Reference no: EM13481623

(Drug Benefits and Post Retirement Liabilities) Delphi Companyreduced its other post reitrement benefits by approx 500 millionbecause of a change in the law. The federal government will notreimburse companies for prescription drug benefits that it providesto its employees who are of Medicare age. The reimbursement is 28%of all prescription drug benefits in excess of $250 per person peryear, up to a maximum of $1300 per person. A) Identify the processthe company would use to identify the liability for post retirementdrug 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 theauditor would verify the $500 million reduction in liability due tothe new federal law.

(Contingencies) -An audit client is being sued for $500,000 fordiscriminatory hiring practices. Indicate the appropriate actionthe auditor should take for each of the following independentresponses to the letter of audit inquiry:

a) The lawyer stated that the client has a "meriroriousdefense."

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

c) The lawyer state the client will probably lose, and theamount 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 thatthe client will lose. The client disclosed this situation but didnot 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. Theclient accrued a $250,000 contingent loss and disclosed thesituation.

(Accounting Estimate) An alfalfa co-op has an ageement with itsfarmers to purcahse alfalfa at a price that is currently above theexisting market price. In addition, the co-op has agreed to pay thefamers interest at 2% for each month delivery is delayed beyondDecember 31, 2006. Management expects that at least 14,500 tonswill 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 foot notes to the financial statements concerning this purchase commitment?