I made this discovery a year late, but better late than never . When I bought my iPad , my son was 5 years old and in Kindergarten - not a big reader yet. But believe me, he spied hard over my shoulder when I put in my iTunes password to purchase an app for him. He still doesn't know the iTunes password, but here's what I just learned. You can either set the iTunes password to require a password immediately or after 15 minutes. Last year when I applied a few gift cards to my account, I couldn't figure out how we spent them so fast. Well, he had 15 minutes to "continue shopping" or go crazy with in-app purchases if I wasn't looking. (I thought that big black bird that clears the level in Angry Birds was free!) Little rascal!
He was the one who naively mentioned to me that he knew how to purchase apps. I ignored him, but he was telling the truth. When he started window shopping too frequently in the App Store (asking me how to spell military jets, dinosaurs and Kung-Fu), I turned on the restriction settings for which you need a password to make changes. When he gets the iPad on the weekends, I turn off Safari, YouTube & Installing Apps. Permanently I have In-App purchases turned off, and now to make a second purchase in iTunes a password is required immediately.
Passwords are also good for teaching/bribing. He was bored with trying to learn our phone numbers with me teaching him (the hard way). But as soon as I made our phone numbers the passcode to enter the iPad, he learned each of them in a day.
For iPad, iPhone, iPod restrictions, go to Settings/General/Restrictions and turn off anything you don't want to allow your child access to. Here you can also turn off access to Music and Podcasts rated Explicit, select movies ratings etc. Finally for the one I didn't know, you can require a password immediately for iTunes purchases.