Contingent liability is a potential obligation which may in the future develop into actual liability or may dissolve without necessitating any outlay. The crucial characteristics of contingent liability is uncertainty i.e, whether it will or will not develop into a real liability. Thus a contingent liability is that which may or may not arise after the preparation of balance sheet.
The following are the usual contents of work paper file:
1. A complete list of all the books in use, and the names of the clerks in charge of each of each should be prepared.
2. All cash and cheques in hand on the closing date of the audit period should be sent to bank, if possible, and if not, the Cash book should be kept written up to the date of the auditor’s visit.
3. A statement reconciling the Bank balance as per cash book with that of the Bank statement should be ready together with a Bank Certificate.
4. All postings, additions, carry-forwards etc, should be ready written in ink, the requisite balances extracted and trial balance agreed.
5. Schedule of debtors, creditors, duly agreed with their control account in the general ledger should be kept ready with confirmation of the parties regarding balance due to or by them.
6. All important contacts, title deeds and other documents having any bearing on accounts to be kept ready for reference.
7. Minutes books, copies of Partnership Deed or Memorandum and Articles of Association and Prospectus etc. to be kept at hand.
8. All vouchers should be available arranged in order of books entries.
9. Bills receivables, post-dated cheques, bonds and securities and investments should be ready for production when required and a list thereof kept ready.
10. List of all prepared expenses, advances, accrued income and of outstanding expenses etc, to be prepared and kept ready.
11. A complete list of stocks of stores should be prepared.
12. A list of over-dues and doubtful debts included in the schedule of debtors stating suggested provisions deemed desirable against possible loss should be prepared.
13. The draft Profit and Loss Account and Balance sheet be prepared, and in case of limited company, should be passed by the Directors.
Prepayment also known as prepared expenses are those expenses which are incurred or paid during the year under audit but relate to the period subsequent to the current year. These represents payments made in advance, for services or rights to be received over some future period of time. Such prepayment may be in respect in telephone charges, rent, rates insurances, subscriptions, advertisement, etc.
Profit may be defined as follows:
1. Generally speaking the profit of the business during a given period is the excess over the expenditure for the period.
2. It is the excess of Assets over the liabilities and the capital between the two periods.
Profit is the different to the net assets of the business an existing on the end of the year and on the commencement of the year after making necessary adjustments for internal or introduction of capital. The surplus of income earned during a particular period after providing for all actual and outstanding expenses, incurred in the earning of such income is the measures of profit.
Divisible Profit is that part of the net profit of the business which has actually been released and bonafide exists after the revaluation of all assets and liabilities and can legally be distributed to the share holders as dividend. The amount of divisible profit is ascertained in accordance with the provisions of the memorandum of Association and the articles of Association. Distribution of profits which would affect the interest of third parties of which would amount to the return of capital to the share holders, would be illegal. In all cases capital of the business is to be maintained intact.