Factors affecting Sharīʿah audit quality in Islamic banking institutions of Pakistan: a theoretical framework

Abdul Rashid,Muhammad Saarim Ghazi

doi:10.1108/ies-07-2020-0025

Abstract

PurposeThe objective of this study is to present a theoretical framework, which helps ascertain the meanings of the Sharīʿah audit quality and identify the factors that affect it.Design/methodology/approachThe current literature of conventional and Islamic finance on audit quality is critically reviewed to propose the theoretical framework for the quality of Sharīʿah audit.FindingsThe paper suggests that for a better Sharīʿah compliance at Islamic banking institutions (IBIs), the role of audit practitioners is very much indispensable. The competency of the practitioner is one of the important factors that affect the quality of the Sharīʿah audit. Assessment and identification of Sharīʿah risk in different financial arrangements, contracts and transactions require a unique competency on the part of the auditor, that is, gripping Sharīʿah law besides traditional assurance skills and techniques.Practical implicationsThe Sharīʿah compliance is one of the primary objectives of IBIs, which works at the conceptual level, product development and implementation level, various business models and governance level. Sharīʿah audit function, internal or external, is an important component of Sharīʿah governance framework and provides an independent assessment of IBIs’ compliance with the Sharīʿah rules and principles and helps in managing the Sharīʿah non-compliance risk and ensuring sound internal Sharīʿah control system.Originality/valueThe paper proposes a theoretical framework for defining the Sharīʿah audit quality and determining the factors that are significant in affecting the Sharīʿah audit quality in the IBIs of Pakistan.

Highlights

The robust and exponential growth of contemporary Islamic banking institutions (IBIs) has unlocked a new horizon of knowledge and skill set in the field of business and finance
Islamic Financial Services Board (IFSB) and local regulatory bodies like the State Bank of Pakistan (SBP) and the Bank Negara Malaysia (BNM) have introduced regulatory, governance and supervisory frameworks, pool and liquidity management guidelines, financial accounting and reporting mechanism, and tax regimes to ensure long-term sustainable growth through better control over the widespread operations of Islamic banking and financial institutions
This study aims to provide a framework to ascertain the meanings of Sharıah audit quality and to identify the factors that affect the quality of Sharıah audit in the context of audit risk model

Summary

Introduction

The robust and exponential growth of contemporary Islamic banking institutions (IBIs) has unlocked a new horizon of knowledge and skill set in the field of business and finance. The frameworks generally categorized the factors affecting audit quality in inputs, process, output and context Inputs are those attributes that belong to auditors such as experience, professional judgment and industry knowledge. The second area discusses the various perspectives developed in the absence of consensus on the definition of audit quality In this regard, it was learned, so far, that there are four perspectives on the audit quality: the perspective linked with successfully detection of material misstatement (that may be termed as “the consequential perspective”), the perspective related to the process of audit (the procedural perspective), the perspectives related to successfully defending the audit work in court of law (the advocacy perspective) and the perspective related to complying with the regulation and best practices (the compliance perspective). This study aims to provide a framework to ascertain the meanings of Sharıah audit quality and to identify the factors that affect the quality of Sharıah audit in the context of audit risk model

Theoretical framework

Conclusion and future research