BACKGROUND INFORMATION

You are Yu$,$ a third year student about to pass test $4$ and preparing to ace the auditing exam!

You came across the following extract of a case study of BidShirt $($Pty$)$ Ltd in the mock test that you are using to prepare for test $4.$ You are attempting the test under $$exam conditions$$ as per the advice of all your lecturers.

$1.$ MOCK TEST

INVESTMENT PROPERTY

BidShirt $($Pty$)$ Ltd $($BidShirt$)$ is a company wholly owned by BidJacket $($Pty$)$ Ltd $($BidJacket$).$ BidJacket is a private South African company known for investing in various industries and companies in South Africa. During $2023$ the BidShirt directors purchased investment property, in the form of land. At year end $(31$ December $2023)$ the directors resolved that the land would be sold in the $2024$ financial year. The sale is considered to be highly probable. The land is available for immediate sale in its current condition. The chief financial officer $($CFO$)$ has assessed the land for impairment in terms of IAS $36,$ Impairment of Assets and has correctly concluded that no separate impairment is required.

The directors began to actively seek a buyer for the land towards the $2023$ year end. The land was marketed at its estimated fair value of R$26$ million using many advertisements and the sale is expected to occur within twelve months after the directors resolution. Costs to sell were deemed to be negligible.

The following disclosure was made in the annual financial statements: Notes Measurement basis $31$ December $2023$

R

Non$-$current assets held for sale $($Investment property $-$ land$)1$ Fair value $26000000$

for in terms of IAS $40$ Investment Property, until year end when it was resolved to sell it$.$ The fair value of the investment property at year end was determined by a third$-$party property valuation expert.

NEW INFORMATION $$ RECORDING OF DISCUSSION After fieldwork was completed and a few days before the signing of the audit report, you came across the company$$s fixed assets manager. In a discussion with you, they indicated that the investment property may have been purchased from a fellow subsidiary within the same group of companies, and that although directors had indicated that they are looking for a buyer, the buyer of the land is expected to be the same company that sold the land, being Vest. The fixed assets manager did not seem to understand the implications of their actions. They also provided you with a recording of the discussion relating to the acquisition of the land $($which was not previously provided to any member of the audit team$).$ It was recorded in June $2023($two months before the purchase of the land$)$ and below is an extract thereof: CFO $($who is also the Finance Director$)$: The loan that we have obtained in $2021$ has gone a long way in ensuring that we survive as a business. I am confident that the profits from $2023$ and $2024$ will allow us to pay back the loan in October $2024,$ when repayment is due. We$,$ however, have a big problem. As per the loan agreement covenant $($special financial and operational requirements of the bank$),$ assets must not be less than $5$ million at any point. As at today our assets are valued at $4$ million and our liabilities are valued at $6$ million. We need to rectify this before December because the bank will use the $31$ December $2023$ annual financial statements to assess our adherence to the loan covenants. I$$m really not sure how I will manage to achieve this by December. Property manager: I can speak to the chief executive officer at Vest. Since we are in the same group of companies, I$$m sure they would not mind selling their investment property to us$,$ so that our assets are inflated for our loan covenants at the end of the financial year. Once our loan is repaid in $2024$ we can immediately sell it back to them. CFO: Give me their number and I will call them to arrange. This means we can buy the land in $2023$ and inflate our asset value at year end and keep the bankers off our shoulders in $2024.$ In October $2024,$ after we have repaid the loan, we can sell back the land to Vest. What a brilliant idea you have given me to solve this problem!

With reference to $1.$ Mock Test:

Formulate the substantive procedures that you would perform to audit the investment property balance of BirdShirt as at $31$ December $2023.$