I wouldn't expect any seller to just jump up and pay a refund at the drop of a hat Anthony, sorry if I gave that impression.
It's just that the package is "somewhere", and to help make the problem go away (as the seller) I'd pull some levers to find out WHAT HAPPENED, I'd take that on, it's one of your best defenses against a bad thing happening here.
I'd truly get the manager on the phone and find out if a temp was on the route that day or week, that's when many mis-deliveries occur and when falsified delivery reports and lies about "we left a package awaiting for you slip" type stuff happens, again it happened to me twice just this past week. The best outcome here is to find that package. If you persue all avenues there, as the seller, you will have much stronger "proof" or reason for the assertion to the seller that you think the problem is "them".
Re: "I have contacted the buyers Post Office and was told the recepient needed to call in as it is in his hands", you got blown a load of smoke, and it's time to call and ask for the branch manager. They of all people know that the computer showing a status of "delivered" doesn't mean much, it doesn't mean it was delivered, doesn't confirm it was delivered to the correct address, they live with this stuff, they know this. They blew you off. I wouldn't take that red herring. That was the lazy "differ it so we don't have to provide service right now with you" response they handed you. If it was return receipt requested, registered mail, Fed-Ex sign-for etc. as others have mentioned in this thread that would be different.
But the post office saying "it's in the buyers hands now so don't you worry about if we got it there and it's him that needs to call us", they blew a load of smoke. Yes I'd send the buyer there to speak with the manager and have them paw around etc, but I'd be on the phone with the manager first, to fact find as much as possible, again closing doors on the possibility of you being screwed. If you find the package you prevented getting screwed.
If the package doesn't turn up, if by some chance the buyer wasn't conning you, and you don't "make things work out", and that floats along for months or years, you actually still are getting screwed, even if the money stays in your pocket, that's just the way life tends to work out. So I'd take every personal action possible to "make" it resolve, including direct phone contact with the buyer and reading the signals, and yes see if they "go to ground" as was pointed out, whichever way all of this jumps as the seller I'd want a pretty good decree of clarity of outcome.
Pretty SURE the package was screwed up by the post office. Or make it get found, make it get delivered, things like that happen even a month later sometimes. Or look behind every potential door such that you can have dialog with the buyer that you're pretty SURE they are jerking your chain. And of course refunding money is a "very late on the checklist" option, but I'd do the work of that checklist and not leave the buyer's duty to filing a police report, I'm make them do some work to find the package from their end. "Write me back and tell me what the manager there told you", etc, etc, and if the guy goes to ground, now HE'S made a decision, it's not "your bad", and that does matter.
If it's ebay etc, their feedback tends to be a good indication. If it wasn't ebay, I'd maybe ask them if they DO have established feedback on ebay or gunbroker etc, find a way to truly "sort out" if they might just might be a straight shooter.
Then you can take the forks in the road as they become clear, without regrets and without wrongfully getting tagged yourself with the wrong reputation, to me that's more important than the money. I'd work hard for the right outcome for that reason alone. Good luck!
Frank H.