You are engaged on the audit of Justlikehome Hotels Ltd (JHL).

For the year ending 31 March 2019

JHL operates three boutique hotels, one each in Rotorua, Queenstown, and the Bay of Islands. Each hotel caters for a maximum of twelve guests in six rooms, and offers five-star accommodation and service, with a Michelin-starred restaurant at each site, and personal butler service. The hotels have been very popular with the Asian and German markets, which together supply 80 per cent of all guests. The other 20 per cent are from elsewhere, including New Zealand.

JHL is owned by three wealthy New Zealand investors, who are also directors of the Company. The Board of Directors meets once a year to sign the accounts, followed by a dinner at one of JHL's restaurants.

Basil Forty, JHL's Managing Director, is the company's fourth director. Basil is left by his fellow-directors to run the company how he wishes, as long as JHL continues to show an increase in profits each year. Basil is much-loved by guests, but is extremely unpopular with the JHL staff. He has a reputation for being rude and severe to his staff, who avoid meeting with him. In particular, if the monthly financial results are down, he quickly loses his temper. Partly because of Basil's reputation, and also because of a severe skills shortage in tourist towns, JHL has been unable to appoint a permanent accountant. Instead, JHL has obtained temporary staff from a local job agency. During the year, JHL has employed three different temporary accountants to fill this vacancy.

The company uses Xero as its accounting platform. Since most of its customers are from overseas, JHL charges guests for their rooms and services in US dollars, which are deposited in JHL's US Dollar account at the Bank of New Zealand, and translated into New Zealand dollars as and when required.

Invoices are emailed to guests after they have departed to speed up their check-out procedure. If a customer subsequently calls to dispute an invoice, the receptionists at each hotel are authorised to issue a credit note or to refund the client if they consider this to be appropriate.

Due to demand, JHL decided to build a new, five-star hotel at Lake Tekapo. Construction commenced in August 2018 and is scheduled for completion in May 2020 in time for the 2020 winter tourist season. To fund this new hotel, JHL arranged a three-year bank loan, which it intends to repay with the expected revenue from the new hotel. The directors have also given personal guarantees to the bank.

REQUIRED:

(a)Provide a brief outline of the objective of, and approach prescribed by, ISA (NZ) 315.

(4 Marks)

(b)Based on the information provided above, identify four distinct factors that might affect an auditor's assessment of the control environment of JHL for the year ending 31 March 2019. Explain why each factor is a possible audit risk, and what action(s) an auditor might undertake to reduce this risk to an acceptable level.

(12 Marks)

(c)Assume it is now a year later and you are planning the 2020 audit. Despite raising a number of concerns in your 2019 Management Letter, little has changed to the control environment at JHL. As part of your planning, would you change your assessment of audit risk for the year ending 31 March 2020? If so, why?

(4 Marks