Am trying to figure out, how you design procedures for warranty provisions, in the sense as to what exactly are you trying to achieve or give to the users of the FS. What exactly are you trying to give them confidence over, please make the example of stating if the provisions are overstated and understated and how these statements will affect the FS and users.
Warranty provision is an accounting estimate of future liability that arise because of the promise made by the company to its customers. Accounting estimate means an approximation of an amount of item in the absence of precise means of measurement. Where estimates are used in accounting management is responsible for making estimate to be reflected in financial position. These estimates are often made in conditions of uncertainty regarding the outcome of events that have occurred or are likely to occur and involve the use of judgment. As a result, the risk of material statement is greater when accounting estimates are involved and in some cases the auditor may determine that the risk of material misstatement related to an accounting estimate is a significant risk that requires special audit consideration.
For this management study past year pattern of warranty claims made by the customers, study present market trend and analyze the durability of products offered for periods under consideration. E.g. the company have offered 2 years warranty and past data suggest that for the first year the warranty claim is 5% and fro the second year it rises to 15% but because of product development in the year X1 of operation research suggest that the claims for the sales of last period drop down to 2%. Then the provision will be 10% of sales X0 and 2% of X1 sales.
Any information presented in financial statement influence the economic decision of the users of the financial statement.
For more check article
Audit of accounting estimate