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Dear tutor,
as a part fo audit reposes, every now and then i read that, we need to compare the warranty provision or refund liability to “post yr end claims/returns”, can i know the logic behind this tutor?
It’s the same principle that I attempted to explain here https://opentuition.com/topic/provisions-26
One of techniques for obtaining evidence about an accounting estimate (e.g. a warranty provision) is to see “how things turned out” – was the estimate enough? (i.e. not understated) or too much? (i.e. overstated) or “just right” (Goldilocks principle)?
i read through the attached post, tutor, but I am afraid am still not quite there.
How does reviewing post-yr end claims/returns help in assessing reasonableness of mgt judgement. I mean auditor would hardly have data of 3-4months after the year end, in that small period what are they going to compare with what? and how?
Keeping it simple – management sells 1,000 units of a product a month for $50 with a warranty that if returned as faulty within 6 months of sale, it will be refunded under a “no-quibble guarantee”. Management estimates, based on past experience that 3% of items will be returned so at 31 December makes a warranty provision for $9,000 (3% x 1,000 x $50 x 6 months).
The company refunds $4,900, $3,300 and $4,100 in Jan, Feb, Mar … does the provision look adequate to you?
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