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 auditor examines the particular thing to assume himself of its existence. Physical examination requires identification of the item. One must be convinced that he has examined the specific theory which he is supposed to be verification of genuineness and quality.
The applicability of its techniques is restricted to those assets which are either material or some tangible evidence of existence such as count, inventories, fixed property, etc and stock-in-trade should be valued by expert values. As the amounts of debtors and creditors can not be correctly ascertained, the purchaser should be recommended not only to take them over, but merely to collect and pay them on behalf of the vendor and account for the net proceeds, therefrom to him.
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.