CASE STUDY $40$ marksREAD THE REQUIRED PART ON PAGE $7$ BEFORE YOU CONTINUE.BACKGROUND INFORMATIONYou 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 thatyou are using to prepare for test $4.$ You are attempting the test under exam conditions as perthe advice of all your lecturers$\mathrm{.}1.$ MOCK TESTINVESTMENT PROPERTYBidShirt $($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 andcompanies 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 wouldbe sold in the $2024$ financial year. The sale is considered to be highly probable. The land isavailable for immediate sale in its current condition. The chief financial officer $($CFO$)$ hasassessed the land for impairment in terms of IAS $36,$ Impairment of Assets and has correctlyconcluded that no separate impairment is required.The directors began to actively seek a buyer for the land towards the $2023$ year end. The landwas marketed at its estimated fair value of R$26$ million using many advertisements and the saleis expected to occur within twelve months after the directors resolution. Costs to sell weredeemed to be negligible.The following disclosure was made in the annual financial statements:Notes Measurement basis$31$ December$2023$RNon$-$current assets held for sale$($Investment property $-$ land$)1$ Fair value $26000000$Notes to annual financial statements$1.$ Non$-$current assets held for saleNon$-$current assets consist solely of land being held as investment property. The investmentproperty was purchased from Vest $($Pty$)$ Ltd $($Vest$)$ in August $2023$ for R$26$ million inpreference share capital. The land was held for capital appreciation and it was accountedCONFIDENTIALPage $5$ of $7$AUE$3761$Test $4$ September $2024[$TURN OVER$]$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$-$partyproperty valuation expert.NEW INFORMATION RECORDING OF DISCUSSIONAfter fieldwork was completed and a few days before the signing of the audit report, you cameacross the companys fixed assets manager. In a discussion with you, they indicated that theinvestment property may have been purchased from a fellow subsidiary within the same groupof companies, and that although directors had indicated that they are looking for a buyer, thebuyer of the land is expected to be the same company that sold the land, being Vest. The fixedassets manager did not seem to understand the implications of their actions. They also providedyou with a recording of the discussion relating to the acquisition of the land $($which was notpreviously provided to any member of the audit team$).$ It was recorded in June $2023($twomonths 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 abusiness. I am confident that the profits from $2023$ and $2024$ will allow us to pay back the loanin October $2024,$ when repayment is due. We$,$ however, have a big problem. As per the loanagreement covenant $($special financial and operational requirements of the bank$),$ assets mustnot be less than $5$ million at any point. As at today our assets are valued at $4$ million and ourliabilities are valued at $6$ million. We need to rectify this before December because the bank willuse the $31$ December $2023$ annual financial statements to assess our adherence to the loancovenants. Im 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,Im sure they would not mind selling their investment property to us$,$ so that our assets areinflated 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 $2024.$ InOctober $2024,$ after we have repaid the loan, we can sell back the land to Vest. What abrilliant idea you have given me to solve this problem!$2.$ SMS FROM EMMAAfter completing your mock test, you receive three text messages from Emma, your friendcurrently employed as a SAICA trainee accountant at an audit firm, and a fellow student ofAUE$3761.$ The SMS is very concerning and you decide to respond to them as best you can.CONFIDENTIALPage $6$ of $7$AUE$3761$Test $4$ September $2024[$TURN OVER$]$Hey Yu$,$ I received the following SMS today:AUE$3761$ Exam Help. Should you requireexcellent guidance during the exam, kindlyemail mrAUEexam$90\%$Pass!@gmail.com.Guaranteed $90\%$ Pass!How do these people even get our numbers?Its not cute! Anyways I have been tooswamped at work to even begin studying. Idont have any choice but to use this person forhelp during my exam.CONFIDENTIALPage $7$ of $7$AUE$3761$Test $4$ September $2024$REQUIRED Marks$1.$ With reference to $1.$ Mock Test:Formulate the substantive procedures that you would perform to audit theinvestment property balance of BirdShirt as at $31$ December $2023.(16)2.$ With reference to $1.$ Mock Test:Based on the impact of the new information $-$ recording of discussion,discuss the considerations of the auditor in all four stages of the audit process.You should structure your answer as follows:STAGES OF THE AUDIT PROCESS MARKS$1$: Preliminary engagement activities $(1$ mark$)2$: Planning $(3$ marks$)3$: Obtaining audit evidence $(2$ marks$)4$: Evaluating, concluding and reporting $(5$ marks$)$Communication mark Layout and structureNote: The investment property note represents all the information disclosed bymanagement in the financial statements.$(11)(1)3.$ With reference to $1.$ Mock Test:Discuss your Companies Act considerations arising from the newinformation.Communication mark $-$ Logical argument$(7)(1)4.$ With reference to $2.$ SMS from Emma:a$)$ Is the SAICA code of conduct applicable to Yu as a student? Provide areason for your answer.b$)$ Which ethical threat arises for Emma in the SMS communications? Providea reason for your answer.$(2)$