A Comparison between Conventional Models of Auditing and The Islamic Models of Auditing

1. A Comparison between Conventional Models of Auditing and The Islamic Models of Auditing By: Sartini, S.E., M.Sc., Ak

2. Conventional Systems of Auditing

3. Definition • A critical examination carried out by auditor(s) in respect of financial statement prepared by third parties. • The auditor is a certified public accountant or some such individual certified by a state licensing board to carry out audit function.

4. Objective • To enable auditor to give an opinion regarding the financial standing of the business entity to the owner of the business as well as other interested parties (stakeholders) • It includes ascertaining whether the financial statement show a true and fair view about the financial and operating position of business. • To raise the level of acceptance amongst the general public towards a set of published financial statement.

5. Importance of External Auditor • Without external auditor the veracity/authenticity of the information found within the financial statement of a company can be questioned (Watts & Zimmerman,1989). • To monitor the performance of management on behalf of the shareholders.

6. Qualification of External Auditor Refer to general standard of GAAS (Chapter 2)

7. Shortcomings of conventional Auditing • The San Francisco Chronicle (a Review year ended 2002) described accounting profession as “Annus Horribilis” because of the scandal ENRON, Worldcom, TYCO, Vivendi, Global Crossing, and others.Most of those blue chip companies are audited by Arthur Andersen. • O’leary (1999) cited a number of cases involving giant corporation in Australia going bankrupt even though they are audited by one of the Big 4 (Estate Mortgage, National Safety Council of Victoria, Tricontinental Corporation)

8. World Accounting Report (August-September 1994) reported the similar cases involving auditing firms in US, Canada, UK and Italy. • In Asia, this problem appears to have spread out in 1999. Some companies became bankrupt even tough audited by the Big 4. Guang Nan Holding Hong Kong audited by Delloite; Finance One Thailand audited by Delloite. • Ethical problem. A study by O’leary and Cotter (1999) found that: • 58% of the Irish student and 23% of the Australian student were prepared to act fraudulantly. • 56% of the Irish student and 28% of the Australian student were prepared to cheat in their final year examination.

9. Thus…. • There are glaring weakness in traditional of training future auditors using conventional models of auditing. • All of the instance of negligence and fraud cited earlier questions as to the efficacy of conventional models of auditing.

10. Could the institutions referred earlier be saved had they audited by auditors trained using approaches based on the absorption of values and ethics exposed by Islam???

11. Islamic Models of Auditing

12. Early History of Auditing in Islam • Atiyah (1993), the knowledge of accounting together with all its various branches originated from the Islamic civilization. • Accounting for budgeting, accounting for business, accounting for taxes, zakat, and other levies, system of checking and monitoring the accounts. • Islamic state was established in 622. Zakat was imposed on Moslem in 623 (establishment of Diwan, where the account is held, and the initial development of accounting records and reports). • Auditing (review of books) played an important role in the Islamic State and designated as one of accounting specializations.

13. Reported that: The responsibility of the reviewer was to check what was written in the book. The head of the Diwan had responsibility to appoint a person to review a book. The person must posses a high standard of the language, be hafidz of the quran, intelligent, wise, trustworthy and neither prejudiced nor inimical The reviewer should sign in the book as an indication of his satisfaction with the content Al-Kalkashandy (1913) as quoted by O.A.Zaid (2000)

14. Definition The computation, checking and monitoring of the work and practices of an individual either in connection with his work during preparation of accounts or the good deeds carried out by him to ensure that it is both complete and correct and thereafter is duly rewarded by Almighty Allah.

15. Objectives • To verify the stages of progress os particular job or of a completed project. • The correction of errors • Reward for those who do good and to take action against wrongdoers. • QS. An Najm 53: 39-41 “That man can have nothing, but what he strives for, that the fruit of his striving will soon come in sight. then will be rewarded with a complete reward”.

16. Stages of Monitoring and Supervision • Self Monitoring • Internal Monitoring • External Monitoring

17. Self Monitoring or Control • Corrective efforts from within one’s inner being (conscience = sense of right and wrong). • An important control within each individual auditor. • God fearing Moslem has a high self of control. • QS. Al Isra’ 17: 14, “Read thine (own) record, sufficient is thy soul this day to make out an account against thee.” • Means to strengthen this internal self control is to reflect on the past and contemplate future deeds.

18. Internal Monitoring • Inspection by those in authority. • Done by the outsiders who are not involved in anyway with the work or project being monitored and refer to both internal and external check. • To attain desires, happiness in this world and the next, success, prosperity, freedom from anxiety and others. • The ideal Moslem community (ummah) is baldatun thoyyibatun warabbun ghofur (God inspiring in every manner) because it invites to all that is good, enjoins the right and forbids the wrong.

19. To achieve that goals, Islam had laid down a well-defined guideline: • Proper organizational structure (Caliph Sayyidina Ali bin Abi Thalib) • Division of work, specialization and responsibility (QS. Al maida 5:2) • System of internal audit • Check the work of accountants to ensure that their reports are complete and accurate. • Applied in Baitul Maal. • The Use of modern techniques in Audit work • Moslem are encouraged to take advantage ol all advances in knowledge for one’s benefit so long as this is not forbidden in religion)

20. External Monitoring • The auditing or checking the work of one individual by another individual in all aspects os his work and other transaction. • To verify the value of assets • To detect error and ommisions, correct them speedily and where possible to try prevent their recurrence in the future. • The aplication in Moslem civilization was al hisbah.

21. Muhtasib • Islamic Auditor • The Al Hisbah Department were known as muhtasib (appointed by ulil amri and ulama). • A muhtasib must be independence, had excellent character and moral, be honest, trustworthy, patient. • Confidentiality of information gathered as part of audit process must be safeguarded. Otherwise, he will be considered a hypocrites (munafiq).

22. Attributes of Islamic Auditor Islam has laid down a number of guideline regarding ethical relationship between man and muamalat (transaction/interaction between people). Try to find some of them!

23. Gathering of Evidence Some learned Fuqaha had made a number of interpretations regarding the methods of verifying evidence. Want to know deeply? Let’s discuss later on other occasion. 

24. Audit Report Upon completion of his work, the auditor is required to submit his audit report. (Al Baqara 2:282-283)

25. Responsibilities of Auditor • Responsible to any unfavourable events that occur during his watch unless it was brought about as a result of certain deliberate actions by his employer. • Must compensate the owner or any party who hired them) for any losses arising from their negligence when carrying out their duties.