Basis of provision

A provision is an example of an accounting estimate. The basis on which it has been estimated by management will include management's assumptions. To understand how a provision has been calculated is a first step in determining is the risk of misstatement and what audit evidence should be obtained to ensure that it is materially correctly stated. For example, you would expect a provision for product warranties to be calculated based on a % of sales and the average cost of repair or replacement product.