Integrated Internal-External Shariah

Audit Model: A Proposal towards the

Enhancement of Shariah Assurance

Practices in Islamic Financial

Institutions

Zurina Shafii

Ahmad Zainal Abidin

Supiah Salleh

Agenda

1. What is Shariah Assurance? What does it

constitutes of?

2. The state of Shariah assurance in GCC, Sudan,

Pakistan, Indonesia Malaysia—active IDB

member countries practicing Islamic finance

3. Internal-External Shariah audit model– Integrated

Assurance Model

Shariah Assurance Model

SC Assurance Oversight

BOD

BAC, BRC

SC

MC

SC Assurance Actors

Shariah audit Risk

management officers

Shariah Reviewers/ Compliance

Officers

Shariah researchers

Line managers

3

Shariah Assurance Hierarchy

Shariah audit

Risk management officers

Shariah Reviewers

Shariah Researchers

Line managers

4

Shariah Audit Scope

• Scope of audit (SGF)

• Audit of financial statements of IFIs

• Compliance audit on org structure, people &

information technology application system

• Review adequacy of Shariah governance process

5

Shariah Issues in Financial Statements

• Source of finance; equity, debt?

• SC investment

• Treasury; risk management, hedging mechanisms

Capital, investment, treasury

• PER

• Ibra’

• Ta’widh

Income and expenses

• Zakat

• Profit distribution

• Non-SC income purification

Distribution

6

Auditing for the Compliance to Shariah

Principles

Satisfy the Maqasid of Shariah

Proper use of Muamalat concepts

Fulfillment of the contract requirements according to Shariah

fulfillment of the commandments or arkan of contracts and conditions to each of the arkan of the contracts.

Major non-compliance occur if the contract does not satisfy its arkan,

Minor non-compliant occur if certain conditions were not observed.

Observations of prohibitions in the Shariah

No Riba, Gharar, Maysir, prohibited activities

7

Compliance Audit

8

Review of Adequacy of Shariah

Governance

9

The coverage of audit prescribed in

Nature of Work Section (IPPF,2013)

10

Shariah Assurance Practices in IDB

member countries

Shariah Review Shariah Audit

Kuwait Shariah Supervisory Dept. ND

Bahrain Shariah Supervisory Department

Internal Shariah audit Dept.

UAE Shariah Supervisory Department ND

Qatar Shariah Supervisory Department

Shariah Audit Dept.

Saudi Arabia Shariah Supervisory Department ND

Pakistan Shariah Adviser Internal Audit Dept.

Sudan Shariah Committee

ND

Indonesia Shariah Committee

ND

Malaysia Shariah Committee Internal Audit Dept.

Internal Shariah Audit on Financial issues

• Internal control for Shariah issues in financial

statements. Does the designed policies observed with

proper internal control mechanisms within IFIs?

External Shariah audit-Financial

statements

• IFRS 9 financial instruments

– financial assets should be measured at fair value unless they are measured at amortised cost.

– Fair value issue and amortised cost issue (cash flows may be said to closely resemble ‘payments of principal and interest’, KFH Research (2012).

– The applicability of the use of Expected Credit Loss Model for the impairment of financial assets that uses mudharabah and musharakah as the underlying concepts

• IFRS4 Insurance contracts-

– Does the definition includes takaful? Further engagement is needed for takaful accounting to reflect the intended design

Concluding Remarks and Policy

Implications

• The model could be used to devise policies with regards to Shariah assurance mechanisms, especially on policies related to Shariah audit conduct.

• The integrated model of internal-internal Shariah audit will promote efficiency and effectiveness of Shariah audit practice in IFIs.

• The model helps to mitigate Shariah non-compliance risk, i,e. the litigation from depositors, shareholders and investors