Ellen Corporation had a temporary cash squeeze near its balance sheet date. It needed cash badly to cover adecrease in sales due to COVID. However, if any additional money were borrowed, the company would violate a loan covenant requiring that a defined debt/equity ratio be maintained. To get around this requirement, the top two officers at Ellen Corporation set up another corporation called Blue, Inc. Ellenmade a large sale of inventory to Blue at cost. Blue used the inventory as collateral for a three-month loan from a local bank. The money from the loan was used to pay Ellenfor the inventory transaction. At the end of the three-month period, Ellenintended to repurchase the inventory from Blue at a price that would allow Blue repay the loan plus interest.

Required:

A) How would this transaction enable EllenCorporation to maintain its required debt/equity ratio and obtain the cash it needs?

B) What tests of controls and/or substantive procedures would lead an auditor to detect this scheme?