"Elle est son amie."
The "son" would suggest the best translation is "she is his friend". Otherwise wouldn't the french be "elle est sa amie"?
Unfortunately, no. When "sa" is in front of a word (adjective or noun) starting with a vowel, it is changed to "son", to ease enunciation (avoid the hiatus SA_A)
But how does one differentiate "son ami" from "son amie" in daily speech? is there difference in the pronouncination?
No difference at all. If any ambiguity with our counterparts, you can say "son amie-EU", or "son amie femme" or "son amie fille". Not academic, but efficient...