Taking a quick glance before going to bed and it looks like the mic audio can do two things. It can go to the audio IC chip directly, or it can be ran through the compander chip first. There is a switching IC that selects between the two.
I do not have experience working on this particular radio, but my first suspects would be the switch IC802, the audio bypass caps around the compander IC801, or the compander itself. I would imagine that the compander is used during TX and the audio is sent to the audio amp uncompressed when in PA mode.
I'll have to keep thinking on this, but I think thats the area you need to look. If it is the switch IC802 (or a control signal to it), shorting pin 3 and 4 and getting modulation means the 3-4 compander audio select switch is bad. Shorting pins 1 and 2 of the switch IC and getting modulation means the compander or its associated caps are bad.