If Apple was still some tiny start-up business, clawing and grasping for every possible dollar of profit to ensure their employees could get paid and business could continue to develop? I'd be right there with you, saying, "Hey... come on! Quit trying to get a repair/replacement when the product looks like it's in this kind of condition!"
But as it is? Apple sits on a huge mound of cash reserves and is more profitable than practically any other computer business in the current economy. A big reason they got this way is their promise that they provide a superior overall "user experience". By definition, that not only includes people enjoying the product, but also includes the service after the sale and an overall positive shopping experience online or in their retail stores.
A given product like an iPhone or iPod only gets a lousy 1 year warranty, by default, to start with. To get 2 more years added on, the customer has to BUY an expensive warranty upgrade. Is it that unreasonable to just go ahead and give a guy a replacement or warranty repair in that situation -- where some water sensors and corrosion show the device got wet, but the customer claims otherwise?
Fact is, the customer isn't always LYING about such things. He/she might simply have been a victim of one of their kids or a family member or buddy dropping the thing in a toilet or sink one time, fishing it out and trying to dry it off, and not telling them about it. Maybe it got left outside one time and condensation built up on it before someone remembered it was sitting out and brought it back in? (In that case, they legitimately might not have ever equated it with "water damage", if it hadn't actually rained.)
Or lastly, yeah -- the guy might be lying, simply because he/she doesn't have the money for a replacement, relies heavily on the thing, and feels like it's not "out of line" to ask Apple for a warranty swap this ONE time.
Most stores keep logs of such actions, so you can quickly eliminate the scammers who keep bringing things back in repeatedly for service, an unreasonable number of times. But in a single situation like this? The good-will Apple would generate by just taking care of it "no questions asked" is worth a lot more in the long-run than trying to save a buck on the warranty claim.
not sure about ipods but think it would be similar to iPhone.
There are 4 sensors on the iPhone and if one is tripped (gone red) then the two in inside are looked at and if they are red then you know its water damage. Its funny I've seen people swear blindly that their iPhone hasn't been near water and then you look inside and its really badly corroded and needless to say the sensors have gone off!