The management of BOB Ltd. could not differentiate between any obligation for which either provisions need to be made or the contingent liability to be shown. The auditor of the company clarifies the management that the provisions are the amounts charged against revenue to provide for a known liability, the amount whereof cannot be determined with substantial accuracy. On the other hand, a contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events not wholly within the control of the entity; or a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. The auditor further explains the concept with the help of examples. State which of the following examples the auditor must have provided in respect of contingent liability?

(a) Depreciation.

(b) Clean-up costs for unlawful environmental damage.

(c) Product warranties.

(d) Lawsuit against the company where it is more likely that no present obligation exists.

7.Toddler Inndya is a charitable institution running hostel for students pursuing different field of professional courses. The hostel charges only Rs. 600 per month as rental from students but a fine of Rs. 100 per day for late entry after 10:00 p.m. M/s Strong & Co., the audit firm, have been appointed as an auditor of the hostel. The audit firm allotted different areas to be examined between all of its partners. You, being one of the partners, have been assigned verification of receipts of the hostel. State which of the following need not be examined by you with respect to receipts of the hostel.

(a)Amounts received on account of monthly rental and receipts issued for the same.

(b)Rental receipts and register maintained comprising students' information.

(c)Additional amounts received on account of fines, penalties, etc.

(d)Eligibility of institution for income tax exemption.

8.An entity in addition to undertaking purchases and incurring employee benefit expenses also spends on other expenditure that are essential and incidental to running of business operations. One of such expenses is the legal and professional expenses. These are the fees paid for professional advices regarding specific deals.

Iconic Ltd. is having a retainership agreement with a lawyer, Mr. Avi, to whom the company is paying a huge sum as legal and professional expenses on monthly basis. While vouching such expenses, what should be kept in mind by the auditor?

(a)In case of monthly retainership agreements, only verify if the expenditure for all 12 months has been recorded correctly.

(b)The auditor should verify that the payments have been only through bank vouchers.

(c)The auditor should be cautious while vouching for legal expenses as the same may highlight a dispute for which the entity may not have made any provision and the matter may also not have been discussed/ highlighted to the auditor for his specific consideration.

(d)In case of monthly retainership agreements, only verify that all the payments have been made and there is no outstanding balance to be shown as liability in the Balance Sheet.

9.OPPOLO MOUNT is a renowned hospital running across the country. CA. Pooh, a newly qualified Chartered Accountant, has been appointed as an auditor of the hospital for the current Financial Year. Being a new-fangled in the audit of hospitals, he request you to kindly guide him regarding auditing the same. State which of the following audit procedures needs to be performed while auditing the receipts from patients of a hospital?

(a)Verify that grants, if any, received from Government or local authority has been duly accounted for.

(b)Compare the totals of various items of expenditure with the amount budgeted for them and report to the Trustees or the Managing Committee, significant variations whic

h have taken place.

(c)Check cash collections as entered in the Cash Book with the receipts, counterfoils and other evidence, for example, copies of patients' bills.

(d)None of the above.

Answer all the parts ---->>>

10.With the shift in favor of formal internal controls in the management of aairs of BEN Ltd., the possibilities of routine errors and frauds have greatly diminished and the auditor, CA. Novara, finds extensive routine checking as nothing more than a ritual because it seldom reveals anything material. Therefore, he decided to select the sample without following a structured technique. Although no structured technique is used, CA. Novara would nonetheless avoid any conscious bias or predictability and thus attempt to ensure that all items in the population have a chance of selection. What method of sample selection is he following?

(a)Simple Random Sampling.

(b)Systematic Sampling.

(c)Block Sampling.

(d)Haphazard sampling.