AAOIFI Governance and Auditing Standards

4th Annual IIBI ISRA Thematic Workshop London, United Kingdom Septem er !"#!

Content
Overview of AAOIFI AAOIFI Governance Standards on Sharia Supervision and Compliance

AAOIFI Auditing Standards Appendices

Overview of AAOIFI
AAOIFI $ AA%I&I is responsi le 'or de(eloping and issuing standards 'or international Islamic 'inance industr)* $ Supported ) o(er !"" institutional mem ers 'rom o(er 4" countries* $ +em ers are central anks, regulator) authorities, 'inancial institutions, accounting , auditing 'irms, legal 'irms, etc*

Overview of AAOIFI (contd)

Standards Total o' -- standards issued. $ 4- Shari/a standards* $ !0 accounting standards* $ 1 auditing standards* $ 2 go(ernance standards* $ ! codes o' ethics* $ In addition, ne3 standards are eing de(eloped and e4isting standards re(ie3ed*

Overview of AAOIFI (contd)

Sharia Standards Accounting Standards $ 5uidances on Shari/a permissi ilit) and rules 'or speci'ic Islamic 'inance products and mechanisms* $ 5uidances on accounting treatment 'or speci'ic Islamic 'inance products and mechanisms* $ 5uidances on presentation o' 'inancial statements 'or Islamic 'inancial institutions*

Overview of AAOIFI (contd)

Auditing Standards Governance Standards $ 5uidances on e4ternal auditing o' Islamic 'inancial institutions* $ 5uidances on Shari/a compliance and super(ision processes and 'rame3ork 'or Islamic 'inancial institutions* $ 6odes o' ethics 'or emplo)ees, accountants and auditors 'or Islamic 'inancial institutions*

Codes of Ethics

Overview of AAOIFI (contd)

Adoption of standards
$ AAOIFI accounting standards have been made part of mandatory regu atory re!uirement in "urisdictions such as #ahrain$ %ordan$ &atar$ &atar Financia Centre$ Sudan$ and Syria' $ AAOIFI accounting standards have a so been adopted by Is amic (eve opment #an) Group$ a mu ti atera institution' $ In addition$ AAOIFI accounting standards have a so been used as basis of nationa accounting standards in "urisdictions such as Indonesia and *a)istan' $ In other "urisdictions inc uding #runei$ (ubai Internationa Financia Centre$ Egypt$ France$ +uwait$ ,ebanon$ -a aysia$ Saudi Arabia$ South Africa$ .nited Arab Emirates and .nited +ingdom as we as in Africa and Centra Asia$ AAOIFI accounting standards have been used vo untari y as basis of interna guide ines by eading Is amic financia institutions'

Overview of AAOIFI (contd)

Adoption of standards
$ AAOIFI Sharia standards have been made part of mandatory regu atory re!uirement in "urisdictions such as #ahrain$ *a)istan$ Sudan$ and Syria' $ AAOIFI Sharia standards have a so been adopted by Is amic (eve opment #an) Group$ a mu ti atera institution' $ In addition$ AAOIFI Sharia standards have a so been used as basis of nationa Sharia guide ines in "urisdictions such as Indonesia and -a aysia' $ In other "urisdictions inc uding #runei$ (ubai Internationa Financia Centre$ France$ %ordan$ +uwait$ ,ebanon$ Saudi Arabia$ &atar$ &atar Financia Centre$ South Africa$ .nited Arab Emirates and .nited +ingdom as we as in Africa$ Centra Asia and /orth America$ AAOIFI Sharia standards have been used vo untari y as basis of interna guide ines by eading Is amic financia institutions'

Overview of AAOIFI (contd)

App ication of standards $ 74pertise 'or technical application o' standards is supported ) AA%I&I/s pro'essional de(elopment 8uali'ication programs. Certified Sharia Adviser and Auditor (CSAA). Certified Islamic Professional Accountant (CIPA).

Overview of AAOIFI (contd)

App ication of standards (contd) $ AA%I&I has also launched 6ontract 6erti'ication 9rogram to certi') that 'inancial contracts et3een Islamic 'inancial institutions and their clients are in compliance 3ith AA%I&I standards and Shari/a rules and principles* $ This is to gi(e 'urther support 'or application o' AA%I&I standards and harmonisation o' Islamic 'inance practices*

AAOIFI Governance Standards on Sharia Supervision and Compliance

AAOIFI Governance Standards
$ Shari/a Super(isor) Board :SSB;. Appointment, 6omposition and Report* $ Shari/a Re(ie3 $ Internal Shari/a Re(ie3* $ Audit and 5o(ernance 6ommittee* $ Independence o' SSB* $ 5o(ernance 9rinciples* $ 6orporate Social Responsi ilit) :6SR;*

AAOIFI Governance Standards on Sharia Supervision and Compliance

+ey components of Sharia supervision and comp iance $ Shari/a Super(isor) Board* $ Shari/a Re(ie3* $ Internal Shari/a Re(ie3*

(contd)

AAOIFI Governance Standards on Sharia Supervision and Compliance

Sharia Supervisory #oard 0SS#1

(contd)

$ Appointed ) shareholders at annual meeting* $ At least < mem ers* $ 74perts in Islamic commercial =urisprudence* $ +a) include # mem er 3ith e4pertise in Islamic 'inance :rather than =urisprudence;*

AAOIFI Governance Standards on Sharia Supervision and Compliance

SS#
(contd)

(contd)

$ +a) not include signi'icant shareholder or mem er o' Board o' >irectors* $ +a) engage e4ternal consultants to assist duties* $ Terms o' engagement to e agreed 3ith the institution and included in letter o' appointment*

AAOIFI Governance Standards on Sharia Supervision and Compliance

SS#
(contd)

(contd)

+ain 'unctions. $ >irecting, re(ie3ing and super(ising institution/s acti(ities to ensure Shari/a compliance* $ Shari/a ad(ice and guidelines* $ Shari/a appro(al on products and ser(ices* $ Shari/a re(ie3*

AAOIFI Governance Standards on Sharia Supervision and Compliance

Sharia 2eview

(contd)

$ 74amination carried out on ehal' o' SSB o' the e4tent o' an institution/s compliance to Shari/a* $ 6o(ers contracts, transactions, policies, etc* $ &orms asis o' SSB/s report in institution/s annual 'inancial report* $ >oes not relie(e management/s responsi ilit) on compliance*

AAOIFI Governance Standards on Sharia Supervision and Compliance

Interna Sharia 2eview

(contd)

$ 6arried out ) an independent department or as part o' internal audit 'unctions* $ 6ontinuous e4amination and e(aluation o' the e4tent o' an institution/s compliance to Shari/a* $ 9eriodical reports su mitted to audit committee or such similar od) o' an institution*

AAOIFI Auditing Standards

AAOIFI Auditing Standards
$ % =ecti(e and 9rinciples o' Auditing* $ The Auditor/s Report* $ Terms o' Audit 7ngagement* $ Testing 'or 6ompliance 3ith Shari/a Rules and 9rinciples ) an 74ternal Audit* $ The Auditor/s Responsi ilit) to 6onsider &raud and 7rror in an Audit o' &inancial Statements*

AAOIFI Auditing Standards

Ob"ective of Audit

(contd)

$ To ena le auditor o' 'inancial statements to e4press an opinion as to 3hether the 'inancial statements are prepared, in all material respects, in accordance to Shari/a rules and principles, AA%I&I accounting standards, and other rele(ant accounting standards and practices*

AAOIFI Auditing Standards

Concept of 2easonab e Assurance

(contd)

$ An audit is designed to pro(ide reasona le assurance that 'inancial statements taken as a 3hole are 'ree 'rom material misstatement* $ Reasona le assurance also means that the auditor has satis'ied himsel' or hersel' that transactions e4amined during audit compl) 3ith Shari/a rules and principles as determined ) the Islamic 'inancial institution/s :I&I/s; Shari/a Super(isor) Board :SSB;*

AAOIFI Auditing Standards

2esponsibi ity of an e3terna auditor for comp iance with Sharia ru es and princip es

(contd)

$ While the auditor is responsi le 'or 'orming and e4pressing an opinion on the 'inancial statements, the management o' the I&I is responsi le 'or ensuring that the 'inancial statements and the I&I/s acti(ities compl) 3ith Shari/a rules and principles as determined ) the I&I/s SSB* $ The responsi ilit) to interpret Shari/a rules and principles lies 3ith the I&I/s SSB*

AAOIFI Auditing Standards

2esponsibi ity of an e3terna auditor for comp iance with Sharia ru es and princip es
(contd)

(contd)

$ The auditor shall e kno3ledgea le a out Shari/a rules and principles, ut 3ould not possess the same le(el o' kno3ledge as that o' SSB mem ers, and thus the auditor shall not e e4pected to pro(ide interpretation o' these rules and principles* $ The 'at3as, rulings and guidance issued ) the SSB 'orm the asis on 3hich the auditor considers 3hether the I&I has complied 3ith Shari/a rules and principles*

AAOIFI Auditing Standards

Scope of auditors wor)

(contd)

$ The responsi ilit) o' the auditor is to 'orm an opinion on 3hether the transactions o' the I&I are in compliance 3ith the 'at3as, rulings and guidance issued ) its SSB* $ The auditor shall ha(e no responsi ilit) 'or assessing the competence o' the mem ers o' the SSB* $ The I&I/s process 'or introducing ne3 products or modi')ing e4isting products shall include appropriate procedures 'or ensuring compliance 3ith Shari/a rules and principles including re(ie3s ) the I&I/s management, internal audit and the SSB*

AAOIFI Auditing Standards

Scope of auditors wor)
(contd)

(contd)

$ Re(ie3 a(aila le documents to ensure that all t)pes o' products o''ered ) the I&I ha(e een su =ect to a re(ie3 ) the SSB, and that the SSB has 'ound these products to e in compliance 3ith Shari/a rules and principles* $ ?eri') that the transactions entered into ) the I&I are consistent 3ith the 'at3as, rulings and guidelines o' the SSB* $ Re(ie3 the 'indings o' all internal re(ie3s carried out ) the I&I management, the internal audit, and the internal Shari/a re(ie3 ) or on ehal' o' the SSB*

4han) 5ou
www'aaoifi'com

Appendi3 I ,ist of current standards

Shari/a Standards 1 2 3 4 Trading in Currencies Debit Card, Charge Card and Credit Card Default in Payment by a Debtor Settlement of Debt by Set-Off !uarantees " ' * , 1. 11 12 13 14 1 1" 1' 1* Continue next page Con#ersion of a Con#entional $an% to an &slamic $an% (a)ala +urabaha to the Purchase Orderer &-arah and &-arah +untahia $ittamlee% Salam and Parallel Salam &stisna/a and Parallel &stisna/a Shari%a /+ushara%a0 and +odern Cor1orations +udaraba Documentary Credit 2ua/la Commercial Pa1ers &n#estment Su%u% Possession /3abd0 1, 2. 21 22 23 24 2 2" 2' 2* 2, 3. 31 32 33 34 3 3" 4oan /3ard0 Commodities in Organised +ar%ets 5inancial Pa1ers /Shares and $onds0 Concession Contracts 6gency Syndicated 5inancing Combination of Contracts &slamic &nsurance &ndices $an%ing Ser#ices 7thics and Sti1ulations for 5at)a +oneti8ation /Ta)arru90 !harar /:ncertainty0 Sti1ulations in 5inancial Transactions 6rbitration ;a9f &-arah on 4abour /&ndi#iduals0 <a%ah Contingent Obligations

Shari/a Standards (continued) 3' 3* 3, 4. 41 42 43 44 4 4" 4' 4* Credit 5acilities Online 5inancial Transactions =ahn /Pledge0 &n#estment 6ccounts and Profit Distribution =einsurance Dis1osal of =ights $an%ru1tcy 4i9uidity +anagement Ca1ital Protection /in &n#estment Products0 &n#estment 6gency Sti1ulations on &ncome and Profit /in 5inancial Transactions0 O1tions in 4egal Contracts

Accounting Statements , Standards S56 1 56S 1 56S 2 56S 3 56S 4 56S 56S " 56S ' 56S * 56S , 56S 1. 56S 11 56S 12 56S 13 56S 14 56S 1 56S 1" 56S 1' Continue next page Conce1tual 5rame)or% for 5inancial =e1orting by &slamic 5inancial &nstitutions !eneral Presentation and Disclosure in the 5inancial Statements of &slamic $an%s and 5inancial &nstitutions +urabaha and +urabaha to the Purchase Orderer +udaraba 5inancing +ushara%a 5inancing Disclosure of $ases for Profit 6llocation bet)een O)ners/ 79uity and &n#estment 6ccount (olders 79uity of &n#estment 6ccount (olders and Their 79ui#alent Salam and Parallel Salam &-arah and &-arah +untahia $ittamlee% <a%ah &stisna/a and Parallel &stisna/a Pro#isions and =eser#es !eneral Presentation and Disclosure in the 5inancial Statements of &slamic &nsurance Com1anies Disclosure of $ases for Determining and 6llocating Sur1lus or Deficit in &slamic &nsurance Com1anies &n#estment 5unds Pro#isions and =eser#es in &slamic &nsurance Com1anies 5oreign Currency Transactions and 5oreign O1erations &n#estments for =eal 7states

Accounting Statements , Standards (continued) 56S 1* 56S 1, 56S 2. 56S 21 56S 22 56S 23 56S 24 56S 2 S&A @ &inancial Accounting Statements &AS @ &inancial Accounting Standards Accounting 5uidance Aote 1 !uidance >ote on 5irst Time 6do1tion of 66O&5& 6ccounting Standards &slamic 5inancial Ser#ices Offered by Con#entional 5inancial &nstitutions Contributions in &slamic &nsurance Com1anies Deferred Payment Sale Disclosure on Transfer of 6ssets Segment =e1orting Consolidation &n#estments in 6ssociates &n#estments in Su%u%, Shares, and Similar &nstruments

Auditing Standards 1 2 3 4 Ob-ecti#es and Princi1les of 6uditing The 6uditor/s =e1ort Terms of 6udit 7ngagement Testing for Com1liance )ith Shari/a =ules and Princi1les by an 7?ternal 6uditor The 6uditor/s =es1onsibility to Consider 5raud and 7rror in an 6udit of 5inancial Statements

5o(ernance Standards 1 2 3 4 Shari/a Su1er#isory $oard@ 611ointment, Com1osition and =e1ort Shari/a =e#ie) &nternal Shari/a =e#ie) 6udit and !o#ernance Committee for &slamic 5inancial &nstitutions &nde1endence of Shari/a Su1er#isory $oard " ' 7thics Standards 1 2 Codes of 7thics for 6ccountants and 6uditors of &slamic 5inancial &nstitutions Codes of 7thics for the 7m1loyees of &slamic 5inancial &nstitutions Statement on !o#ernance Princi1les for &slamic 5inancial &nstitutions Cor1orate Social =es1onsibility Conduct and Disclosure for &slamic 5inancial &nstitutions

Appendi3 II ,ist of standards inc uded in standards deve opment programs for 6788 onwards

,ist of standards inc uded in the standards deve opment program 6788 onwards Accounting Standards $ Ae3 6onceptual &rame3ork 'or &inancial Reporting :to replace Statements o' &inancial Accounting # and !; issued in 20 * $ Re(ised B ne3 &inancial Accounting Standard :&AS; !1 In(estments in Sukuk, Shares, and Similar Instruments issued in 20 * $ Re(ised B ne3 &AS on In(estments in Real 7state exposure draft released in !an 20 2.

,ist of standards inc uded in the standards deve opment program 6788 onwards (contd) Accounting Standards (contd) $ Re(ised &AS 1 and 0 78uit) on In(estment Accountholders consultation note released in !an 20 2* $ Re(ised &AS #!, #<, #1 and #C relating to Taka'ul consultation note to "e released in 2# 20 2* $ Re(ised &AS # 5eneral 9resentation and >isclosures in &inancial Statements consultation note to "e released in 2# 20 2.

,ist of standards inc uded in the standards deve opment program 6788 onwards (contd) Accounting Standards (contd) $ Re(ised &AS ! +ura aha* $ Re(ised &AS < +udara a* $ Re(ised &AS 4 +usharaka* $ Re(ised &AS - I=arah* $ Re(ised &AS ## 9ro(isions and Reser(es* $ Re(ised &AS #4 In(estment &unds* $ Ae3 standard on accounting 'or Sukuk*

,ist of standards inc uded in the standards deve opment program 6788 onwards (contd) Accounting Standards (contd) $ Ae3 &AS on Interim Reporting* $ Ae3 &AS on &air ?alue* $ Ae3 &AS on Assets Deld 'or Sale* $ Ae3 &AS on Lia ilities* $ Ae3 &AS on Re(enue Recognition* $ Ae3 &AS on Related 9art) Transactions*

,ist of standards inc uded in the standards deve opment program 6788 onwards (contd) Auditing and Governance Standards $ Ae3 5o(ernance Standard :5S; on 5o(ernance 'or Shari/a Super(isor) Board :SSB; consultation note to "e issued in 2# 20 2* $ Amendment to Auditing Standard :AS; #, !, < and 4 relating to auditors/ opinion on Shari/a compliance* $ Ae3 5S on Relationship et3een Regulators, SSB and 74ternal Auditors*

,ist of standards inc uded in the standards deve opment program 6788 onwards (contd) Auditing and Governance Standards (contd)
$ $ Ae3 AS on materialit) in planning and per'orming an audit* Ae3 AS on audit e(idence regarding speci'ic 'inancial statement account alances and disclosures* Ae3 AS on anal)tical procedures* Ae3 AS on 8ualit) control 'or an audit o' 'inancial statements* Ae3 AS on modi'ications to the auditor/s opinion* Ae3 AS on auditor/s responsi ilit) regarding su se8uent e(ents*

$ $ $ $

,ist of standards inc uded in the standards deve opment program 6788 onwards (contd) Sharia Standards
$ Ae3 Shari/a Standards :SSs; on >isposal o' RightsE Bankruptc)E Li8uidit) +anagementE 6apital 9rotection :in In(estment 9roducts;E Agenc) In(estment 6ontractsE Stipulations on Income and 9ro'its :in &inancial Transactions;E %ptions in Legal 6ontracts issued in 20 * $ Ae3 SSs under de(elopment include those on 6ontracts Termination and 6ompensationE &iduciar) In(estment 6ontractsE 9romise and Bilateral 9romiseE 9uri'ication o' 9rohi ited IncomeE ReposE Risk +anagementE and Special 9urpose ?ehicles*

Appendi3 III Standards deve opment process

Standards deve opment process

Sharia #oard $ . timate authority on Sharia standards' $ Comprises eading Sharia scho ars representing a ma"or schoo s of thoughts' $ A so vets through other standards to ensure Sharia comp iance'

Accounting 9 Auditing Standards #oard $ . timate authority on accounting$ auditing$ ethics$ governance standards' $ Senior representatives of the industry'

Accounting standard committee Sharia standards committees Auditing 9 governance standard committee

Standards deve opment process (contd)

*re iminary study

Consu tation note

E3posure draft

2eview of standard

Issuance of standard

Fina standard

Standards deve opment process (contd)

8' *re iminary study $ On potentia new standard to be deve oped$ or e3isting standard to be reviewed based on suggestions from industry$ AAOIFI or its boards' $ 4o cover genera or broad issues re ating to the standards concerned' $ For discussion by standards boards 0i'e' Sharia #oard or Accounting and Auditing Standards #oard1 and their committees'

6' Consu tation note $ Gives an out ine on proposed ma"or points of a new standard$ or proposed ma"or changes to an e3isting standard' $ For discussion by standards committees and boards' $ Subse!uent y to be re eased to the industry for comments and suggestions$ and discussed at pub ic hearing meetings' $ Comments and suggestions from industry and pub ic hearing meetings to be considered when deve oping e3posure draft'

Standards deve opment process (contd)

;' E3posure draft $ 4o be prepared in the same format as a fina standard' $ For discussion by standards committees and boards' $ Subse!uent y to be re eased to the industry for comments and suggestions$ and discussed at pub ic hearing meetings' $ Comments and suggestions from industry and pub ic hearing meetings to be considered when deve oping fina standard'

:' Fina standard $ 4o be prepared for issuance as a standard for the industry' $ For discussion and approva by standards committees and boards' $ Once approved by standard boards$ standard is issued and considered binding 0ta)ing into account effective date$ if any$ of the standard1'

Standards deve opment process (contd)

=' Issuance of standard $ Announcement on approva of new or revised standard$ and issuance thereof$ is carried out through media and industry pub ication' $ 4he new or revised standard is a so inc uded in AAOIFI standards pub ications'

<' 2eview of standard $ A e3isting standards are sub"ect to review' $ 2eviews of some specific e3isting standards have been inc uded in current standards deve opment and review program' $ Other e3isting standards may be reviewed upon suggestions from the industry' $ 2eview of e3isting standards fo ow the same processes as deve opment of e3isting standards'

4han) 5ou
www'aaoifi'com