta office lease," a spreadsheet user has to reconstruct the answer from emails, calendar entries, and memory. That is not an audit trail. It is a reconstruction, and auditors know the difference.
A purpose-built lease accounting platform maintains a complete, timestamped record of every change made to every lease in the system. The audit trail is not something you build for audit season. It accumulates automatically, every time someone makes a change, throughout the year. By the time your auditors arrive, it already exists. If you want to understand just how risky a spreadsheet-based approach really is, our post on why spreadsheets fall short for IFRS 16 compliance covers this in detail.
The reconciliation of your IFRS 16 subledger to your financial statements is the point where most month-end processes either hold together or fall apart. Auditors will perform this reconciliation. You should perform it first, every month, so there are no surprises.
The reconciliation should demonstrate three things at minimum:
ROU asset movement reconciliation. Opening balance, plus additions (new leases commenced during the period), plus upward modifications, less depreciation charged, less disposals and terminations, plus or minus other remeasurements, equals the closing balance per the financial statements. Every line should be supported by the underlying lease register.
Lease liability movement reconciliation. Opening balance, plus additions, plus modifications that increase the liability, less lease payments made (split between principal repayment and interest), plus interest accrued, less early terminations, equals the closing balance per the financial statements. Auditors will split the closing balance between current (due within 12 months) and non-current to verify the balance sheet classification.
Income statement reconciliation. Total depreciation charged on ROU assets should reconcile to the income statement. Total interest expense on lease liabilities should reconcile to the finance cost line. Both should be consistent with the amortisation schedules in the lease register.
If you are performing this reconciliation manually, the risk of error increases substantially with portfolio size. A dedicated lease accounting platform produces these reconciliations automatically at month-end, so the supporting workings are ready for auditors without additional preparation.
Use this checklist to structure your preparation in the four weeks before your audit begins. Each task maps to one of the five areas auditors test.
| Week | Task | What auditors are testing |
|---|---|---|
| Week 1 | Circulate lease identification questionnaire to all department heads (property, IT, fleet, ops, procurement) | Completeness of the lease register |
| Week 1 | Screen all service and outsourcing contracts for embedded leases | Completeness of the lease register |
| Week 1 | Document rationale for every contract excluded under the short-term or low-value exemption | Lease identification decisions |
| Week 1 | Confirm each lease has commencement date, term, payment schedule, and renewal options documented | Completeness of the lease register |
| Week 1 | Verify IBR is documented for each lease at commencement, with methodology and approval recorded | Discount rate documentation |
| Week 2 | List every lease event in the period: new leases, modifications, reassessments, extensions, and terminations | Modification and reassessment evidence |
| Week 2 | Classify each event (modification vs. reassessment) and document the accounting treatment applied | Modification and reassessment evidence |
| Week 2 | Confirm a revised IBR was determined and documented for each modification requiring remeasurement | Discount rate documentation |
| Week 2 | Gather signed amendments, addendums, and side letters for each modification event | Modification and reassessment evidence |
| Week 3 | Reconcile opening ROU asset and lease liability to prior-year closing balance per audited financial statements | Journal reconciliation |
| Week 3 | Prepare ROU asset and lease liability movement schedules (additions, depreciation, modifications, terminations, closing balances) | Journal reconciliation |
| Week 3 | Reconcile depreciation and interest expense per the lease register to the income statement and cash flow statement | Journal reconciliation |
| Week 4 | Prepare IFRS 16 maturity analysis of undiscounted future lease payments by year bucket | Financial statement disclosures |
| Week 4 | Prepare total cash outflows disclosure (principal, interest, variable, short-term, and low-value payments) | Financial statement disclosures |
| Week 4 | Assemble full audit pack: lease register, modification log, IBR documentation, amortisation schedules, reconciliations, and signed contracts | All areas |
Audit readiness should not be a seasonal activity. The organisations that struggle most during audits are those that treat preparation as a once-a-year exercise. The ones that sail through are those whose lease accounting processes generate audit evidence automatically, every month, as a by-product of normal operations.
LOIS is built around this principle. Every change made to a lease in LOIS is automatically logged with a timestamp, the identity of the user who made the change, and the previous state of the record. There is no manual trail to reconstruct. The audit trail exists because it has been accumulating since the first lease was entered.
The LOIS lease accounting platform also automates the reconciliation process. ROU asset and lease liability movement schedules are produced at month-end from the system, not assembled manually from multiple spreadsheets. Journal entries are mapped to GL accounts in a consistent, traceable format. Disclosure workings are generated from the same dataset that produced the journals.
For organisations that want the highest level of assurance, the LOIS Managed Service goes further. LOIS's CA-qualified lease accounting experts validate all lease data each month, review calculations, prepare journals ready for posting, and deliver a fully reconciled, audit-ready reporting pack. When your auditors arrive, the pack is already waiting for them. The most common audit deficiencies described in this guide, unsupported IBR choices, missing modification documentation, irreconcilable journals, are addressed proactively, before they become audit findings.
What documents does an auditor need for IFRS 16?
For an IFRS 16 audit, auditors typically request the complete lease register, the modification log for the period, IBR documentation (methodology and rate at commencement and modification), signed lease agreements and amendments, amortisation schedules, journal entries mapped to the GL, and movement schedules for ROU assets and lease liabilities. They will also test the completeness of the register and verify financial statement disclosures against the supporting data.
What are the most common IFRS 16 audit issues?
The most common IFRS 16 audit issues are: incomplete lease registers (particularly from embedded leases in service contracts), undocumented or inadequately supported incremental borrowing rate choices, missing modification documentation for lease extensions and partial terminations, GL journals that cannot be reconciled to the lease register, and IFRS 16 disclosures that do not tie back to the underlying calculations.
How do I create an IFRS 16 audit trail?
An IFRS 16 audit trail must record every modification to every lease including the effective date, what changed, the supporting contract document, the revised IBR if applicable, the recalculated amortisation schedule, and the resulting journal entries. It must capture who made the change and when. A proper audit trail must be generated automatically by the system, not reconstructed manually. Spreadsheets cannot provide a genuine audit trail because they do not record who changed a cell, when, or what it contained before.
What is an IBR for IFRS 16 purposes?
The incremental borrowing rate (IBR) is the rate of interest a lessee would pay to borrow, over a similar term and with similar security, the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment. Under IFRS 16, IBR is used to discount future lease payments when the interest rate implicit in the lease cannot be readily determined. The IBR must be determined at lease commencement and reassessed at each modification requiring remeasurement. Auditors will scrutinise IBR documentation carefully, requiring methodology, inputs, and approvals: not just the rate itself.
Talk to our team about getting your lease portfolio audit-ready
LOIS combines a purpose-built lease accounting platform with CA-qualified experts who understand what auditors look for. Whether you need to clean up your lease register before an imminent audit or build a permanent process that keeps you audit-ready year-round, we can help.
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