Part A Answer BOTH questions in this section. Question 1 You are the Audit Manager of Mole and Co and are currently planning the audit of your existing client, Ratty Ltd, whose year end was 31 December 2021. Ratty is a pharmaceutical company that manufactures and supplies a wide range of medical supplies. The draft financial statements show revenue of 27.3 million and profit before tax of 3.2 million. Ratty's previous finance director left the company in October 2021 after it was discovered that he had been claiming fraudulent expenses from the company for a significant period of time. A new finance director was appointed in at the start of December 2021. She was previously a Chief Financial Officer of a retail company and has expressed surprise that Mole & Co had not uncovered the fraud during last year's audit. During the year Ratty has spent 1.2m million on developing several new products, including 500,000 on an unsuccessful attempt at a Covid 19 vaccine. These projects are at different stages of development and the draft financial statements show the full amount of 1.2 million within intangible assets. In order to fund this development, 1.5 million was borrowed from the bank and is due for repayment over a seven-year period. The bank has attached minimum profit targets as part of the loan covenants. The new finance director has informed the audit partner that since the year end there has been an increased number of sales returns and that in the month of September over 0.3 million of goods sold in August were returned. An audit assistant from Mole & Co attended the year-end inventory count at Ratty's warehouse. The auditor present raised concerns that during the count there were movements of goods in and out the warehouse and this process did not seem well controlled. During the year, a review of plant and equipment in the factory was undertaken and surplus plant was sold, resulting in a profit on disposal of 130,000. Required: (a) State Mole & Co's responsibilities in relation to the prevention and detection of fraud and error. (4 marks) (b) Describe FIVE audit risks, and explain the auditor's response to each risk, in planning the audit of Ratty Ltd. (10 marks) (c) Describe TWO substantive audit procedures Mole & Co should perform when undertaking the audit of inventory at Ratty. (4 marks)