Consider the following independent situations which arose in respect of your firm, ATB Partners. In each case Mr Abbot is the audit partner, Ms Tan is the tax partner, and Mr Bell is the business advisory partner.

(i) Holiday Motels Ltd is a chain of ten motels operating on the far south coast of NSW. Your firm performs both audit and tax work for Holiday Motels. The audit fees comprise around 10% of total audit fee revenue, while the tax work comprises around 5% of total tax related revenue. Holiday Motels has not paid any of its fees for the last three years, citing cash flow problems. However, in actual fact, Holiday Motels has made impressive profits over the last few years and has significant cash reserves. The partners have been reluctant to push the issue further, as Holiday Motels is a high profile client who they wish to retain. Last month, your firm agreed to hold their annual staff retreat at one of Holiday Motel's new motels, as a partial contra against the outstanding fees. Half of the outstanding fees will be waived, even though the reasonable market value of the services to be provided is only 30% of the total outstanding amount.

(ii) Ms Tan has just been appointed a director of Discount Travel Pty Ltd, a large proprietary company which is a travel agent. Mr Abbot performs the audit of Discount Travel in accordance with the relevant legislation. Mr Bell recently assisted Discount Travel in selecting and installing ABC Brand accounting software. ABC pay the firm a commission for every software package sold, and this fact was verbally disclosed to Discount Travel. In addition, Mr Bell has just performed a valuation of Discount Travel's business for the purposes of a Family Law Court dispute.

(iii) Several of Mr Abbot's staff recently completed a review of the internal controls at Expo Pty Ltd, a large proprietary company which is also an audit client. The work was charged at 120% of the usual consulting fees to partially recoup the lower audit fees brought about by a competitive tender. Audit staff implemented all the recommended changes in procedures by updating the company's accounting manual and running a two-hour training session for the accounting staff. As the audit staff has already performed significant work on Expo's internal controls, the audit manager has decided to assess control risk as low and not perform any tests of control.

a) For each of the above independent situations, identify any professional standards and regulatory requirements which have been breached and explain the impact of the breaches. (9 marks)

b) APES 110 adopts a conceptual approach to audit independence. Briefly outline the framework adopted. (3 Marks)

c) Identify the factors necessary for a third party to sue an auditor for negligence. (2 marks)