Question
Please answer me briefly and immediately Istiklal Corporation had a temporary cash squeeze near its balance sheet date. It needed cash badly to cover a
Please answer me briefly and immediately
Istiklal Corporation had a temporary cash squeeze near its balance sheet date. It needed cash badly to cover a seasonal dip in sales. 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 Istiklal Corporation set up another corporation called Alep, Inc. Istiklal made a large sale of inventory to Alep at cost. Alep used the inventory as collateral for a three-month loan from a local bank. The money from the loan was used to pay Istiklal for the inventory transaction. At the end of the three-month period, Istiklal intended to repurchase the inventory from Alep at a price that would allow Alep repay the loan plus interest.
Required: A) How would this transaction enable Istiklal Corporation 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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started