4. You have recently been appointed the auditor of Freak Beans Ltd., which operates a chain of health food shops in the south-west of England. Originally, the company began 10 years ago with just one store catering to less conventional customers but with increasing concern about consumers health and the sustainability of food sources, the company attracted more mainstream customers. Demand in the last five years has grown to the extent that the company has opened a new store every year. Control is largely through the daily involvement of the owner, Mr. Semolina. Each store has a manager hand-picked by Semolina himself. Each is paid a basic salary with a generous profit-related bonus. Semolina believes this not only incentivises the managers to work hard but also to be honest if they skim from the takings, their bonus will be reduced. The accounting and control systems have remained much the same as when only one store was operating. Semolina has noticed that one of his six stores routinely reports modest sales figures but high net profits; it has high inventory levels but not very much cash. Semolina is concerned but has been too busy to investigate fully. Semolina recognises the need to formalise the financial control systems especially as he is keen to continue to expand the business. However, he has no more of his own money to invest and does not want to increase the companys indebtedness to the bank. One day, a friend of a friend introduced Semolina to a business contact, an overseas investor, John Sago. Semolina instantly liked Sago who seemed very knowledgeable about the health food industry and especially about the emerging market for hemp-based food supplements. Sago explained that UK and European regulations allowed the sale of certain hemp-based products. Sago went on to explain that he believed he had discovered a loophole in the regulations which allowed him legally to import and sell products that the regulators had yet to approve. These products could produce very high profit margins while they remained unregulated, but Sago warned that tighter regulations could be introduced in two or three years. Sago said that he could sign contracts of supply that very day and he urged Semolina to act fast. As if to demonstrate his credentials, Sago showed Semolina a briefcase full of cash. On the spot, Sago offered to invest 1million for a 10% stake in Freak Beans Ltd. Sago said that his offer would stand until the end of the week; Semolina could either take it or leave it. Semolina comes to you, as the auditor, for advice. Required: a) From the above scenario, what are you principal concerns about your new client and his request for advice? (15 marks) b) Set out what you understand to be the extent of auditors responsibilities when faced with situations where clients either have committed acts or are about to commit acts which auditors know or suspect may be in breach of laws or regulations. (10 marks)