The Mica Corporation has lending agreement with the First Bank of Madison. The details of the lending agreement are included

  

The Mica Corporation has lending agreement with the First Bank of Madison. The details of the lending agreement are included in the Bank Statement Confirmation obtained by the auditors. The exclusive lending agreement is for Mica to the purchase of inventory throughout the year. As part of the lending agreement, Mica cannot obtain loans from any other source. If any part of the loan agreement is breeched, the entire loan is due immediately. During the audit, you notice a very large accounts payable account. The account is linked to a large supplier of inventory to Mica. The account charges interest on the outstanding balance. Mica includes the interest payments to the supplier in the cost of the inventory. The interest payments being applied to the inventory account are immaterial.