(Drug Benefits and Post Retirement Liabilities) Delphi Company reduced its other post reitrement benefits by approx 500 million because of a change in the law. The federal government will not reimburse companies for prescription drug benefits that it provides to its employees who are of Medicare age. The reimbursement is 28% of all prescription drug benefits in excess of $250 per person per year, up to a maximum of $1300 per person. A) Identify the process the company would use to identify the liability for post retirement drug benefits. Assume this was done prior to the new federal law. Identify the data the company would need to make the estimate. Identify how the auditor might audit the data. B) Explain how the auditor would verify the $500 million reduction in liability due to the new federal law.

(Contingencies) -An audit client is being sued for $500,000 for discriminatory hiring practices. Indicate the appropriate action the auditor should take for each of the following independent responses to the letter of audit inquiry:
a) The lawyer stated that the client has a "merirorious defense."

b) The lawyer stated that there is only a remote chance that the client will lose. The client did not accrue any contingent loss or disclose this situation.

c) The lawyer state the client will probably lose, and the amount of loss could be anywhere between $250,000 and $500,000, with no amount within that range being more likely than another. The client disclosed this situation but did not accrue a loss.

d) The lawyer state that there is a reasonable possibility that the client will lose. The client disclosed this situation but did not accrue a loss.

e) The lawyer stated that the client will probably losebetween $250,000 and $500,000, but most likely will lose $400,000. The client accrued a $250,000 contingent loss and disclosed the situation.

(Accounting Estimate) An alfalfa co-op has an ageement with its farmers to purcahse alfalfa at a price that is currently above the existing market price. In addition, the co-op has agreed to pay the famers interest at 2% for each month delivery is delayed beyond December 31, 2006. Management expects that at least 14,500 tons will be delivered sometime after the balance sheet date.
a) What factors should be considered in making an estimate of the loss accrual?

b) What information should management disclose in the footnotes to the financial statements concerning this purchase commitment?

A) For the company to identify the liability for post-retirement drug benefits, they would need to follow a process that involves estimating the expected costs and obligations related to providing these benefits to employees. The data they would need to make this estimate would include the number of employees eligible for post-retirement benefits, the average cost of prescription drugs per person per year, and the historical utilization rates of prescription drugs by eligible employees.

The auditor might audit the data by performing procedures such as reviewing employee records, verifying the accuracy of the prescription drug cost data, and comparing the estimate with industry benchmarks or other similar companies' estimates. They may also review the company's policies and procedures for estimating post-retirement liabilities and test the effectiveness of the internal controls in place to ensure the accuracy and completeness of the data used in the estimation process.

B) To verify the $500 million reduction in liability due to the new federal law, the auditor would need to review the relevant documentation and evaluate the company's compliance with the new law. This may involve examining the updated plan documents, communication to employees regarding the changes, and any correspondence with the federal government regarding the reimbursement eligibility and amounts.

The auditor might also perform additional procedures such as testing the accuracy of the calculations used to determine the reduction in liability, reviewing the applicable sections of the law to confirm the eligibility criteria and reimbursement percentages, and obtaining written representation from management regarding the reduction and its compliance with the law. Additionally, the auditor may consider obtaining the opinion or confirmation from legal counsel to support the company's assessment of the impact of the new federal law on the liability for post-retirement drug benefits.