You are the audit of manager of Jasmin Chartered Accountants and you are planning the audit of Mesins Bhd, a listed company, which has been audit client for four years and specialises in manufacturing luxury mobile phones. During the planning stage of the audit you have obtained the following information. The employees of Mesins Bhd are entitied to purchase mobile phones at a discount of 10%. The audit team has in previous years been offered the same level of staff discount. During the year the financial controller of Mesins was ill and hence unable to work. The company had no spare staff able to fulfil the role and hence a qualitied audit senior of Jasmin Chartered Accountants was seconded to the client for three months. The audit partner has recommended that the audit senior work on the audit as he has good knowledge of the client. The fee income derived from Mesins was boosted by this engagement and along with the audit and tax fee, now accounts for 16% of the firm's total fees. From a review of the correspondence files you note that the partner and the finance director 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 the partner has not yet spoken to the client about the fee for last year's audit, 20% of which is still outstanding.

Required:

a) (i) Explain the ethical threats which may affect the Independence of Jasmine's audit of Mesins Bhd. [20 marks]

(ii) For each threat explain how it might be avoided [20 marks]

b) Describe the steps an audit firm should perform prior to accepting a new audit engagement [10 marks]