Dolphin Surf & Leisure Holidays Pty Ltd (Dolphin) is a resort company based on the Great Barrier Reef. Its operations include boating, surfing, diving and other leisure activities, a backpackers’ hostel, a family hotel and a five-star resort. Justin and Sarah Morris own the majority of the shares in the Morris Group which controls Dolphin. Justin is the chairman of the board of directors of both Dolphin and the Morris Group, and Sarah is a director of both companies as well as the CFO of Dolphin. In February 2017, Justin Morris approached your audit firm, Clarke Partners, to carry out the Dolphin audit for the year ended 30 June 2017. Dolphin has not been audited before but this year the audit has been requested by the company’s bank and a new private equity investor group which has just acquired a 20 per cent share of Dolphin. You know that one of the partners at Clarke Partners went to school with Justin and has been friends with both Justin and Sarah for many years.

Required

(a) Identify and explain the significant threats to independence for Clarke Partners in accepting the audit of Dolphin.

(b) Explain any relevant and practical safeguards that Clarke Partners could implement to reduce the threats.