The text talks about Delphi Company reducing its other post-retirement benefits by approximately $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 $1,300 per person.

Required

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.