(Drug Benefits and Post Retirement Liabilities) Delphi Company reduced its other post retirement 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.
A) To identify the liability for post retirement drug benefits, Delphi Company would typically use the actuarial process. This process involves making estimates based on certain assumptions and data. Prior to the new federal law, the company would need the following data to make its estimate:
1. Employee data: This includes the number of employees who are of Medicare age and are eligible for post retirement drug benefits.
2. Prescription drug data: The company would need information on the prescription drug benefits provided to eligible employees, including the total amount spent on prescription drugs for each person per year.
3. Reimbursement data: The company would also need to know the reimbursement percentage provided by the federal government for prescription drug benefits that exceed $250 per person per year, as well as the maximum reimbursement amount per person.
The auditor would verify this data by performing various audit procedures, such as:
1. Testing the accuracy and completeness of the employee data by comparing it with personnel records and relevant documents.
2. Examining the prescription drug records and expenses to ensure that they are accurately recorded and supported by appropriate documentation.
3. Reviewing the federal government reimbursement policy and confirming the percentage and maximum reimbursement amounts stated in the company's records.
B) To verify the $500 million reduction in liability due to the new federal law, the auditor would likely perform the following procedures:
1. Reviewing the documentation of the change in the law: The auditor would examine the official documents, such as the new federal law and related regulations, to confirm and understand the changes that led to the reduction in liability.
2. Analyzing the calculation and estimation process: The auditor would assess the methodology used by the company to estimate the liability prior to the new law, and compare it with the revised methodology after the law change. This would involve examining the assumptions made, the data used, and the calculations performed.
3. Testing the accuracy of the reduction amount: The auditor would review the calculations made to determine the reduction in liability, ensuring that the appropriate reimbursement percentages and maximum reimbursement amounts were applied correctly. They would reconcile the reduction amount in the company's records with the calculated reduction amount.
4. External confirmation: The auditor might also contact the relevant government agencies or authorities to verify the details of the new law and confirm the reimbursement percentages and maximums stated in the law.
Through these procedures, the auditor would seek to obtain sufficient and appropriate evidence to support the $500 million reduction in post retirement drug benefit liability due to the new federal law.