EXPLORING PRACTITIONERS’ PERCEPTIONS OF SHARI’AH AUDIT IN MALAYSIA

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EXPLORING PRACTITIONERS’ PERCEPTIONS OF SHARI’AH AUDIT IN MALAYSIA

BY

FATIHU SHEHU ISA

A dissertation submitted in fulfilment of the requirement for the degree of Master of Science (Accounting)

Kulliyyah of Economics and Management Sciences International Islamic University Malaysia

JUNE 2016

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ABSTRACT

The Shari’ah audit, a monitoring tool for ensuring Shari’ah compliance, is an important component in the operations of Islamic financial institutions. In the case of Malaysia, Bank Negara Malaysia issued a Shari’ah Governance Framework in 2010 which categorically made Shari’ah audit function as one of the required functions in Islamic financial institutions in addition to Shari’ah Review, Shari’ah Research and Shari’ah Risk Management. In line with this, this study aims to explore the extent of practitioners’ awareness and perceptions of Shari’ah audit, the possible challenges associated with it as well as its future implications. The study used 83 practitioners drawn from various Islamic financial institutions and external audit firms that are involved in Shari’ah audit services through purposive sampling procedure. A questionnaire instrument was employed in generating the data. The data were analysed using descriptive statistical tools comprising of frequency, percentage, mean and standard deviation due to the descriptive nature of the study. In addition, independent- sample t-test was conducted between audit and non-audit practitioners to examine if there is any difference in their perceptions of Shari’ah audit. The findings of the study show that practitioners’ awareness is satisfactory as the majority of them got to know about Shari’ah audit through an educational programme, which gave them the opportunity to express what ought to be the desirable practice of Shari’ah audit.

Similarly, the findings reveal that lack of an independent Shari’ah audit report, standalone Shari’ah audit framework as well as inadequate competent Shari’ah auditors are among the main concerns in the practice. Moreover, the findings also show that Shari’ah audit will have a high potential to take up as a marketable career in the near future. Lastly, the finding shows that there is no statistically significant difference between audit and non-audit practitioners in their perceptions of Shari’ah audit. Finally, the findings suggest that integration of Shari’ah audit in accounting courses in institutions of higher learning; comprehensive Shari’ah audit framework and standards; new regulatory/professional body with a mandate of supervising Islamic financial institutions as well as a professional certification in Shari’ah audit should be made available. It is hoped that the study will contribute towards the development of the desired Shari’ah audit practices in Malaysia.

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ثحبلا ةصلاخ

في ةعيرشلا طباوضب مازتللاا نم دكأتـلل ةيباقر ةادأ اهفصوب ةيعرشلا ةباقرلا ىلع دامتعلاا نأ ينبت جئاتنلا مهف لىإ ةفاضلإبا ،ابه ةنترقلما ةلمتلمحا تاسسؤلما ىلع ثحبلا اذه دمتعا .ةيلبقتسلما

ًابقارم 83

،اذه .تانّيعلا عجم في فدالها بولسلأا دامتعبا ،ةيملاسلإا ةيلالما تاسسؤم فلتمخ نم اويرِتخا اًّيلخاد تاودلأا مادختسبا تناايبلا ليلتح تم ثيح.تناايبلا عملج ًةادأ اهفصوب نايبتسلاا لِمْعُـتسا دقو تت تيلا ةيفصولا ةيئاصحلإا ةلالحا لىإ ًارظن يرايعلما فارنحلااو ،طسوتلماو ،ةيوئلما ةبسنلاو ،ددترلا نم فلأ

نأو ،لوبقم ةيلالما تاسسؤلما في ينسراملما َيعو َّنأ لىإ ثحبلا جئاتن يرشت .ةساردلا هذله ةيفصولا يغ نأ لىإ جئاتنلا يرشت امك.يميلعتلا جمنابرلا للاخ نم ةيعرشلا ةباقرلبا اولمع مهتيبلاغ ةباقرلا ريرقت با

روملأا نم ،ينلهؤلما ينبقارلما بايغ كلذكو ،رايعلماو ةيعرشلا ةباقرلل لقتسم لكيهو ،ةلقتسلما ةيعرشلا تتح عقت تيلا ةمهلما ًةئيه يزكرلما كنبلا َّينع دقف يازيلام فيو .ةيملاسلإا ةيلالما تاسسؤلما لماع لهاع

ماع في ًةيعرش 2010

في عطاق لكشب دعاس يذلا ،م ساسأ ةيملاسلإا ةيلالما ةيعرشلا ةباقرلا لعع

لمعت تيادحتلا اذكو ،ةيعرشلا ةباقرلبا مهرظن ةهعوو ينسراملما يعو ىدم فئاظولا نم ًةدحاو اهفصوب

ةرادإ كلذكو يعرشلا ثحبلاو ،ةيعرشلا ةععارلما لىإ ةفاضلإبا ،ةيملاسلإا ةيلالما تاسسؤلما في ةبولطلما .رطاخلما لىإ ةفاضلإبا

ءارعإ تم،كلذ ةنّيع

الم ةلقتس t-text ينب

و ةباقرلل ينسراملما مهيرغ

ةساردل اذإ ام

كانه ناك فلاتخا

في مهروصت .قيقدلا يعرشلا

ةيعرشلا ةباقرلل نأ لىإ ًاضيأ يرشت جئاتنلا نإف ،اذه عمو

ىظحتل ىبرك ةيلامتحا الهو .ركذلا ةفنآ تلاكشلما ىلع بلغتلا تم اذإ ًاصوصخو ،ًارشبم ًلابقتسم اله يعو ىدم ىلع ءوضلا ثحبلا طلس دقو .بيرقلا لبقتسلما في قيوستلا ثيح نم يربك بيصنب نبأ ينيعرشلا ينسراملما يدل

م اهذخلأ ةيلاع ةردق

ةنهمك قيوستلل لبقتسلما في

ًايرخأو.بيرقلا ،

هذه نإف

لماش لكيهو ،ةيلاعلا ةيميلعتلا تاسسؤلما في ةلقتسم ةيعرش ةباقر )ةدام( ةصح دايجإ حترقت ةساردلا يرفوت حترقت كلذكو ،ةيملاسلإا ةيلالما تاسسؤلما ةبقاربم ضوفم ديدع ماظنو ،رايعلماو ةباقرلل لقتسم هش ةيعرشلا ةباقرلا تايكولس ريوطت ونح ثحبلا اذه مهسي نأ ىعري ،ماتلخا فيو .ةيعرشلا ةباقرلل تادا

.يازيلام في ةوعرلما ةقيرطلبا

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APPROVAL PAGE

I certify that I have supervised and read this study and that in my opinion, it conforms to acceptable standards of scholarly presentation and is fully adequate, in scope and quality, as a dissertation for the degree of Master of Science in Accounting.

_______________________________

Noraini Mohd Ariffin Supervisor

_______________________________

Nor Hafizah Zainal Abidin Supervisor

I certify that I have read this study and that in my opinion, it conforms to acceptable standards of scholarly presentation and is fully adequate, in scope and quality, as a dissertation for the degree of Master of Science in Accounting.

_______________________________

Sherliza Puat Nelson Examiner

_______________________________

Maslina Ahmad Examiner

This dissertation was submitted to the Department of Accounting and is accepted as a fulfilment of the requirement for the degree of Master of Science in Accounting.

_______________________________

Muslim Har Sani Mohamad Head, Department of Accounting This dissertation was submitted to the Kulliyyah of Economic and Management Sciences and is accepted as a fulfilment of the requirement for the degree of Master of Science in Accounting.

_______________________________

Maliah Sulaiman

Dean, Kulliyyah of Economics and Management Sciences

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DECLARATION

I hereby declare that this dissertation is the result of my own investigations, except where otherwise stated. I also declare that it has not been previously or concurrently submitted as a whole for any other degree at IIUM or other institutions.

Fatihu Shehu Isa

Signature .….……….. Date………

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DEDI

INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA DECLARATION OF COPYRIGHT AND AFFIRMATION

OF FAIR USE OF UNPUBLISHED RESEARCH

EXPLORING PRACTITIONERS’ PERCEPTIONS OF SHARI’AH AUDIT IN MALAYSIA

I declare that the copyright holder of this dissertation are jointly owned by the student and IIUM

No part of this unpublished dissertation may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the copyright holder except as provided below

1. Any material contained in or derived from this unpublished dissertation may only be used by others in their writing with due acknowledgement.

2. IIUM or its library will have the right to make and transmit copies (print or electronic) for institutional and academic purpose.

3. The IIUM library will have the right to make, store in a retrieval system and supply copies of this unpublished dissertation if requested by other universities and research libraries.

By singing this form, I acknowledged that I have read and understand the IIUM Intellectual Property Right and Commercialization policy.

Affirmed by FATIHU SHEHU ISA

………. ………

Signature Date

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This dissertation is dedicated to my parents, Alhaji Shehu Isa and Hajiya Maryam Haladu, my wife Rukayya Farouk Bello (Fulani), my daughter Maryam Fatihu Shehu

(Amal) and the entire Muslim Ummah. May Allah (SWT) reward them with Jannatul Firdaus.

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ACKNOWLEDGEMENTS

Alhamdulillah. All praises be to Almighty Allah (SWT), the most Gracious and the most Merciful, Lord of the universe. Peace and blessing be upon prophet Muhammad (PBUH). Alhamdulillah, I am very grateful that Allah (SWT) has given me the strength, patience, courage and determination in compiling this dissertation.

First, I would like to express my sincere appreciation to my supervisors, Associate Professor Dr. Noraini Mohd Ariffin and Dr. Nor Hafizah Zainal Abidin for their never-ending support, guidance, cooperation and patience in guiding me to complete my dissertation. This dissertation would not be complete without their motherly and professional guidance and supports. I am indebted to them for their patience in correcting and improving my draft before I can come up with the final version of this dissertation.

Secondly, I would like to thank my parents, Alhaji Shehu Isa, and Hajiya Maryam Haladu for their prayers and supports given to me in the course of my study.

Obstacles encountered would not be easily overcome without their supports and prayers. Similarly, a special gratitude goes to my beloved wife, Rukayya Farouk Bello (Fulani) and my daughter Maryam Fatihu Shehu (Amal) for their patience, perseverance and encouragement throughout the period of the studies, May Allah (SWT) rewards them abundantly.

Above all, special thanks to all the lecturers of the Department of Accounting, Kulliyyah of Economic and Management Sciences (KENMS), International Islamic University Malaysia (IIUM) as these are the people who are responsible for nurturing me throughout the journey. My gratitude also goes to the administrative staff of the Postgraduate unit who always assists me, especially regarding the dissertation procedure. May Allah (SWT) reward them for their kindness and assistance throughout my study period in IIUM.

Finally, big thanks to everyone, who have helped me directly or indirectly in the completion of this dissertation, I sincerely appreciate everything that you have done to me, Alhamdulillah for having good people like all of you in my life. May Allah (SWT) reward you and your family. To be candid, I can never thank you enough for your prayers, assistance and encouragement. Last but not the least, I presented this dissertation as a symbol of gratitude to everyone, and as the celebration of knowledge that we have gained, hoping that it will be beneficial to the Ummah.”

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LIST OF TABLES

Table No. Page No.

2.1 Differences Between Conventional and Shari’ah Auditing 16

3.1 Items Measuring Practitioners' Awareness of Shari’ah Audit 50

3.2 Items Measuring Practitioners' Perceptions of Shari’ah Audit 51

3.3 Items Measuring Challenges faced by Shari’ah Audit 51

3.4 Items Measuring Future Implications of Shari’ah Audit 52

3.5 Items About Respondents' Demographic Information 53

4.1 Reliability Statistics 60 4.2 Demographic Profile of the Respondents 63 4.3 Sources of Knowing about Shari’ah Audit 65 4.4 Scope of Shari’ah Audit 66 4.5 Timing of Shari’ah Audit 67 4.6 Party to conduct Shari’ah Audit 67 4.7 Appointment of Shari’ah Auditors 68 4.8 Qualification of Shari’ah Audit 69 4.9 Practitioners’ Perceptions of Shari’ah Audit 71 4.10 Challenges of Shari’ah Audit 74 4.11 Future Implications of Shari’ah Audit 77 4.12 T-test Result of Questionnaire Statements Section B 80

4.13 Audit and Non-Audit Practitioners’ Perceptions of Shari’ah Audit 81

4.14 T-test Result of Questionnaire Statements Section C 82

4.15 Practitioners’ Views about Shari’ah audit Challenges 84

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LIST OF ABBREVIATIONS

AAOIFI Accounting and Auditing Organisation for Islamic Financial Institutions ASIFI Auditing Standard for Islamic Financial Institutions

BNM Bank Negara Malaysia

GSIFI Governance Standard for Islamic Financial Institutions IFIs Islamic Financial Institutions

IFSA Islamic Financial Service Act

IIAM Institute of Internal Auditors Malaysia ISAs International Standards on Auditing

PwC PricewaterhouseCoopers

SGF Shari’ah Governance Framework SSB Shari’ah Supervisory Board

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CHAPTER ONE INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The rise of Islamic Financial Institutions (IFIs) has taken a unique dimension in terms of growth and development for the past few decades. The assets under management of IFIs are estimated to have reached almost US$ 2 trillion in 2012 (Global Islamic Finance, 2012 p. 1). It is rather astonishing, the industry started with a handful amount of capital which was less than US$ 200 billion in the midst 1990, the amount increased sharply to more than US$ 1 trillion at the beginning of the year 2011 (Global Islamic Finance, 2012 p. 2). A similar trend has been projected in Malaysia by Ernst and Young World Islamic Competitiveness 2013 – 2014 report, that Malaysia’s international Islamic banking assets are expected to exceed US$ 390 billion (RM1.27 trillion) by 2018 from US$ 125 billion (RM410 billion) in 2012. At present, a considerable number of IFIs operating in Muslims and non-Muslims countries across the globe is increasing every day. Countries like USA, British, Yemen, Sudan, Nigeria and others alike embraced the idea of Islamic banking. In addition, the industry’s average growth for the past few years surpassed the global economic growth estimation (Rammal & Parker, 2010).

This outstanding development of the Islamic financial industry was triggered by the strong demand for Shari’ah banking services to ensure all the transactions used by Muslims and non-Muslims comply with Shari’ah. Therefore, the need for a proper check and balance system in the industry is very crucial in order to safeguard the huge amount of assets under its management. Consequently, this can enhance and preserve

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the public’s confidence in the operations and activities of the industry. It is undeniable fact that audit function can serve this purpose (Yaacob & Donglah, 2012).

Furthermore, this rapid growth initiated significant changes in most of the current activities such as the discipline of auditing, accounting, economics and others. In the field of auditing, Shari’ah audit is established which is in addition to a conventional audit with a sole objective to attest for Shari’ah compliance. Hence, looking at the current practices of Shari’ah audit, where the exercise is under the supervision of the Shari’ah Supervisory Board (SSB) who lacks adequate accounting knowledge, something needs to be properly done to adequately improve the practice (Abdul Rahman, 2014). This would indeed enhance the faith and boost the confidence of various stakeholders of the industry.

In an effort to address the issue of proper Shari’ah compliance in IFIs Shari’ah Governance Framework (SGF, 2010) and Islamic Financial Services Act (IFSA, 2013) have been issued by Bank Negara Malaysia (BNM). The SGF contains Shari’ah Risk Management, Shari’ah Review, Shari’ah Research and Shari’ah Audit functions, whereas IFSA is to encourage Shari’ah compliance in the IFIs. It also highlighted various penalties for noncompliance issues. Both the SGF and the IFSA are meant to ensure adequate implementation of Shari’ah compliance across the Malaysian IFIs through the function of Shari’ah audit, to attest for Shari’ah compliance or non-compliance. The SGF (2010) clearly, spell out that:

“Shari’ah auditing should be conducted by the internal auditors from the internal audit department and the internal auditor should be competent in terms of Shari’ah knowledge and understanding on the Shari’ah issues related to Islamic banking products and operations”

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All the IFIs in Malaysia adhered to the new framework by January 2011 (Yahya & Mahzan, 2012). However, the statement made by the SGF in relation to Shari’ah audit poses a reasonable doubt in the mind of some researchers on the issue of independence, as to whether the internal audit practitioners were able to give an independent Shari’ah audit report of their respective institutions (Najeeb & Ibrahim, 2014). Another issue is whether the new SGF has comprehensively addressed the issues of Shari’ah audit practice is still another question (Yahya & Mahzan, 2012).

Shari’ah audit can be seen as a process to attest for Shari’ah compliance.

However, the current practices of Shari’ah audit are not quite clear on many aspects including certification of Shari’ah auditors, competency requirements, professional judgement and reporting structure, as well as a Shari’ah audit framework (PricewaterhouseCoopers, PwC, 2011). Prior studies have focused mainly on these issues, but still little is known about them. These are among the few things that need proper attention from academicians, researchers and practitioners to adequately address unanimously, as Shari’ah audit becomes an important pillar in upholding the Islamic principles in the IFIs.

Therefore, it is the aim of this study to examine the practitioners’ awareness and to assess their perceptions of Shari’ah audit in the context of Malaysia. The study also attempts to provide insights into the challenges associated with the practice as well as to explore the future implication of Shari’ah audit in Malaysia. It is also crucial to assess the IFIs level of compliance with Shari’ah as majority of their stakeholders are heavily relying on the report that their activities and operations are in compliance with Shari’ah principles. Also, their internal control system for Shari’ah compliant is properly adequate and effective. However, the findings of the study are expected to provide insights on how to improve the Shari’ah audit practices, as an

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improved Shari’ah audit quality would definitely preserve the stakeholders’

confidence in the operation and activities of these IFIs.

1.2 PROBLEM STATEMENT

The contributions of IFIs to economic development have been widely recognized. The growth and development of these institutions indicate that they have high economic potentials which could be instrumental in the economic development in Malaysia.

However, one of the cardinal objectives of the IFIs is compliance with the principles of Shari’ah, and it is, for this reason, Shari’ah audit is provided to ensure total Shari’ah compliance in both products and services. However, despite the provision of Shari’ah audit in IFIs, issues related to the competency of Shari’ah audit practice and guidelines remain a source of concern. Previous studies have clearly raised a similar concern, indicating that empirical evidence is required in order to have an overall view of awareness, perceptions and challenges associated with the Shari’ah audit practices (Abdul Rahman, 2008; Kasim, Mohammad & Sulaiman, 2009; Rammal & Parker, 2010; Haniffa, 2010; Shafii, Abidin, Salleh, Jusof & Kasim, 2013).

Yahya & Mahzan (2012) claims that currently, there is neither standard nor framework to guide the function of Shari’ah audit as compared to conventional auditing from either government regulatory body or from the professional body. The issuance of the SGF by BNM in 2010 is a commendable effort indeed and can be seen as the most significant framework so far obtainable in the Shari’ah audit practice.

However, whether this newly issued framework is capable enough to holistically cater to the current practices in Malaysia is something yet to be known (Yahya & Mahzan, 2012).

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In response to that, the study of Abdul Rahman (2014) shows that among the requirements of the SGF, is for all the IFIs to establish an internal audit function to carry out annual audits in order to express an independent opinion about the adequacy of compliance with stipulated Shari’ah rules and procedures, and adequacy of the Shari’ah governance processes. However, careful scrutiny of the SGF indicates that the framework has shown less emphasis in providing adequate explanations on the functions of Shari’ah audit. Many studies opine that the framework is short in providing generally acceptable procedure on how Shari’ah audit is to be conducted by the practitioners (see Shaharuddin, 2011; Shafii et al. 2013; Abdul Rahman, 2014).

Another pertinent issue is a lack of specific guidance on Shari’ah knowledge and specific areas of Shari’ah in the framework, should internal auditors need to equip themselves with, in order to conduct Shari’ah audit. Similarly, the issue of external Shari’ah audit function as a third party to provide checks and balance similar to an external financial audit, on Shari’ah compliance requirement, is purposely excluded in the framework (Abdul Rahman, 2014). Shari’ah auditors are to be perceived as independent, as such Shari’ah audit should be carried out by the external Shari’ah auditors, or the internal audit staff should report directly to the Board of Directors to mitigate ‘self-review’ threat (Kasim & Sanusi, 2013).

However, a study of Kasim et al. (2013) show that a huge gap exists between desirable and current practices of Shari’ah auditing in Malaysian IFIs. The desirable one is to conduct the practices externally by the external Shari’ah auditors. However, the current practice is carried out at an internal level only by internal audit unit of the IFIs as required by SGF. The authors argue that the absence of a Shari’ah audit framework, scope, qualifications requirement and issue of independence are other gaps that currently exist in the practice. They also found that most of the practitioners

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have inadequate qualifications in both accounting/auditing and Shari’ah background.

Similarly, they are not independent of their respective organisations. This raises the issue of auditor’s independence judgement which will seriously affect the credibility of the IFIs report in the eyes of various stakeholders (Abdul Rahman, 2014). It is very important to identify the extent of the Shari’ah audit in order to ascertain the level of independence and competency requirement of Shari’ah auditors as both elements were silent in the SGF (Shafii et al. 2013). The current situation clearly signifies the urgent need for the standalone Shari’ah Audit Framework (SAF) to complement the function of the SGF (Abdul Rahman, 2014).

Moreover, a well-recognized audit firm in Malaysia PwC in their study conducted in 2011 finds out three challenges which can be related to the current practices that need proper attention if the future of Shari’ah audit is to be saved. These include the urgency to increase the number of competent and knowledgeable Shari’ah auditors, provision of a Shari’ah audit framework and standards, and enhance Shari’ah audit methodologies. However, considering the rapid growth of IFIs across the world and the need for competent Shari’ah auditors, there is no doubt that auditing practice of IFIs must be properly reshuffled in the nearest future to overcome the claimed challenges. Perhaps, a new Shari’ah audit professional body will soon emerge (Haniffa, 2010). As suggested by Najeeb & Ibrahim (2014), that “Shari’ah audit is a profession waiting to be developed”. Therefore, having a clear understanding of what constitute Shari’ah audit will undeniably contribute to the development of Shari’ah audit as a profession.

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The study aims to explore practitioners’ perceptions of Shari’ah audit and its future implication with regard to some issues and challenges associated with the practice in Malaysia. It is the vision of the researcher that through the opinion derived from the study, the Shari’ah audit will be further enriched and nurtured as a distinct body of knowledge. Thus, the objectives of this study are:-

1. To examine the practitioners’ awareness of Shari’ah audit in Malaysia.

2. To assess the practitioners’ perceptions of Shari’ah audit in Malaysia.

3. To identify the challenges faced by Shari’ah audit practices in Malaysia.

4. To explore the future implication of Shari’ah audit in Malaysia.

1.4 RESEARCH QUESTIONS

The above research objectives can be put into the following research questions:

1. To what extent is the practitioners’ awareness of Shari’ah audit in Malaysia?

2. What are the practitioners’ perceptions of Shari’ah audit in Malaysia?

3. What are the challenges faced by Shari’ah audit practices in Malaysia?

4. What is the future implication of Shari’ah audit in Malaysia?

1.5 SIGNIFICANCE OF THE STUDY

The current study might be significant in the following ways: Firstly, the study may enhance the practice of Shari’ah audit by providing further evidence about the challenges weakening its practices and the way out in Malaysia. Secondly, the study claims that exploring the practitioners’ awareness and perceptions of Shari’ah audit may contribute significantly to the development of the Shari’ah audit framework.

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Meaning that the practitioners are the one that are heavily affected by the SGF requirement to carry out the function, and their feedback would surely contribute to the development of the comprehensive Shari’ah audit framework.

Furthermore, the importance of practitioners’ perceptions of Shari’ah audit cannot be over emphasized as it will give an insight into the exact situation of the current practice of Shari’ah audit whether the practice conforms with the principles of Shari’ah or not. This will in no doubt helps in bringing back the practice into the right position. Lastly, the study also tends to give an insight to the educational sector to think of introducing Shari’ah audit in the curriculum of institutions of higher learning as it will help in producing students with both accounting and Shari’ah knowledge.

The students are also likely to become competent Shari’ah auditors in the future.

Finally, the study hopes to inspire further research in this area to enrich existing knowledge and literature.

1.6 MOTIVATION OF THE STUDY

The study is motivated by the limited literature on the practitioners’ perceptions of Shari’ah audit as compared to the conventional audit in Malaysia. Moreover, Shari’ah audit is relatively a new concept compared to the conventional audit, the earliest after the birth of the IFIs during the 1980s. In addition, the introduction of SGF by BNM in 2010 made Shari’ah audit to become an important function of great concern in Malaysia, being a major hub of the Islamic financial industry across the globe.

However, the attention of the industry itself, academician and some scholars are most likely concentrated on the compliance issues with regards to the products and services provided by the industry, as well as monitoring the huge amount of the assets under its management. Forgetting that, as the Shari’ah compliance industry grows rapidly, the

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need for competent and knowledgeable Shari’ah auditors to reasonably attest on the claimed compliance also increases, as such unavoidable (Yaacob, 2012). Therefore, examining this new discipline with many unresolved issues and when well trained and competent Shari’ah auditors are highly needed is a subject worthy of scholarly investigation.

1.7 ORGANISATION OF THE THESIS

The present chapter introduces the main themes of the study highlights its underlying significance, motivation, research problem, objectives, research questions and organisation of the study. Following this brief introductory section, the subsequent chapters in this thesis are organized and presented as follows: Chapter Two discusses the prior studies where a gap that needs further research will be identified. Chapter Three covers research methodology. The chapter consists of research design, research population, research instrument, sample size, data collection and analysis method employed in the study. Subsequently, the findings, discussion and analysis will further be explored in Chapter Four. Finally, Chapter Five provides the conclusions and recommendations of the study.

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CHAPTER TWO LITERATURE REVIEW

2.1 INTRODUCTION

This chapter intends to review relevant literature in support of the research objectives of the study. The chapter has been organized into nine sections. Section 2.1 describes the chapter while Section 2.2 presents the historical development of auditing. Section 2.3 provides an overview of the Islamic worldview and auditing. Section 2.4 elaborates the differences that exist between conventional and Shari’ah auditing, following this is Section 2.5 which explores the definition of Shari’ah audit, development of Shari’ah audit, the scope of Shari’ah audit, the role of Shari’ah auditors and lastly the qualification of Shari’ah auditors. Section 2.6 presents the challenges of Shari’ah audit, followed by Section 2.7 which describes the theory to explain the current practice of Shari’ah audit. Next is Section 2.8 which discusses the gap in the literature. Finally, Section 2.9 is the summary of the chapter.

It is important to note that literature which specifically discusses the issues related to the development of auditing from conventional or Islamic perspective is quite limited compared to other writings in the field of accounting history. One common reason for that is either the development of auditing has been incorporated in the sub-discussion of accounting development or accounting and auditing have been considered as one.

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2.2 HISTORICAL DEVELOPMENT OF AUDITING

The contemporary theory and practice of auditing can be traced back to the medieval ages, it comes from the Latin word ‘audire’ which means to ‘hear’. Even though, the concept of this is not restricted to only financial issues nevertheless, this stipulated financial auditing in the minds of ordinary people of that time (Mohiuddin, 2012). It keeps on evolving with the growth of capitalism during the industrial revolution.

Since then, the notion of auditing has undergone some considerable changes.

Auditing, as at then, was listening to the accounts of the owner by an employed agent in the name of an auditor. His duty was to examine the accounts and give an opinion against any irregularities (Khan, 1985).

In British and Dublin, the audit was carried out by the Mayors and also during the Columbus era, when America was invented (Mohuiddin, 2012). But in the USA evolution, the role of an auditor presented a new dimension, where his duty was to give an unqualified opinion about the business and its financial position. Finance houses heavily relied on his report to assess the credit-worthiness of the borrowers.

Gradually, the thinking about the role of an auditor was reshaped to the different direction around the globe. In this contemporary generation, reporting of the

“truthfulness and fair representation” of accounting records as shown by the statement of financial position is the ultimate objective of the auditing. The auditor is expected to give an independent opinion on whether or not the financial record has been properly kept by the management and whether or not they are in agreement with the ones presented in the balance sheet (Khan, 1985).

However, history has shown that accounting and auditing system has evolved long ago in Muslim communities, starting from the second Caliphate. During Umar (R.A) were evidence of the authorized people that make a proper record of the

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business transaction in terms of payment, receiving and recording of cash, materials and similar alike. In the early 14^thCentury, a new type of business took shape in the form of a sole proprietorship, partnership and trade barter system. During that time, the involvement of a third party in the business and practice of internal audit was witnessed (Mohiuddin, 2012). In addition, audit practices is not a new invention in the history of Islam, this can be witnessed as the Muslims scholars responded to the economic challenges of their time through the influence of the guidance of the Qur’an and Sunnah.

According to Kasim (2010), history of audit practices can be traced down to the Prophet (PBUH) era. The role of the auditor (Muhtasib) which is to monitor, control and prevent fraudulent exploitations on consumers in the marketplace was established at that time itself. Elsergany (2010) claims that Prophet (PBUH) appointed the first Muhtasib in Islam, who was Saìd ibn Saìd ibn Al-Àas when Islam grew as a state on its own. He was in charge of the Makkah market. Even Ùmar (RA) went rounds and played the role of the Muhtasib by himself. He toured the market carrying a stick to warn against frauds, cheats and monopoly practices. The above traditions were strongly intact in the Muslim kingdoms to ensure free and fair market practices under the Islamic Caliphates (Elsergany, 2010). Therefore, auditing (in the form of Muhtasib) is not only injunctions in Islam but also a widely implemented concept throughout the history of Islam.

2.3 OVERVIEW OF ISLAMIC WORLDVIEW AND AUDITING

According to Al-Faruki (1982: 6), “a worldview is the way a person sees and explains the world and his place in it”. In the word of Chapra (1992: 4) “it is the set of explicit and implicit assumptions about the origin of the universe and the nature and purpose