OSIER M17/J17 (A) Kaplan kit part a ii)warranty provision

Noah098 wrote:“The estimate is made by the sales director; while this may be the best person to forecast sales they may not be the best person to predict returns. Returns are likely to be influenced more heavily by product quality, which the production or quality control manager may be better placed to predict. This implies that the forecast amount is based on simplistic, general estimates using sales levels rather than consideration of specific product quality issues.”

The exercise of professional scepticism does not mean that the auditor assumes that the client's staff are dishonest. You could argue for the finance director if you preferred - the point is that the sales director is unlikely to be the best person.

Noah098 wrote:doubt 2: related to same section of question

That's the whole point - the greater the volume of the sales - the greater the volume of returns under warranty.

Noah098 wrote:doubt 3: related to same section of question

Consider sales volume 1m, expected returns 1%, cost of repair $10 (I am making #s up - this is not meant to be specific to Osier) gives provision $100k. If this is opening provision but actual expense is only $90k, there is over-provision of $10k - this will "fall out" in the year's expense. So if the closing provision is again $100k, the expense would be $90k. But if sales doubled during the year, the closing provision should be $200k - making the expense for the year $190. You certainly can't presume manipulation/bias without first considering what should be expected.