Puzzle Limited is a company manufacturing, selling and laying carpet tiles, currently preparing financial statements at 31 December 2015. Under the terms of sale, Puzzle gives a warranty, under which it agrees to make good manufacturing or laying defects that become apparent within three years after the date of laying. Independent inspectors would determine if making good was best done by repair or replacement. On the basis of past experience, the company expects that 3 percent of sales will be the subject of a claim for making good, of which two-thirds will result in repair or replacement.

 

State whether you believe the above matter would give rise to a provision under IAS 37, giving your reasons. If a provision is recognized, what work would the auditor perform to ensure that it is the best estimate of costs to be incurred?