7th DISTANCE LEARNING PROGRAM

ISLAMIC DEVELOPMENT BANK ,

JEDDAH

· Al-Hujurat (The Dwellings) [49:6]

O ye who believe! If a wicked person comes to you with any news, ascertain the truth
lest ye harm people un wittingly, and afterwards become full of repentance for what ye have done.

SHARI’AH AUDITing: between the

ideals and realities

Assoc. Prof. Dr. Shahul Hameed Hj. Mohamed Ibrahim

Kulliyah of Economics and Mangement Sciences
International Islamic University Malaysia
 INTRODUCTION

Shariah auditing has currently emerged as an important subject of

discussion inline with the advance development of Islamic
Financial Institutions (IFIs) . This demands the proper
governance of the Shari’ah compliance issues. As a new
emerging discipline, there are several issues which need to be
dealt . It is important that we discuss these issues and make
inputs to the development of shariah auditing.
This lecture will proceed as follows:

•
Presentation outline
Types of auditing and review
Financial Statement Audit
International Standards on Auditing (ISA) 200, Objective
and General Principles Governing an Audit of Financial
Statements, states that:
“The objective of an audit of financial statements is to
enable the auditor to express an opinion whether the
financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting
framework”.
 Audit Definition

Broader definition of audit

AAA defined auditing as:

“a systematic process of objectively obtaining and evaluating

evidence regarding assertions about economic actions and
events to ascertain the degree of correspondence between
those assertions and established criteria and communicating the
results to interested users” (Committee on Basic Auditing
Concepts [COBAC], 1972: 2)
Auditing process
 Comparison between conventional and islamic auditing

Element Conventional Audit Islamic Auditing

3 party relationship Entity, auditor, user Entity, auditor and

broader range of users
Appropriate Financial statement Processes, contracts,
subject matter assertions personnel, systems,
performance, financial
statements
Suitable criteria IFRS Shari’a principles and
rules, aaoifi standards
and appropriate parts
of IFRS
Sufficient Sufficient and SSB rulings, fatwas of
appropriate appropriate evidence international and
evidence national fiqh boards,
plus all other
conventional evidence
Written assurance Standard audit report A more detailed report
report prepared by auditor prepared by a shari’a
auditor
 Evolution of Auditing

Social &
Financial Audit Performance Audit Shari’ah Audit
Environmental Audit

Every aspect of
Economy, Social contribution & organization’s
Financial effectiveness and environmental activities as required
statements efficiency of resource compliance by Islamic religiious
utilization, programs teaching
& activities

Late 1800s/1900s 1960s/1970s 1970s 2000s

Need for shariah auditing
research
The advanced development of Islamic financial
industry necessitates for an auditing mechanism
which can fulfill the unique requirements of the
industry
Lack of research (especially empirical-based
research) in the field of auditing from Islamic
perspective.
The many unresolved issues regarding the
conceptual and practical dimensions of Shari’ah
audit.
Issues in shariah auditing
 Shariah auditing definition
According to GSIFI 2 of AAOIFI,
Shari’a review is an examination of the extent of an IFI’s compliance, in all its
activities, with the Shari’a. This examination includes contracts,
agreements, policies, products, transactions, memorandum and articles of
association, financial statements, reports (especially internal audit and
central bank inspection), circulars, etc. The objective of a Shari’a review is
to ensure that the activities carried out by an IFI do not contravene the
Shari’a.
While the SSB is responsible for forming and expressing an opinion on
the extent of an IFI’s compliance with the Shari’a, the responsibility
for compliance therewith rests with the management of an IFI

• The AAOIFI definition is broad “in all its activities”

• It uses the word “review” instead of the word audit
• Review =negative assurance, lower level of assurance than audit
• Perhaps in the beginning this is better than a full scale audit, however, the
scope in AAOIFI is quite broad
 REVIEW AND AUDIT

ASSURANCES

REASONABLE LIMITED
ASSURANCE ASSURANCE
ENGAGEMENT (RAE) (E.g. AUDIT) ENGAGEMENT (E.g. REVIEW)
(EG AUDIT) (E.G. REVIEW)

REDUCTION IN ENGAGEMENT RISK TO AN

REDUCTION IN ENGAGEMENT RISK TO A ACCEPTABLE LEVEL (BUT AT A HIGHER LEVEL
SUBSTANTIALLY LOW LEVEL IN THE THAN RAE) IN THE CIRCUMSTANCE OF THE
CIRCUMSTANCE OF THE ENGAGEMENT ENGAGEMENT

POSTIVE FORM OF
NEGATIVE FORM OF
EXPRESSION OF THE
CONCLUSION
EXPRESSION
 The meaning of “sharia’” in sharia auditing

 Shariah compliance according to AAOIFI means “compliance

with Islamic Shari’a Rules and Principles as reflected in the
fatwas, rulings and guidelines issued by them (hereinafter, the
Shari’a)
 This seems contradictory. Unless fatwas, rulings and guidelines
covers all activities, then the “extent of shariah compliance in all
its activities cannot be reviewed.”
 In practice, as our research confirms, the SSB is mainly issuing
fatwa's related to financing products and not other activities,
hence aaofi’s definition is a bit contradictory.
 Auditing by persons based on criteria issued by the auditor
themselves poses a “self review” threat to independence.
 It does not bode well for the use of audit judgment making the
review a mechanistic procedure.
 Shariah auditing standards
In the conventional accounting world, the IAASB develops
International standards on auditing and assurance services and
these are pretty established and accepted globally
In the case of shariah auditing, the Accounting and Auditing
Association for Islamic Financial Institutions (AAOIFI ) has a set
of standards both for conventional and shariah auditing of IFIs.
The shariah auditing standards were reclassified as Governance
standards. These are :
Shari’a Supervisory Board: Appointment, Composition and Report
Shari’a Review
Internal Shari’a Review
Audit and Governance Committee for Islamic Financial Institutions
Independence of Shari’a Supervisory Board (new)
Statement on Governance Principles for Islamic Financial Institutions (new)
Corporate Social Responsibility (under development)
 Independence and qualifications of shariah
auditors (SSB)
 A unique corporate governance mechanism of Islamic financial Institutions is the
shari’a supervisory board (SSB) which is theoretically an independent external
body akin to external auditors.
Consisting of at least 3 scholars in fiqh muamalat, who may be supported by
experts in Islamic banking with knowledge of fiqh muamalat- problem may not
have accounting or auditing expertise
The board is supposed to direct, supervise and review the activities of the Islamic
Financial Institution to ensure shari’a compliance in all its activities- problemSelf
interest threat to independence.
The SSB is known under various names
In Malaysia, Bank Negara calls it shari’a committee, although Bank Islam Malaysia Bhd., uses the
term Shariah Supervisory Council,
whereas Meezan Bank of Pakistan has both a Shari’a Advisor (who issued the Shari’a Report) and a
SSB,
Shamil Bank of Bahrain uses Religious Supervisory Board,
and al Baraka Bank uses the term Shari’a Board.
 Confusion in SSB Nomenclature?

Bank Negara Bank Islam Malaysia

Malaysia
Shariah supervisory
Shari’a Council
Committee

Meezan Bank
Pakistan

Shari’a
Al Baraka Advisor
Shamil Bank
Bank Bahrain Bahrain
Shari’a Board Religious
Supervisory Board
 Duties of the SSB – A Malaysian view
GPS1 (Shariah Guideline 1 of the Central Bank of Malaysia gives what i
believe is a more thought out role of the SSB then the AAOIFI standard
i.e.
 participate and actively engage in deliberating Shariah issues put before them.
 advise the BOD on Shariah matters in its business operation.
 Endorse Shari’a Compliance Manuals which specify the manner in which a
submission or request for advice is to be made to the SC, the conduct of SC
meetings, and the manner of compliance with any shari’a decision.
 endorse and validate relevant documentations such as contracts, agreemnts,
product manual, marketing, advertisements, sales illustrations and brochures
used to describe the product. for shari’a compliance.
 To assist related parties such as the IFI’s legal counsel, auditor, or consultant,
on shari’a matters for advice upon request.
 To advise on matters which have not been endorsed or resolved to the Shariah
Advisory Concil of BNM.
 To provide written shari’a opinions where the IFI requests advice and on
applications for product approvales to the BNM and to assist the SAC on
reference for advice e.g by explaining shari’a issues involved and references to
jurisprudential literature. And established sources.
Shariah audit procedures

SHARI’A REVIEW
CYCLE
 Planning Review Procedures
The Shari’a review procedures shall be planned so that it is completed in
an effective and efficient manner. The plan shall be adequately
developed to include a complete understanding about the IFI’s
operations in terms of products, size of operation, locations, branches,
subsidiaries and divisions. The planning shall include obtaining a list of
all fatwas, rulings and guidelines issued by the SSB.
Understanding the activities, products and management’s awareness
and attitude towards compliance with the Shari’a is essential. This will
have a direct effect on the nature, extent and timing of the Shari’a
review procedures.
The plan shall be properly documented including the sample selection
criteria and sizes, taking into consideration complexity, and frequency of
transactions.
The review procedures shall be designed based on the above input. The
review procedures shall cover all activities, products and locations.
These procedures shall ascertain whether the SSB approved
transactions and products have been undertaken and all related
conditions have been met.
 Executing Review Procedures
& preparing working papers

At this stage all the planned review procedures are

executed. The SSB review procedures shall normally include:
obtaining an understanding of the management’s awareness, commitment
and compliance control procedures for adherence to the Shari’a;
reviewing of contracts, agreements, etc.;
ascertaining whether transactions entered into during the year were for
products authorised by the SSB;
reviewing other information and reports such as circulars, minutes,
operating and financial reports, policies and procedures, etc.;
consultation/co-ordination with advisors such as external auditors; and
discussing findings with an IFI’s management.
The execution of the above review procedures shall be
documented in work papers which shall be complete, neat and
cross referenced to review procedures.
 Documenting Conclusions
& Reporting to shareholders
The SSB shall document their conclusions and prepare their
report to the shareholders based on the work done and
discussions held. The SSB report shall be read at the annual
general meeting of the IFI. A detailed report, when warranted,
shall also be issued to an IFI’s management.
Quality assurance
The SSB shall implement adequate quality control policies and procedures to
ensure that the review is conducted in accordance with this standard.
Quality control procedures may include review of all work papers to ensure
that review procedures were properly understood and executed. Additional
discussions may be held with the IFI’s management, if required, to ensure
that all significant matters were covered during the review.
 Internal shariah review

In addition to the shari’a review, the IFI is also

required to conduct an internal shari’a review by a
special shari’a compliance unit or department or a
branch of the internal audit department depending on
the size of the bank. This is just like the internal audit
and external audit which complement each other. It is
plainly impossible for the SSB to carry out a vouching
audit to verify the shari’ah compliance of an IFI.
Therefore, it has to rely on its internal control systems,
part of which is the internal shari’a review.
 Elements of internal shariah review

ELEMENTS OF
INTERNAL
SHARI’A REVIEW

ELEMENTS OF
MANAGEMENT OF QUALITY EFFECTIVE
CHARTER AND INDEPENDENCE & PROFESSIONAL
SCOPE OF WORK PERFORMANCE THE INTERNAL ASSURANCE OF INTERNAL
OBJECTIVES OBJECTIVITY PROFICIENCY
SHARI’A REVIEW SHARI’A REVIEW SHARI’A REVEWI
CONTROL SYSTEM

PLANNING AND
COMPLIANCE KNOWLEDGE, CONTINUOS DUE
STAFFING AND DESIGN OF
WITH CODE OF SKILLS AND EDUCATION PROFESSIONAL EMPLOYEES
SUPERVISION INTERNAL
ETHICS DISCIPLINES AND TRAINING CARE
SHARI’A REVIEW

EXAMINING
AND
EVALUATING SEGREGATION OF
INTERNAL DUTIES
SHARI’A REVIEW
INFORMATION

CONTROL
REPORTING
PROCEDUES

FOLLOW UP
Shariah audit reports
 AAOIFI’S SHARIAH AUDIT REPORT
In the name of Allah, The Beneficent, The Merciful

To the Shareholders of The Example Islamic Financial Institution

Assalam Alaikum Wa Rahmat Allah Wa Barakatuh

In compliance with the letter of appointment, we are required to submit the following report:
We have reviewed the principles and the contracts relating to the transactions and applications introduced by the Example
Islamic Financial Institution during the period ended. We have also conducted our review to form an opinion as to whether
the Example Islamic Financial Institution has complied with Shari’a Rules and Principles and also with the specific fatwas,
rulings and guidelines issued by us.
The Example Islamic Financial Institution’s management is responsible for ensuring that the financial institution conducts
its business in accordance with Islamic Shari’a Rules and Principles. It is our responsibility to form an independent opinion,
based on our review of the operations of the Example Islamic Financial Institution, and to report to you.
We conducted our review which included examining, on a test basis of each type of transaction, the relevant documentation
and procedures adopted by the Example Islamic Financial Institution
We planned and performed our review so as to obtain all the information and explanations which we considered necessary
in order to provide us with sufficient evidence to give reasonable assurance that the Example Islamic Financial Institution
has not violated Islamic Shari’a Rules and Principles.
In our opinion:
a) the contracts, transactions and dealings entered into by the Example Islamic Financial Institution during the year ended
... that we have reviewed are in compliance with the Islamic Shari’a Rules and Principles;
b) the allocation of profit and charging of losses relating to investment accounts conform to the basis that had been
approved by us in accordance with Islamic Shari’a Rules and Principles;
(where appropriate, the opinion paragraph shall also include the following matters:)
c) all earnings that have been realized from sources or by means prohibited by Islamic Shari’a Rules and Principles have
been disposed of to charitable causes; and
d) the calculation of Zakah is in compliance with Islamic Shari’a Rules and Principles.
We beg Allah the Almighty to grant us all the success and straight-forwardness.
Wassalam Alaikum Wa Rahmat Allah Wa Barakatuh
(Names and signature of the members of the Shari’a supervisory board)
Place and Date
EXTREMES IN PRACTICE - TOO BRIEF (THE MALAYSIAN
CASE)
EXTREMES IN PRACTICE – THE GOLD STANDARD –
MEEZAN BANK OF PAKISTAN
EXTREMES IN PRACTICE – THE GOLD STANDARD – MEEZAN
BANK OF PAKISTAN
LITERATURE
REVIEW
 Literature Review

The literature on auditing in the Islamic perspective is very

limited.
Among the writings which attempt to explore the conceptual
framework of auditing from Islamic perspective are for e.g.
Khan, 1985; Briston & El Ashker, 1986; Harahap; 2002.
The writings which highlight the auditing issues in Islamic banks
(Al Abji, 1989; Janahi, 2000; Simpson & Willing, 2000)
The studies on the role, functions, responsibility and
independence of Shari’ah advisors (for example Abu Mouamer,
1989; Abdallah, 1990; Abdul Rahman et al., 2004; Shafei,
2005).
 Gap of the Literature on Shari’ah Audit
There are also studies that compare the different models of the
roles of Shari’ah Supervisory Board (SSB) and external auditors in
Islamic banks (Banaga, 1994), the notion of independence
between SSB and external auditors (Karim, 1990) and possible
interaction between the two parties (Hood & Bucheery, 1999).
The relevance of Islamic auditing to the public audit institutions
has been explored by Khan (2001) who analyzes the role of
Supreme Audit Institutions (SAIs) in the Islamic economy.
The latest study which is more comprehensive in identifying the
issues and challenges of Shari’ah compliance process in the IFIs is
a paper by Grais & Pellegrini (2006). Their study has explored the
limitations in relying the Shari’ah compliance assurance to the
internal party (i.e. SSB) and proposed an effective framework to
monitor and assess Shari’ah compliance.

summary
RESEARCH OBJECTIVE
& METHODOLOGY
Research Objective

To explore the perceptions of accounting

academicians, audit practitioners and
Shari’ah scholars in Malaysia with regards
to the issues of Shari’ah auditing.
 Research Questions
1. Is it important to develop the discipline of Shari’ah audit and
what should be the definition of Shari’ah audit? This question
examines the awareness of respondents of the term Shari’ah audit
and their perception on the importance to establish the discipline of
Shari’ah audit and its definition.
2. What are qualification requirements for Shari’ah auditors and
who should appoint Shari’ah auditors? This question seeks to
identify who are supposed to perform Shari’ah audit, what should
be the qualification requirements for Shari’ah auditors, and who
should appoint the Shari’ah auditors.
3. What should be the scope of Shari’ah audit? This question
encompasses the investigation on the business areas to be audited
under Shari’ah audit
4. To what extent should Shari’ah audit be performed? This question
aims to explore the extent of and when Shari’ah audit should be
performed.
Question of definition
Review or audit?
Review is defined as “is a service where the auditor’s
objective is to provide a moderate level of assurance,
being a lower level of assurance than that provided by an
audit” (CPA Australia, 2006)
Review has also been defined as “a formal assessment of
an activity with the intention of suggesting or
implementing changes” or a review “implies an audit type
investigation that does not meet the full requirements of
Generally Accepted Auditing Standards (GAAS)”
(O’Regan, 2004)
GSIFI No.2 on Shari’ah review states that “Shari’ah
review is an examination of the extent of an IFI’s
compliance in all its activities with the Shari’ah” (AAOIFI,
2002)
Shariah reports indicate an audit not a review
 Who should Conduct Shari’ah Audit?

New
Professionals
called
Shari’ah
auditors??

Internal
External Shari’ah auditors
Islamic Supervisory
Financial under
Jurists Board??
auditors?? supervision
(Ulama)?
of SSB??
 Qualification & Competence
Requirements
Degree/Professional
qualification in accounting
and specialized certification
in Shari’ah audit??

Degree/Professional
? Degree/Professional
qualification in
accounting & Fiqh qualification in
(Islamic Law)?? accounting??

Trax Associates, Sept 2003

 Scope of Shari’ah Audit
Business
Processes &
Policies??
Human Procedures??
resource
Management??

Zakat calculation
Scope of
& payment??
Marketing & Shari’ah
advertising??
Audit

Social Contracts &

contribution?? agreements??

Environmental
impact of
operation??
 To What Extent & When Should Shari’ah
Audit be Performed?

To what extent? When?

Every single activity? Throughout financial

To the extent deemed year?
satisfactory by the During new product
auditors? application?
Using sampling At the end of financial
method? year?
 Respondents’ Background
1. Muslim accounting academicians
Muslim lecturers teaching at the Accounting Program in
public universities in peninsular Malaysia

2. Muslim audit practitioners

Muslim audit practitioners in peninsular Malaysia

3. Shari’ah scholars
Members of the Shari’ah Committee or Shari’ah Supervisory
Board (SSB) of the Islamic commercial banks (ICB) and
Islamic subsidiaries of commercial banks (ISCB) in Malaysia
FINDINGS &
ANALYSIS
 Response Rate

Total Response
Distributed Total Total Rate (%)
Received Used
No. Respondents

No % No % No %

1. Accounting lectures
187 52.1 62 62 60 61.2 33.2

2. Auditors
126 35.1 27 27 27 27.6 21.4

3. Shari’ah Committee
46 12.8 11 11 11 11.2 23.9

Total
359 100 100 100 98 100 27.9
 Research Question No.1
Awareness of the term “Shari’ah Audit”

Acctg. Shari'ah
Auditors Overall
No Lecturers scholars
Statement
.
N % N % N % N %

1. Awareness of the term “Shari’ah

Audit”:
Yes 28 46.7 7 26 7 63.6 42 42.8
Not Sure 9 15 5 18.5 - - 14 14.3
No 22 36.6 14 51.8 3 27.3 39 39.8
Missing 1 1.7 1 3.7 1 9.1 3 3.1
60 100 27 100 11 100 98 100
 Research Question No.1
The Importance of Developing the Discipline of “Shari’ah
Audit”
 Research Question No.2
Who should perform Shari’ah audit for IFIs
 Research Question No.2
Competence and Qualification Requirements of Shari’ah
Auditors
Kruskal-
Wallis
Acctg. Shari'ah
Auditors Overall Test
Lecturers scholars
(Asymp.
N Sig.)
Statement
o
M Me M M
M e M d M e M e
N e d N e i N e d N e d
a i a a a i a i
n a n n n a n a
n n n
6. It is important for a body to set
up qualification and
competence requirements for 59 4.68 5 27 4.48 5 9 5 5 95 4.65 5 .023
Shari’ah auditors

7. Minimum qualification of the

Shari’ah auditor:
a)Degree/Professional in 38 3.76 4 21 4.29 4 4 3.75 4 63 3.94 4 .193
accounting
b)Degree/Professional in 43 4.42 5 24 4.08 4 6 4.50 4.5 73 4.31 4 .094
accounting & Fiqh (Islamic
Law)
c)Degree/Professional 54 4.54 5 24 4.37 4.5 10 4.90 5 88 4.53 5 .076
qualification in accounting and
specialized certification in
Shari’ah audit
 Research Question No.2
Who should appoint Shari’ah auditors for IFIs
Shari'ah
Acctg Lecturers Auditors Total
No Statement scholars
N % N % N % N %
5a. Shareholders of the respective IFI through its
AGM
Yes 6 10 7 25.9 3 27.3 16 16.3
No 54 90 20 74.1 8 72.7 82 83.7
60 100 27 100 11 100 98 100
5b. Bank Negara of Malaysia
Yes 5 8.3 4 14.8 2 18.2 11 11.2
No 55 91.7 23 85.2 9 81.8 87 88.8
60 100 27 100 11 100 98 100
5c. Islamic Financial Service Board (IFSB)
Yes 23 38.3 16 59.3 1 9.1 40 40.8
No 37 61.7 11 40.7 10 90.9 58 59.2
60 100 27 100 11 100 98 100
5d. A newly established regulatory and
supervisory body dedicated to oversee the
practice of Shari’ah audit
Yes 46 76.7 14 51.9 5 45.5 65 66.3
No 14 23.3 13 48.1 6 54.5 33 33.7
60 100 27 100 11 100 98 100
 Research Question No.3
Areas to be audited under Shari’ah audit
 Research Question No.4
To what extent Shari’ah Audit should be performed?

Acctg.
Auditors Shari'ah scholars Overall
No Statement Lecturers

N % N % N % N %
9a. Every single activity 20 33.9 5 18.5 4 44.4 29 30.5

9b. As assumed satisfactory by the 19 32.2 6 22.2 2 22.2 27 28.4

auditors

9b. Using sampling method 20 33.9 16 59.3 3 33.3 39 41.1

59 100 27 100 9 100 95 100

 Research Question No.4
When Should Shari’ah Audit be Performed?

Acctg. Shari'ah
Auditors Overall
No Statement Lecturers scholars
N % N % N % N %
10a. Throughout financial year 32 53.3 15 57.7 3 33.3 50 52.6

10b. During new product application - - 3 11.5 1 9.1 4 4.2

10c. At the end of financial year 28 46.7 8 30.8 5 55.6 41 43.1

60 100 26 100 9 100 95 100

CONCLUSION
Conclusion – Research Question No.1

While the subject of Shari’ah audit is gradually attracting

the attentions from relevant parties such as scholars in the
field of Islamic finance, however generally it has yet to
become a popular subject to the academic individuals in
the accounting field and to the audit professionals
especially.
Despite the respondents’ varying degree of awareness, it
is very encouraging to discover that the respondents
highly regarded the importance to develop the discipline of
Shari’ah audit.
While many of the respondents tend to agree towards
defining the term Shari’ah audit based on the definition of
Shari’ah review by AAOIFI, several other respondents
have instead see the inappropriateness of such
association.
Conclusion – Research Question No.2

Shari’ah audit should be performed by new professionals

called “Shari’ah auditors” who are specifically certified in
Shari’ah audit
Shari’ah auditors must be appointed by a new
independent body dedicated to oversee the practice of
Shari’ah audit
It is seen strongly important to establish and standardize
the qualification and competence requirements for
Shari’ah auditors who are supposed to have minimum
degree/professional qualification in accounting and
specialized certification in Shari’ah audit
Conclusion – Research Question No.3
Among the areas of the business activities that are
perceived as mostly important in Shari’ah audit work are;
Zakat calculation and payment, contracts and agreements,
processes and procedures, financial system & reporting,
and business policies.
Conclusion – Research Question No.4

Since the term “Shari’ah compliance” implies a broader

understanding, responsibility and accountability (i.e. in this
world and hereafter), there could be a dilemma of
whether the audit to attest such compliance is sufficient
by relying on the sampling method or the extent deemed
satisfactory by the auditors, or we should go beyond those
assumptions by checking and assuring every single activity
of the IFIs are in compliant with the Shari’ah precepts and
conducting the Shari’ah audit throughout financial year.
 Literature Review – Khan (2001)

Discussed the role of Supreme Audit Institutions (SAI) in the Islamic countries.
The scope of Supreme Audit Institutions (SAIs) in the Islamic countries need to be
expanded to play an effective role in realizing the objectives of an Islamic economy
which stands for freedom, justice, fairness, protection of public interest and
elimination of and corruption.
Illustrated the newer expectations of the SAI which covers 15 areas, namely
accountability, transparency, corruption and fraud, performance auditing, evaluation
of policies, audit of expenditure management systems, audit of privatization,
evaluation of regulators, audit of public debt, environmental audits, leadership role in
reforming government accounting, audit of social services and public administration,
and lastly the framework for realizing Shariah goals through the SAI.
Among the element of framework for realizing Shari’ah goals through Supreme Audit
Institution is to train the auditors.
The SAI (perhaps to apply to the regulator of Shari’ah audit practice in general)
would need to determine the knowledge and skill requirements of its staff for the
expanded role outlined in his study.
back
 Literature Review – Karim (1990)

Provided analysis on the factors affecting the notion of the independence of SSB versus the external
auditors
It is necessary that both SSB and the external auditors are perceived independence to ensure the
credibility of financial statements
The perceived independence of the SSB is very much influenced by moral values while that of external
auditors is largely affected by economic factors.
Another incentive for SSB’s independence is due to the belief that a rational management would be
very keen to adhere to religious precepts since the cost it would bear for a reported breach would be
more than the cost it can impose on the SSB.
He opines that ideally both SSB and external auditors should be from one organizational body since
Islam does not recognize any separation between business and religion.
suggested that accounting principles compatible with Islamic law must be developed as guidance for
those who conduct the financial audit for Islamic financial institutions or Islamic enterprise and be
familiar with the various religious rulings which have a bearing on the financial matters of the bank.

back
Literature Review – Simpson & Willing (2000)

Shari’ah compliance is essential for the Islamic banks given the

impact that their products may no longer be acceptable if they
fail to comply.
Emphasized that one of the relevance of the Islamic banking
industry’s infancy is highlighted by the continued lack of an
internationally accepted framework of uniform and
comprehensive accounting standards or auditing guidelines.
Argued that the role of external auditors in the Islamic banks is
seen to be complex due largely to the lack of experience of most
external auditors on the Shari’ah principles
Believed that establishment of rules and regulations would
enhance the effectiveness of the banks and ensure its
compliance to the Shari’ah.

back
Literature Review – Harahap
(2002)
Wrote a book in Indonesian language on Auditing from the Islamic
Perspective
Provided discussion on the development of accounting and auditing in the
Islamic sphere and urged for the Muslim Intellectuals to develop the
discipline of Islamic auditing as it is inline with the development of Islamic
Financial System.
Stressed the importance of formulating a philosophical foundation of the
auditing theory from Islamic perspective as he elaborated that the
absence of a philosophical foundation would lead to the variation and lack
of focus in the development of Islamic auditing as a discipline and in
practice.
Among other future initiatives to be taken with regards to Islamic auditing
are: 1) to transform the social system into Shari’ah based system where
currently Muslim society are very much tied to the Western ideology and
civilization, and 2) to harmonize the practice among all the Muslims.
back
 The Malaysian Practice
The following is the result of interviews conducted by my
student Sister Nawal Kassim who is undertaking a PhD in
Accounting under my supervision.
22 respondents comprising external auditors, Sharia supervisory
board members and staff of shariah compliance units/internal
auditors of 9 IFIs and 6 Islamic branches of conventional banks in
Malaysia.
 Interviews covered:
 definition and responsibility,
 organization of the shariah compliance function
 Reporting structures of shariah compliance units
 scope of audit,
 audit procedures,
 independence, qualifications and authority of SSBs.
 Malaysian Practice- Definition
Preference for shariah review as opposed to audit (in line with
aaoifi definition.)
One respondent (head of Islamic bank audit dept of local
Islamic branch) consider no need for separate audit unit as
“procedures and processess are the same as conventional
auditing” – minority view
Another respondent (shariah compliance unit) said that the
responsibility for the shariah audit is the responsibility of the
Shariah supervsory board or in Malaysia known as the Shariah
Committee
Another respondent (external auditor) is of the view that
shariah compliance audit is an internal matter nothing to do
with external auditor because:
Not required by law
Lack of expertise
Will increase audit cost
Practice- Organization of the shariah
compliance function
Many different structures as illustrated below:
Reporting structures of Shariah compliance
units
The shariah departments or units reports to various
persons in different IFIs. This includes
Reporting to CEO/MD (3/22 )
Reporting to SSB (10/22)
Reporting to Risk manager (4/22)
Product development manager (3/22)
Problems of independence can be seen. Perhaps
should report to audit committee of the BOD
All products/findings are endorsed by SSB
No direct contact with Scompliance personnel but
through shariah division head or shariah co-ordinator
who attends the SSB meetings.
 Malaysian Practice- Audit Scope
Most IFIs audit compliance of products only.
Cost consideration of extending scope
Newcomers and therefore need to compete by developing new
products
• (discuss Implication on audit report on activities and operations)
Education of staff needed before scope expansion
Perceived to be difficult
Other scope under research stage
Extension of scope in agenda
Discussion on going on staff compliance with sharia dress codes
and marketing of products
Not in favour of social and environmental or performance audit
as considered not within scope and lack of public awareness
Fear workload increase without adequate resources
Capitalist mentality- shariah audit is a business unit to make profits.
 Malaysian Practice- Audit Procedures
Begins at proposal stage
Use of checklist with non-compliance parameters
development by shariah division and endorsed by
SSB
Key Risk indicators
Use shariah policy, guidelines, circulars and fatwas.
Non compliance reported to SSB on a monthly basis
 Ex post audit
Documents reviewed include
Concept papers, structure and terms sheet
Documentation examined include agreements, letters of offer, policies
and procedures, corporate advertisements/brochures and pamphlets
The above documents are compared with
Fatwas
Central bank regulations
Company’s shariah compliance audit manual
Non compliance are noted as comments and queries and post
audit monitoring is carried out.
Observation: lack of audit judgment, very mechanical process
is evidence.
Authority , Independence and Qualifications issues
Internal audit teams who conduct shariah audits are
not Muslims nor shariah qualified except in a very
few cases.
However, they claim to be exposed to
concepts/policies and ethics of Islam
They work with shariah qualified officers in the
shariah department or compliance unit
Use shariah compliance checklist handed down from
HeadQuarters but modified for Malaysian
environment
SSB is dominant in the process as they must endorse
the work of the SC units
Authority , Independence and Qualifications issues

However, there seems to be overdependence on the

organizational units to carry out most of the audit
work due to:
SSB members are part time
Mostly academics who are busy
Therefore their Independence and reliability of the
evidence on which their report is based is put into
question.
SSB meetings discuss Shariah compliance matters in
addition to product development approvals
 Recommendations for future development of
Shariah Auditing
There is need for integrated education of shariah auditors and
accountants to produced competent shariah accountants and
auditors
Accountants can be certified in shariah audit (short term)
Shariah/madrasah/hafiz students with a strong grounding in Arabic and
islamic studies should follow an integrated curriculum in both Arabic and
English with accounting, auditing, business, fiqh muamalat and usulul fiqh
subjects as well as Islamic economics, finance, accounting etc
Shariah auditing needs to evolve to cover marketing, personnel, systems,
processes, social and environmental areas
SSB functions should be decomposed into advising and directing and the review
function should be split to an independent outside professional group known as
shariah public accountants and auditors who are independent of the company
and the SSB.
AAOIFI needs to update its GSIFI standards to differentiate review from audit as
well as broadening the scope of shariah audit and develop standards on related
audit procedure and better audit report standard.
There needs to be a professional body for Shariah accountants and auditors.
The End

Wassalamu’alaikum
Thank You!