You are an audit senior of an audit firm and have been allocated to the audit of Magic World Limited (Magic World), a listed company which has been an audit client for eight years and specialises in manufacturing musical instruments.

Michael Smith was the audit engagement partner for Magic World and as she had completed seven years as the audit engagement partner, she has recently been rotated off the audit engagement. The current audit partner, Mona Wang, has suggested that in order to maintain a close relationship with Magic World, Michael should undertake the role of independent review partner this year.

In addition, Magic World has requested that Michael assist them by attending their audit committee meetings, as a non-executive director has recently left the company. Magic World has also asked Michael and the other partners at RMIT audit firm to help them in recruiting a new non-executive director.

During the year, the assistant finance director of Magic World left and joined RMIT audit firm as a Audit & Assurance Partner. It has been suggested that due to his familiarity with Magic World, he should be appointed to provide an independent partner review for the audit.

From a review of the correspondence les you note that Michael Smith, the Audit & Assurance Partner and Jennifer Pham, the Finance Director of Magic World, have known each other socially for many years and in fact went on holiday together last summer with their families. As a result of this friendship, Michael Smith has not yet spoken to Jennifer Pham about the outstanding fee for last years audit, 20% of Magic World's last year audit is still unpaid.

In addition, Jennifer Pham told Michael Smith that Magic World plans to list in the Singapore Stock Exchange by end of the year. Once Magic World obtains its stock exchange listing, it will require several assignments to be undertaken, for example, obtaining advice about corporate governance best practice. Michael Smith is very keen to be appointed to these engagements, however, Jennifer Pham has implied that in order to gain this work Michael Smith needs to complete the external audit quickly and with minimal questions/issues.

Explain FIVE (5) ethical threats which may affect the independence of RMIT audit firm in the audit of Magic World Ltd; and

b) For each threat, explain how it might be reduced to an acceptable level