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

Models of AuditingModels of Auditing

By: Sartini, S.E., M.Sc., AkBy: Sartini, S.E., M.Sc., Ak

Conventional Systems of AuditingConventional Systems of Auditing

A critical examination carried out by A critical examination carried out by auditor(s) in respect of financial auditor(s) in respect of financial statement prepared by third parties.statement prepared by third parties.

The auditor is a certified public The auditor is a certified public accountant or some such individual accountant or some such individual certified by a state licensing board to certified by a state licensing board to carry out audit function.carry out audit function.

DefinitionDefinition

ObjectiveObjective To enable auditor to give an opinion To enable auditor to give an opinion

regarding the financial standing of the regarding the financial standing of the business entity to the owner of the business entity to the owner of the business as well as other interested business as well as other interested parties (stakeholders)parties (stakeholders)

It includes ascertaining whether the It includes ascertaining whether the financial statement show a true and fair financial statement show a true and fair view about the financial and operating view about the financial and operating position of business.position of business.

To raise the level of acceptance amongst To raise the level of acceptance amongst the general public towards a set of the general public towards a set of published financial statement. published financial statement.

Importance of External AuditorImportance of External Auditor

Without external auditor the Without external auditor the veracity/authenticity of the veracity/authenticity of the information found within the financial information found within the financial statement of a company can be statement of a company can be questioned (Watts & questioned (Watts & Zimmerman,1989).Zimmerman,1989).

To monitor the performance of To monitor the performance of management on behalf of the management on behalf of the shareholders.shareholders.

Qualification of External AuditorQualification of External Auditor

Refer to general standard of GAASRefer to general standard of GAAS(Chapter 2)(Chapter 2)

Shortcomings of conventional Shortcomings of conventional AuditingAuditing

The San Francisco Chronicle (a Review year The San Francisco Chronicle (a Review year ended 2002) described accounting profession as ended 2002) described accounting profession as “Annus Horribilis” because of the scandal ENRON, “Annus Horribilis” because of the scandal ENRON, Worldcom, TYCO, Vivendi, Global Crossing, and Worldcom, TYCO, Vivendi, Global Crossing, and others.Most of those blue chip companies are others.Most of those blue chip companies are audited by Arthur Andersen.audited by Arthur Andersen.

O’leary (1999) cited a number of cases involving O’leary (1999) cited a number of cases involving giant corporation in Australia going bankrupt giant corporation in Australia going bankrupt even though they are audited by one of the Big 4 even though they are audited by one of the Big 4 (Estate Mortgage, National Safety Council of (Estate Mortgage, National Safety Council of Victoria, Tricontinental Corporation)Victoria, Tricontinental Corporation)

World Accounting Report (August-September World Accounting Report (August-September 1994) reported the similar cases involving 1994) reported the similar cases involving auditing firms in US, Canada, UK and Italy.auditing firms in US, Canada, UK and Italy.

In Asia, this problem appears to have spread out In Asia, this problem appears to have spread out in 1999. Some companies became bankrupt even in 1999. Some companies became bankrupt even tough audited by the Big 4. Guang Nan Holding tough audited by the Big 4. Guang Nan Holding Hong Kong audited by Delloite; Finance One Hong Kong audited by Delloite; Finance One Thailand audited by Delloite.Thailand audited by Delloite.

Ethical problem. A study by O’leary and Cotter Ethical problem. A study by O’leary and Cotter (1999) found that:(1999) found that:• 58% of the Irish student and 23% of the Australian 58% of the Irish student and 23% of the Australian

student were prepared to act fraudulantly.student were prepared to act fraudulantly.• 56% of the Irish student and 28% of the Australian 56% of the Irish student and 28% of the Australian

student were prepared to cheat in their final year student were prepared to cheat in their final year examination.examination.

Thus….Thus….• There are glaring weakness in traditional There are glaring weakness in traditional

of training future auditors using of training future auditors using conventional models of auditing.conventional models of auditing.

• All of the instance of negligence and All of the instance of negligence and fraud cited earlier questions as to the fraud cited earlier questions as to the efficacy of conventional models of efficacy of conventional models of auditing.auditing.

Could the institutions referred Could the institutions referred earlier be saved had they audited earlier be saved had they audited

by auditors trained using by auditors trained using approaches based on the approaches based on the

absorption of values and ethics absorption of values and ethics exposed by Islam???exposed by Islam???

Islamic Models of AuditingIslamic Models of Auditing

Early History of Auditing in IslamEarly History of Auditing in Islam

Atiyah (1993), the knowledge of accounting Atiyah (1993), the knowledge of accounting together with all its various branches originated together with all its various branches originated from the Islamic civilization.from the Islamic civilization.

Accounting for budgeting, accounting for Accounting for budgeting, accounting for business, accounting for taxes, zakat, and other business, accounting for taxes, zakat, and other levies, system of checking and monitoring the levies, system of checking and monitoring the accounts.accounts.

Islamic state was established in 622. Zakat was Islamic state was established in 622. Zakat was imposed on Moslem in 623 (establishment of imposed on Moslem in 623 (establishment of DiwanDiwan, where the account is held, and the initial , where the account is held, and the initial development of accounting records and reports).development of accounting records and reports).

Auditing (review of books) played an important Auditing (review of books) played an important role in the Islamic State and designated as one of role in the Islamic State and designated as one of accounting specializations.accounting specializations.

Al-Kalkashandy (1913) as quoted Al-Kalkashandy (1913) as quoted by O.A.Zaid (2000)by O.A.Zaid (2000)

Reported that: Reported that: • The responsibility of the reviewer was to check The responsibility of the reviewer was to check

what was written in the book. what was written in the book. • The head of the Diwan had responsibility to The head of the Diwan had responsibility to

appoint a person to review a book.appoint a person to review a book.• The person must posses a high standard of the The person must posses a high standard of the

language, be hafidz of the quran, intelligent, language, be hafidz of the quran, intelligent, wise, trustworthy and neither prejudiced nor wise, trustworthy and neither prejudiced nor inimicalinimical

• The reviewer should sign in the book as an The reviewer should sign in the book as an indication of his satisfaction with the contentindication of his satisfaction with the content

DefinitionDefinition

The computation, checking and The computation, checking and monitoring of the work and practices monitoring of the work and practices of an individual either in connection of an individual either in connection with his work during preparation of with his work during preparation of accounts or the good deeds carried accounts or the good deeds carried out by him to ensure that it is both out by him to ensure that it is both

complete and correct and thereafter complete and correct and thereafter is duly rewarded by Almighty Allah. is duly rewarded by Almighty Allah.

ObjectivesObjectives

To verify the stages of progress os To verify the stages of progress os particular job or of a completed project.particular job or of a completed project.

The correction of errorsThe correction of errors Reward for those who do good and to take Reward for those who do good and to take

action against wrongdoers.action against wrongdoers. QS. An Najm 53: 39-41QS. An Najm 53: 39-41

““That man can have nothing, but what he That man can have nothing, but what he strives for, that the fruit of his striving will strives for, that the fruit of his striving will soon come in sight. then will be rewarded soon come in sight. then will be rewarded

with a complete reward”.with a complete reward”.

Stages of Monitoring and Stages of Monitoring and SupervisionSupervision

1.1. Self MonitoringSelf Monitoring

2.2. Internal MonitoringInternal Monitoring

3.3. External MonitoringExternal Monitoring

Self Monitoring or ControlSelf Monitoring or Control Corrective efforts from within one’s inner being Corrective efforts from within one’s inner being

(conscience = sense of right and wrong).(conscience = sense of right and wrong). An important control within each individual An important control within each individual

auditor.auditor. God fearing Moslem has a high self of control.God fearing Moslem has a high self of control. QS. Al Isra’ 17: 14, “QS. Al Isra’ 17: 14, “Read thine (own) record, Read thine (own) record,

sufficient is thy soul this day to make out an sufficient is thy soul this day to make out an account against theeaccount against thee.”.”

Means to strengthen this internal self control is to Means to strengthen this internal self control is to reflect on the past and contemplate future deeds.reflect on the past and contemplate future deeds.

Internal MonitoringInternal Monitoring Inspection by those in authority.Inspection by those in authority. Done by the outsiders who are not involved in Done by the outsiders who are not involved in

anyway with the work or project being monitored anyway with the work or project being monitored and refer to both internal and external check.and refer to both internal and external check.

To attain desires, happiness in this world and the To attain desires, happiness in this world and the next, success, prosperity, freedom from anxiety next, success, prosperity, freedom from anxiety and others.and others.

The ideal Moslem community (ummah) is The ideal Moslem community (ummah) is baldatun thoyyibatun warabbun ghofurbaldatun thoyyibatun warabbun ghofur (God (God inspiring in every manner) because it invites to all inspiring in every manner) because it invites to all that is good, enjoins the right and forbids the that is good, enjoins the right and forbids the wrong. wrong.

To achieve that goals, Islam had laid down To achieve that goals, Islam had laid down a well-defined guideline:a well-defined guideline:• Proper organizational structure (Caliph Proper organizational structure (Caliph

Sayyidina Ali bin Abi Thalib)Sayyidina Ali bin Abi Thalib)• Division of work, specialization and Division of work, specialization and

responsibility (QS. Al maida 5:2)responsibility (QS. Al maida 5:2)• System of internal auditSystem of internal audit

Check the work of accountants to ensure that their Check the work of accountants to ensure that their reports are complete and accurate.reports are complete and accurate.

Applied in Applied in Baitul MaalBaitul Maal..

• The Use of modern techniques in Audit work The Use of modern techniques in Audit work Moslem are encouraged to take advantage ol all Moslem are encouraged to take advantage ol all

advances in knowledge for one’s benefit so long as advances in knowledge for one’s benefit so long as this is not forbidden in religion)this is not forbidden in religion)

External MonitoringExternal Monitoring

The auditing or checking the work of one The auditing or checking the work of one individual by another individual in all individual by another individual in all aspects os his work and other transaction.aspects os his work and other transaction.

To verify the value of assetsTo verify the value of assets To detect error and ommisions, correct To detect error and ommisions, correct

them speedily and where possible to try them speedily and where possible to try prevent their recurrence in the future.prevent their recurrence in the future.

The aplication in Moslem civilization was al The aplication in Moslem civilization was al hisbah. hisbah.

MuhtasibMuhtasib Islamic AuditorIslamic Auditor The Al Hisbah Department were known as The Al Hisbah Department were known as

muhtasib (appointed by ulil amri and muhtasib (appointed by ulil amri and ulama).ulama).

A muhtasib must be independence, had A muhtasib must be independence, had excellent character and moral, be honest, excellent character and moral, be honest, trustworthy, patient.trustworthy, patient.

Confidentiality of information gathered as Confidentiality of information gathered as part of audit process must be part of audit process must be safeguarded. Otherwise, he will be safeguarded. Otherwise, he will be considered a hypocrites (munafiq). considered a hypocrites (munafiq).

Attributes of Islamic AuditorAttributes of Islamic Auditor

Islam has laid down a number of Islam has laid down a number of guideline regarding ethical guideline regarding ethical

relationship between man and relationship between man and muamalat (transaction/interaction muamalat (transaction/interaction

between people).between people).

Try to find some of them!Try to find some of them!

Gathering of EvidenceGathering of Evidence

Some learned Fuqaha had made a Some learned Fuqaha had made a number of interpretations regarding number of interpretations regarding the methods of verifying evidence.the methods of verifying evidence.

Want to know deeply?Want to know deeply?

Let’s discuss later on other occasion.Let’s discuss later on other occasion.

Audit ReportAudit Report

Upon completion of his work, the Upon completion of his work, the auditor is required to submit his audit auditor is required to submit his audit

report. (Al Baqara 2:282-283)report. (Al Baqara 2:282-283)

Responsibilities of AuditorResponsibilities of Auditor

Responsible to any unfavourable Responsible to any unfavourable events that occur during his watch events that occur during his watch unless it was brought about as a unless it was brought about as a result of certain deliberate actions by result of certain deliberate actions by his employer.his employer.

Must compensate the owner or any Must compensate the owner or any party who hired them) for any losses party who hired them) for any losses arising from their negligence when arising from their negligence when carrying out their duties.carrying out their duties.