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Auditing procedures have developed significantly and more complex since the last
few years. Auditing procedures base on PSAK 23 (Revisi 2010). During the years the
auditing procedures is not only implemented on the conventional financial institutions but
also to the Islamic Financial Institutions (IFIs) that are growth rapidly since the last few
years. It raises the issue of shariah compliance in IFIs and the need for a new audit function,
shariah audit. Its functions to ensure accountability of financial statements prepared by
management and also ensuring shariah aspects are met perfectly by IFIs. This paper briefly
analyzes the differences of auditing procedures in Islamic and conventional financial
institution in Indonesia. The discussion of this auditing procedures will cover four areas in
auditing, i.e the framework, scope, qualifications and independence of auditors. This paper
was conducted using a literature review method which provide data from another resources
and researches.

1. Introduction
The growth of Islamic Financial Institutions (IFIs) in Indonesia trigs to design
new system in auditing procedures. The auditing process that is implemented in the
financial institution in Indonesia based on PSAK 23 (amendment 2010). Because of the
growth of IFIs in Indonesia, it needs new basic procedures of auditing process for IFIs in
Indonesia, shariah audit. During the years, the auditing procedures implemented in
Indonesia are divided into two types of auditing, they are shariah (Islamic) auditing for
IFIs and auditing for conventional financial institutions. Therefore, this paper analyzes
the basic differences between shariah (Islamic) auditing and conventional auditing for
financial institutions in Inonesia.
2. Literature Reviews
Audit Definition
Audit comes from a Latin word audire, which means to hear. The modern concept
of auditing has progressed in terms of more formalized accounts: separation of ownership and
control. Auditors certify the information provided by the people of the organization to the
Stakeholders (Creditors, Shareholders, Investors, Regulatory bodies, Govt., Researchers, and
Employees etc.) that these are true. Stakeholders are the people who use the audit report.
Elder et al. (2009:4), definisi audit adalah akumulasi dan evaluasi dari bukti
mengenai informasi untuk menentukan dan melaporkan tingkat kesesuaian antara informasi
tersebut dengan suatu kriteria yang telah dibuat. Pengauditan hanya dapat dilakukan oleh
seorang yang profesional, kompeten dan independen. From Islamic perspective, Shariah audit
has been defined as an audit attestation for Shariah compliance (Yahya and Mahzan, 2012).
Shariah audit is the examination of an IFIs compliance with the Shariah, in all its
activities particularly the financial statements and other operational components of the IFI
that are subjected to the risk of compliance including but not limited to products, the
technology supporting the operations, operational processes, the people involved in key areas
of risk, documentations and contacts, policies and procedures and other activities that
requires adherence to Shariah principles (Akram Laldin, 2009),.However, the term is not so
easy to be explained by such a simple expression and the writers confess this fact by pointing
towards different issues that might arise as a result of this definition.

History of Auditing
Origin and Growth of Auditing: In Mesopotamian Civilization (3600 B.C.), one
person records transaction and another person summarized it. There may be an audit
conducted by them or others. In Egyptian Pharaohs, required documents should be needed for
cash disbursements and for goods inflow or outflow. There is auditing only for
disbursements. In Greek Civilization, audit was taken place only for public officials for
public expenses after the retirement of their jobs. But the scenario was changed in Roman
Civilization. Islamic history proves that during the Umar,s(RA) Caliphate detail accounting
as well auditing systems were cultured which is till now famous as Hisbah. During the
Caliphate rain there were different authorized persons to receive, pay and record cash,
materials and so on like present. In 14th Century, business became more expand than before.
There was sole proprietorship, partnership business besides barter system. The practice of
internal audit was first started as all partners were not equally involved in partnership. During
this time the involvement of third party was seen. In London and Dublin, audit was
conducted by Mayor and in 1492 when Colombus invented America; In 18th Century after
the industrial revolution, the Joint Stock companies were expanded. To serve the interest of
shareholder professional auditing was first started and recognized by law in Table A,
Company Act 1857. But auditors qualification, scope, responsibility, power etc. were not
clearly defined like the Company Act 1913.
Objective of Auditing
Objective of auditing from conventional point of view based on The International
Standards of Supreme Audit Institutions (ISSAIs) states the purpose of an audit of financial
statements is to enhance the degree of confidence of intended users in the financial
statements. This is achieved through the expression of an opinion by the auditor as to whether
the financial statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework, or in the case of financial statements prepared in
accordance with a fair presentation financial reporting framework whether the financial
statements are presented fairly, in all material respects, or give a true and fair view, in
accordance with that framework. Laws or regulations binding public-sector audit
organisations may prescribe other wordings for this opinion. An audit conducted in
accordance with standards based on the INTOSAI Fundamental Principles of Financial
Auditing and relevant ethical requirements will enable the auditor to express such an opinion

while from Islamic point of view. On

the other hand objective of auditing based on

AAOIFIs Governance Standard for IFIs no. 3 elaborate the objective of Shariah audit as the
primary objective of the internal Shariah review (carried out by independent division or part
of internal audit department) is to ensure that the management of an IFI discharge their
responsibilities in relation to the implementation of the Shariah rules and principles as
determined by the IFIs Shariah Supervisory Board (SSB).
Framework of Internal Auditing
Conventional auditing has the framework consists of ten core competencies,
listed below:
I. Professional ethics: Promotes and applies professional ethics
II. Internal audit management: Develops and manages the internal audit function
III. IPPF: Applies the International Professional Practices Framework (IPPF)
IV. Governance, risk and control: Applies a thorough understanding of governance,
risk and control appropriate to the organization
V. Business acumen: Maintains expertise of the business environment, industry
practices and specific organizational factors
VI. Communication : Communicates with impact
VII. Persuasion and collaboration: Persuades and motivates others through
collaboration and cooperation
VIII. Critical thinking: Applies process analysis, business intelligence and problem
solving techniques
IX. Internal audit delivery: Delivers internal audit engagements
X. Improvement and innovation: Embraces change and drives improvement and
The following chart depicts the structure of the Framework and how the core
competencies relate to each other:

Professional Ethics and Internal Audit Management provide a firm foundation for
the delivery of internal audit. In order to be able to provide an effective service, internal
auditors need to operate according to high ethical standards and coordinate the resources and
activities of the internal audit function.
The principal points of focus of an internal auditors expertise are the IPPF,
governance risk and control, and business acumen. The IPPF is the primary source of
professional standards for internal audit that the IIA provides to all internal auditors around
the world. Additionally, internal auditors require technical expertise in Governance, Risk
and Control to inform their work and help organizations accomplish their objectives.
Business Acumen in the form of understanding the client organization, its culture, the way
it works, the sector it operates in and the local and global factors that act upon it is another
essential prerequisite that enables internal auditors to provide effective assurance and
advisory services and so add value to the organization.
Internal auditors need to be competent in Communication, Persuasion and
Collaboration, and Critical Thinking in order to deliver internal audit engagements, and
drive improvement and innovation in an organization.

In Islamic auditing, the framework for internal shariah audit framework consist of
I. scope of internal shariah audit
II. Internal Shariah audit objectives
III. Internal shariah audit and governance
IV. Audit charter
V. competency of internal shariah auditors
VI. Internal shariah audit process
VII. Reporting requirements for internal shariah audit

Key Players
Key players in each auditing system are occupied by the similar and different player.
Auditing in conventional financial institution means that Audits of financial statements are
defined as assurance engagements, which involve at least three separate parties. They are an
auditor, a responsible party and intended users.
a. Auditors
When conducting audits, the auditors have to follow Code of Ethics for Professional
Accountants issued by the International Ethics Standards Board for Accountants (IESBA)
(the IESBA Code), which establishes fundamental ethical principles for professional
accountants, or to adopt national requirements that are at least as demanding; or they have to
follow the auditing regulated in PSAK 23 in Indonesia. The auditors conduct auditing process
for conventional financial institution by following the financial reporting framework. The
auditor should assess whether the preconditions for an audit of financial statements have been
b. Responsible party
In an audit of financial statements, the responsible party is responsible for the subject
matter information (normally the financial statements themselves) and may also be
responsible for the underlying subject matter (the financial activities reflected in the financial
statements). The responsible party is normally the executive branch of government and/or its
underlying hierarchy of public-sector entities responsible for the management of public
funds, the exercise of authority under the control of the legislature, and the content of the
financial statements. These bodies are expected to manage resources and exercise authority in
accordance with the decisions and premises of the legislature.

c. Intended Users
Legislators represent the citizens, who are the ultimate users of financial statements in
the public sector. The intended user is primarily the parliament, which represents the
citizens by making decisions and determining the priorities of public finance and the purpose
and content of spending and income as part of a public democratic process. The legislatures
decisions and premises may form the basis of the broader perspective of financial audit in the
public sector. For public-sector entities, legislators and regulators are often the primary users
of their financial statements.
The responsible party and the intended users may be from the same public-sector
entities or from different bodies. In the first scenario, the supervisory board of a
governmental structure may seek assurance about information provided by the management
board of the same public sector entity. The relationship between the responsible party and the
intended users needs to be viewed within the context of the specific engagement and may
differ from more traditionally defined lines of responsibility.
In the other hand, the main key players in Islamic auditing as mentioned by Hanifah
(2010), explained that in shariah auditing, there are several key players exist who have its
role in auditing, they are :
a. DPS (Dewan Pengawas Syariah) and Internal Auditor
DPS is a party that performs main role in entire auditing and the framework of Islamic
Financial Isstitutions (Kasim & Sanusi, 2013; Karim, 1990). DPS has a role to formulate
policies and guideline for management in their activities, including in agreement of output
product and perform shariah review to carry out auditing for ensuring the activities
performed by Islamic Financial Institutions are not in contradiction with shariah compliance
rules. When performe shariah review, internal auditor helps DPS as daily implementer.
Yacoob (2012) argued that internal auditors may perform the shariah auditor function if they
have adequate shariah knowledge and ability. The main objective is to ensure the good and
effective internal control that follow the shariah compliance.
b. Auditor Eksternal
External auditors has a unique role in shariah auditing, not only perform financial
auditing but also audit the shariah compliance test to nsure the shariah compliance of the

company of Islamic Financial Institutions. Auditing process is performed systematically,

starts with auditing planning and ended by giving opinion by the auditor related to the
financial statements that already prepared. This opinion is given by considering the fatwa,
AAOIFI, standards, and accounting practice applied in Indonesia
Types of Financial Statements
There some elements differ the Islamic Financial Institutions and Conventional
Financial Institutions. In conventional Institution, the main elements of financial Statements
are :

Income Statement
Retained Earning Statement
Balance Sheet/Statement of Financial Position
Cash Flow Statement, and
Note Disclosures

In Islamic Financial Institutions, the types of financial statements are :

The Scope of Auditing
Scope of auditing is based on its needs for each conventional and Islamic auditing.
For conventional financial auditing, the scope of auditing is related to the external auditing.
From conventional perspective, the scope of auditing is related to three main keys, they are
Independent examination of financial statements or reports of any entitys financial
information, whether profit making or not, Verification of financial statement and
determining accuracy and reliability, and the result is expression of an opinion through audit
report. From Islamic perspective, the scope of shariah audit cover three main keys, they are
audit of financial statements of Islamic Financial Institutions (IFIs), compliance audit on
organizational structure, people, process and information technology system, and review of
adequacy of the shariah governance process.
Process of Auditing

The process of auditing in conventional financial institution usually has three steps,
they are :
Audit procedures are performed in order to test financial statement assertions.
Therefore, the first step in explaining an audit procedure is to identify the assertion
that needs to be tested.
STEP 2: IDENTIFY THE AUDIT PROCEDURE. Choose audit procedures from
AEIOU that means :
A: Analytical procedures
E: Enquiry and confirmation directly from a third party ie inquiry
I: Inspection of records and assets
O: Observation
U: recalcUlation and reperformance
1 .Write it clearly
Audit procedures should be written in such a way that even a junior auditor will be
able to understand what is to be done. For example, avoid vague procedures like check
goods received notes. This is vague as it does not explain what is to be examined in the
goods received notes. Is it the description of items received, the quantity received or the name
of the vendor?
2 .Write down the reason for performing the audit procedure
The audit procedure check goods received notes does not mention why the goods
received notes are to be checked. Instead, write the audit procedure as: agree the description
of items and the quantities ordered mentioned on the goods received note with the
descriptions on the purchase orders raised on the vendor. This confirms that the entity has
procured goods based on an authorised purchase order.
3 .Use audit terminology
Use terminology relating to audit like cast, agree, trace, etc.
Use the word cast to mean totalling up a list for example, cast the trial balance.
Use the words agree or trace to mean matching information from two
documents/records for example, agree the total sales of the sales day book to the general

ledger account; or trace a sample of trade payables to the purchase invoices, to confirm the
existence of the rights to the goods purchased.

In Islamic auditing cover three main process, they are :

Shariah audit program to be developed. It includes a complete understanding about
the Islamic Banks operations in terms of products, size of operations, location, branches,
subsidiaries and divisions. Properly documented including the sample selection criteria and
size taking into consideration complexity and frequency of transactions.
This step includes understanding of the management awareness, commitment and
compliance control procedures for adherence to shariah, auditing of contracts and standard
operating procedures, auditing information and reports, auditing profit computation and
distribution, zakat and its distribution, penalty and manner of distribution, interviewing
relevant personnel and observing operations and process.

This step is the final step of shariah audit process. It includes report findings of
shariah compliance and non-compliance, assess the degree of recurring of non-compliance
and its systematic effect to Islamic Financial Institutions (IFIs). It also recommend corrective
actions, improvements and rectifications.
Qualities of an Auditor with regard to Ethical and Divine View
A. Ethical View: Ethics can be defined as acceptable code or pattern of behavior for
every human being in the society. Professional ethics is simply the application of the general
theory of ethics. All recognized professionals developed their own codes of ethics. The basic
logic of codes of ethical conduct applicable to different profession is to provide a framework
to all the members of the profession, regarding their professional behavior to ensure a high
degree of esteem and the continued acceptability of the profession. Code of professional
ethics consists of two things: General statements of ideal conduct and Specific rules defining
unacceptable conduct.
The Code of Ethics that is usually used in financial auditing are listed in four elements
in order to increasing specificity (Alvin A. Arens & Loebbecke, 2000)

B. Qualities of an Auditor in the Eye of Islam: The auditor should comply with the
Code of Ethics for Professional Accounts issued by Accounting and Auditing Organization

for Islamic Financial Institution (AAOIFI) and the International Federation of Account which
do not contravene Islamic rules and principles. The ethical principles governing the auditor
professional responsibilities included:

Righteousness: An auditor should be righteous in regard to his duty.

Regarding to righteousness there are a lot of evidence in Al-Quraan and Al-Hadith

Trustworthiness: Without this quality, a person cannot be a good
auditor. It is the prerequisite of an auditor. It is the quality of all prophets. Muhammad
(SAW) treated Sadiq and Amin in his boyhood
Professional Behavior. In Islam, there are ample evidences about how
the professional behavior should be in particular job field. In this regard, we may
mention the following Hadith about excellence in profession.
Fairness: A person who works for another person, a firm or an
institution, has been commended by Allah (SWT) to perform his work efficiently and

Proficiency and Efficiency (Ihsan): Ihsan is commonly understood as

doing marginally more than the minimalrequirements. Islam urges Muslims to do

their jobs without any lapse or omission and to the best of their efficiency and
competence. The Quraan urges the believers to gain control over the universe and to
move full use of its natural resources.
Sincerity (Iklas): Sincerity is the key to all virtue because one cannot
be ore genuinely performing a task without sincerity. When an auditor is sincerely
undertaking the task; he has to make sure that it is completed with the best of his

Objectivity: Without identifying clear cut objective, a person cannot

proceed smoothly. He should know his mission and vision.

3. Contents and Discussion

The Islamic auditing and conventional auditing for financial institutions have the key
similarities and differences. The conventional auditing underlie the Islamic auditing process.

The growth of Islamic Financial Institutions (IFIs) in Indonesia especially for Islamic Banks
require a new procedure to conduct auditing in these financial institutions. The needs for
shariah auditing for IFIs occurs because of external financial auditors only legally
responsible to audit conventional financial and operational system, processes, activities,
policies, the shariah advisors only focused on shariah compliance on products and policies,
and internal auditors only focused on internal control and operational matters, thus, there is a
need for purposely a designed shariah audit program to ensure reasonable assurance of
shariah compliance for IFIs activities.
The Islamic auditing must be conducted by the auditors that has a knowledge related
to shariah compliance and rules in shariah auditing. The auditor may conduct auditing if he
or she has a knowledge about it.
During the last few years, the Islamic auditing process in the world and also in
Indonesia was conducted by the conventional institutions.
Table 1. External Auditors of Islamic Banks

Name of bank



Al Baraka Islamic Bank


Bahrain Islamic Bank

Ernst and Young

Shamil Bank

Ernst and Young

Kuwait Finance House

Ernst and Young

ARCapita Investment Bank

Ernst and Young

Al Baraka banking Group

Ernst and Young

Al Rajhi Bank

Ernst and Young

Saudi Arabia

Meezan Bank Limited

A.F. Ferguson & Co (Associate of PWC)


Bank Islam Malaysia Berhad

KPMG Desa Megat & Co

Bank Muamalat Malaysia Berhad

Ernst and Young

RHB Islamic Bank


From the table, we show that the auditing process in IFIs is also conducted by
conventional auditing institutions.
The IFIs auditing should be conducted by shariah auditors, but the major restrictios
in the world even in Indonesia are the needs of establishing audit evidence, developing a
systematic and through audit program and producing competent and independent shariah

auditors. All of the challenges mentioned above have not developed in Indonesia. The last
restriction are the framework used by IFIs to conduct auditing is only a guideline of shariah
auditing issued by IAI (Ikatan Akuntan Indonesia) at 2005. This guideline is only discuss
about financial statements. Since last few years in auditing financial statements of IFIs has
run well because of the existence PSAK Shariah as source containing shariah aspects.
Although the auditing technics still use conventional auditing technics, it means the auditor
conduct auditing by using conventional technics. It occurs because of the lack of shariah
auditing framework that can be used as a guideline

4. Conclusion