After a bit of fiddling around I managed to find out how to set the "Applies to" field. You need to use a combination of InheritanceFlags and PropagationFlags when creating your audit rule object.
Here is the example code (based on the question example) that shows you the combinations of flags and what their outcomes are to the "Applies to" field:
// This folder only (default)
fSecurity.AddAuditRule(new FileSystemAuditRule(account, FileSystemRights.WriteData | FileSystemRights.Delete | FileSystemRights.ChangePermissions, InheritanceFlags.None, PropagationFlags.None, AuditFlags.Success));
// This folder and subfolders
fSecurity.AddAuditRule(new FileSystemAuditRule(account, FileSystemRights.WriteData | FileSystemRights.Delete | FileSystemRights.ChangePermissions, InheritanceFlags.ContainerInherit, PropagationFlags.None, AuditFlags.Success));
// This folder and files
fSecurity.AddAuditRule(new FileSystemAuditRule(account, FileSystemRights.WriteData | FileSystemRights.Delete | FileSystemRights.ChangePermissions, InheritanceFlags.ObjectInherit, PropagationFlags.None, AuditFlags.Success));
// This folder, subfolders and files
fSecurity.AddAuditRule(new FileSystemAuditRule(account, FileSystemRights.WriteData | FileSystemRights.Delete | FileSystemRights.ChangePermissions, InheritanceFlags.ContainerInherit | InheritanceFlags.ObjectInherit, PropagationFlags.None, AuditFlags.Success));
// Subfolders only
fSecurity.AddAuditRule(new FileSystemAuditRule(account, FileSystemRights.WriteData | FileSystemRights.Delete | FileSystemRights.ChangePermissions, InheritanceFlags.ContainerInherit, PropagationFlags.InheritOnly, AuditFlags.Success));
// Files only
fSecurity.AddAuditRule(new FileSystemAuditRule(account, FileSystemRights.WriteData | FileSystemRights.Delete | FileSystemRights.ChangePermissions, InheritanceFlags.ObjectInherit, PropagationFlags.InheritOnly, AuditFlags.Success));
// Subfolders and files only
fSecurity.AddAuditRule(new FileSystemAuditRule(account, FileSystemRights.WriteData | FileSystemRights.Delete | FileSystemRights.ChangePermissions, InheritanceFlags.ContainerInherit | InheritanceFlags.ObjectInherit, PropagationFlags.InheritOnly, AuditFlags.Success));
This information and much more on access control can be found on this very useful page by Michael Taylor.