Question 3 (5 marks)

A review of clients of the auditing firm of Kimberly & Rina (K&R) revealed that several engagements were potentially in breach of the independence requirements of APES110. One of the cases is detailed below for your consideration.

(i)Does a potential threat to audit independence exist in the circumstances (Yes/No)?

(ii)If your answer to part (i) is yes, identify the type/s of potential threat/s. Explain why there is a threat and recommend a safeguard, if any, that could reduce or remove the threat/s. Alternatively, if your answer to part (i) is no, give reasons why no threat exists.

Holiday Motels Ltd is a chain of ten motels operating on the far North coast of NSW. The 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.