Evaluate the estimated warranty liability

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ABC Auditors is reviewing the estimated warranty liability for Company X for the year ended 12/31/20X1. In order to help evaluate the estimated warranty liability, ABC Auditors is investigating the number of service calls within the first year. While reviewing previous trends,

Company X has determined that 3% of Company X's products require a service call within the first year and this 3% figure is what Company X has used to record Warranty Expense in prior years. In order to investigate whether the 3% figure is still accurate, ABC Auditors survey 400 customers that recently purchased on of Company X's products.

1. What is the probability that more than 5% require a service call within the first year?

2. What conclusions would you draw about using 3% as an estimate if in a random sample of 400 customers, 5% report at least one service call? What is the impact of this finding on Company X's warrant expense for the year ended 12/31/20X1?

Reference no: EM133227933

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