SHARIA AUDIT Presented by:

Suleman Ahmed - 1200163Abdussattar Muis - 1200027

Moosa Hassim - 1200077Yazrif Yusof – 1200018

The term Shariah Audit is relatively a new term in Shariah

Islamic tradition introduced hisbah which lies with the concept of عن والنهي بالمعروف االمر ”“ المنكر

‘‘enjoining the good and forbidding the evil’’

التدقيق الشرعي

Hisbah was institutionalized in the early days of Islam, but not focusing on economic and commercial activities only. Instead it was an integral part of a justice, economy & society

All the Sources of the Hisbah are from the Quran & Sunnah (primary)

In fact, the 1st to hold the position of Hisbah in the history of Islamic civilization was? Any ideas Bro & Sis..

Hisbah

To assist human-being in worshipping Allah (ibadat)

Those relates to the right of Allah

Those relates to the right of other human beings –including Islamic financial transactions

Objective of Hisbah:

Reporting to Allah

Reporting to Authorities

Reporting to Shareholders

Reporting to the public

Hisbah -The Foundation of Shariah Auditing

Hisbah – Shariah AuditGeneral purpose

(al-amr bilma’ruf wal nahyu an almunkar)

Against government and public

Wider scope (+ non-economic/Financial)

+Shariah compliance

Municipal function

True and fair implementation of Shariah rules and principles

Against IFI

Financial statement (reflect the operation)

Established Shariah decisions

Regulatory function

HisbahShariah Audit

There are two major views on the Shariah rule on hisbah which is based on the discussion of al-amr bil’ma’ruf wal-nahyu ‘an almunkar.1. Fardh kifayah, but if everyone is ignorant of it, it is fard ‘ayn – Views of the majority of Scholars (Shafi’yyah, Hanabilah and Hanafiyyah).

2. The duty is wajib on everybody – Malikiyyah e.g. Imaam Ibn Abi Zayd al Qayrawaani

Many Quranic verses and ahadith supported the first view

Shariah Rule on Hisbah & Shariah Auditing

Audit in the Quran

Then he who is given his Record in his right hand, Soon will his account be taken by an easy reckoning, And he will turn to his people, rejoicing!

Samra' bint Nuhaik al-Asadiyyah – female auditor

Umar ibn al-Khattab – laid the foundation of Al-Hisbah & also appointed her to continue

Ibn al-Jawzy – confirmed the above facts.

For Alex info

In the present context of the Islamic financial services industry, the regulatory organs of the state refer to the statutory bodies enacted under the Ministry of Finance or equivalent, which vary among jurisdictions.

Periodical assessment conducted from time to time, to provide an independent assessment and objective assurance designed to add value and improve the degree of compliance in relation to the IFI’s business operations, with the main objective of ensuring a sound and effective internal control system for Shariah compliance.

Todays Shariah Audit

this refers to the financial authorities such as the Central Banks, Monetary Authorities, Securities Commission and other relevant institutions that are vested with the power to implement the legislation through guidelines and requirements, monitor statutory compliance through supervision, physical inspection and examination of premises and documents, enforcement of the act as well as prescribe punitive measures for non-compliance.

Shariah Audit cont…….

This is done by ensuring effective internal control system as well as risk management system that provide reasonable assurance in the form reports, opinions and communications that promote transparency and market discipline.

Internal Shariah review is independent department or part of internal audit examining and evaluating extent of compliance with Shariah rule, fatwas, instructions etc issued by the IFI’s Fatwa and Shariah Supervisory Board (SAB)

Shariah Audit Cont…

Preparing the annual budget

Revisit the objectives

Area of audit

Cost & pricing of the audit

Annual Audit Budget

Confirms the auditors acceptance of appointment

Objectives & scope of audit

Auditors responsibility to the client

Report to be provided by the auditors

Letter of Engagement

Audit objective & criteria of shariah audit

Shairah audit focuses on attesting the true and fair view of the financial statements in accordance to the shariah principles and requirements.

Financial audit is conducted in a consideration that financial activities and financial reporting is compliance with shariah requirements and principles.

Auditing & ASIFI

Obejctive of shariah audit according to para 2 of ASIFI No.1; the objective of an audit of financial statement is to ensure the statement are prepared in accordance with shariah rules and principles, the accounting standards of AAOIFI and relevant national standard in which the IFI operates.

ESSENTIAL PRINCIPLES GOVERNING THE AUDITOR

To attain the audit objective, the auditor is expected to comply with code of ethics for professional accountants .

The audit should be conducted in shariah manners and in accordance to basic principles and essential procedures given ASIFI.

The auditor should understand pertinent shariah rules and principles.

Paragraph 7 of ASIFI No. 1 is stated as follows:“The scope of audit refers to audit procedures deemed necessary to achieve the audit objective. The procedures required to conduct an audit having regard to the requirements of appropriate Islamic

rules and principles, ASIFIs, relevant professional bodies, legislation, regulations which do not contravene Islamic rules and principles, and where appropriate, the terms of audit engagement and reporting requirements. International Standards of Auditing (ISA) shall apply in respect of matters not covered in detail by ASIFI provided that these do not contravene Islamic principles”

Scope of Audit

In order to formulate the audit procedures necessary to accomplish the specific audit objectives, it is necessary for the auditors to define the scope of audit taking into account various aspects such as the type of activities the IFI is involved in and the relevant regulations and requirements on these activities.

Scope of Audit (2)

Functions of auditor that relate to scope and defined in the letter of engagement include:

To conduct the audit in accordance to standards and requirements as specified by the scope of audit.

To understand and assess the adequacy of the accounting system as basis of preparations of financial statements of IFIs.

To obtain relevant and reliable evidence to enable them to draw reasonable conclusions therefrom.

To determine the nature and extent of audit procedures to be adopted in lieu of the assessment of the internal control system.

To plan an audit that allows reasonable expectation of detecting material misstatements or errors in the financial statements or accounting records.

To provide for sampling error and level of confidence in testing the sampled information when conducting the audit.

Scope of Audit (3)

Auditor will indicate in the letter of engagement on matters pertaining to recurring audit on whether the terms of engagement are to be revised or reaffirmed.

Any changes will affect the scope, role of auditors as well as the budget and fees.

Change of terms of engagement

Possible sources of change for the terms of engagement are as follows:

Changes in processes whether business or institution processes Misunderstandings as to nature of audit related service originally

requested Restriction on scope of engagement imposed by management or

by any other circumstance Should these changes not affect the professional conduct

of due care and diligence of the auditor and the auditors agree with reasonable justification then these changes can be made. Else the auditor should withdraw.

Change of terms of engagement cont.

DEVELOPING SHARIAH AUDITING RATING

SYSTEMS

METHODOLOGIES OF AUDIT RATING SYSTEMS

1. Control Environment 2. Risk assesment 3. Control activities 4. Information and Communication 5. Monitoring

Essential Components in Assigning Shariah audit rating

1. Effectiveness of audit program 2. Effectiveness of the Board and Audit

Committee 3. Audit Management and Processes 4. Audit Reporting

KEY ATTRIBUTES WHEN ASSESSING QUALITY OF FINANCIAL INSTITUTIONS

AUDIT PROGRAM

1. STRONG 2. SATISFACTORY 3. WEAK

QUALIFIED AUDIT OPINION

Audit options are expressed as ‘the financial statements as a whole are free from material misstatements based on accumulated audit evidence’.

TYPES OF AUDIT OPINION

1. Unqualified Opinion 2. Qualified Opinion 3. Disclaimer Opinion 4. Adverse Opinion

NUMBER OF AUDIT FINDINGS

Frequency and impact of audit findings are indicative of prevalence and materiality of such findings.

IMPACT ON ISLAMIC FINANCIAL INSTITUIONS’ FINANCIAL

STATEMENTS AND STAKEHOLDERS

May affect the integrity and acceptability of the financial statements of IFI

Thank you!

Nothing is coming!!!