Red Corporation Had a Temporary Cash Squeeze near Its Balance

Red 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 Red Corporation set up another corporation called Pink, Inc. Red made a large sale of inventory to Pink at cost. Pink used the inventory as collateral for a three-month loan from a local bank. The money from the loan was used to pay Red for the inventory transaction. At the end of the three-month period, Red intended to repurchase the inventory from Pink at a price that would allow Pink repay the loan plus interest.
Required:
A) How would this transaction enable Red 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?