Malaysia Islamic Banks – Guidelines on Appointment of External Auditors – An Overview and Summary of Requirements

• By: Staff Editor
• Date: April 11, 2013

• Islamic banks must ensure auditor to be appointed meets qualifying criteria.
• Islamic banks must obtain and verify information supporting their assessment of the auditor.
• The board may rely on attestations provided by the auditor.
• Auditor appointed under section 17 of the IBA must:

1. Not be disqualified.
2. Have adequate resources and the necessary skills, knowledge and appropriate experience to perform their duties.
3. Not have relationships with, or interests in, the Islamic banks or any other entity that are likely to impair their objectivity or independence.
4. Not have any record of disciplinary actions taken against them for unprofessional conduct by the Malaysian Institute of Accountants (MIA).
5. Not have served as an engagement partner for a continuous period of more than five years with the same Islamic bank.

1. Non-approval by company auditor.
2. Interest in that bank, including an interest in the shares of the bank.
3. Being director, controller or officer of that bank.
4. Being indebted to that bank or to any related corporation of that bank.
5. Being a partner, employer or employee of a director, controller, or officer, of that bank.
6. Oneself or spouse being a shareholder of a corporation, whose employee is an officer of that bank.
7. Being responsible, or is the partner, employer, or employee of a person responsible, for the keeping of the register of members or the register of holders of debentures of that bank
8. Being convicted of any offence under IBA or the Companies Act 1965, or of any offence under any other written law involving fraud or dishonesty.

• A firm shall be appointed as an auditor of an Islamic bank if:

1. All partners of the firm resident in Malaysia are approved company auditors.
2. If the firm is not registered, a return showing the full names and addresses of all the partners of the firm has been lodged with the Bank.
3. No partner is disqualified from acting as the auditor of the Islamic bank.

• The board should carefully review the terms of audit engagements prior to confirming an engagement.
• The terms of audit engagements should clearly address:

1. Objective of the audit.
2. Scope of the audit engagement.
3. Agreement on the audit plan.
4. Responsibilities of the engagement and concurring partners.
5. Reports to be prepared by the auditor.
6. Timing and fees.
7. Use of experts in certain aspects of the audit.
8. Other significant arrangements in relation to the audit.

• The scope of the audit engagement should take into account the Islamic bank’s financial reporting risk areas.
• The audit program and audit plan must at least include specific procedures to test the Islamic bank’s internal controls over financial reporting in relation to the loan and investment portfolios.
• The audit scope and plan should address any other area which presents a significant financial reporting risk to the Islamic bank such as:
  • business combinations
  • significant changes in operating structures, processes or key management personnel and so on
• As an extension of the financial statement audit, it should include recommendations to management for improving internal controls to ensure the fair presentation of financial statements.

• The engagement partner is principally responsible for the performance of the audit engagement and the auditors’ report issued on behalf of the audit firm.
• The terms of the audit engagement should clearly state the Islamic bank’s expectations of the engagement partner. This should include an explicit expectation that the engagement partner will:

1. Effectively direct, supervise and perform the audit in compliance with professional standards and the audit firm’s internal quality control procedures throughout the audit engagement;
2. Ensure that the engagement team collectively has the appropriate capabilities, competence and time to devote to the audit of the Islamic bank.

• The board should ensure that a concurring partner is identified for each audit.
• The terms of the audit engagement should establish an expectation of the concurring partner to form an objective assessment of :-

1. Significant risks identified by the engagement team during the audit and the appropriateness of the team’s responses to those risks.
2. Whether the audit evidence obtained is sufficient to support the significant judgments made and conclusions reached.
3. Whether differences of opinion with management or other contentious matters were appropriately dealt with.
4. Matters which should be communicated to management and the Bank or other regulatory authority.

• The Board should be satisfied that the concurring partner is suitably qualified and commits the necessary time to carry out the required review of audit documentation.

• The terms of engagement should clearly establish the Bank’s expectation of reliance on the auditors’ report for its supervisory purposes.
• The auditor should perform all necessary procedures to comply with the Malaysian Approved Standards on Auditing.
• It is inappropriate for Islamic banks to include any provisions in the terms of the audit engagement that limit the auditor’s responsibility with respect to audit opinions expressed.

• The board should ensure that audit fees are appropriate with the scope of the audit and accountability assumed by auditors.
• The audit fees should take into account the required skills, knowledge and the allocation of time and resources needed to complete the audit assignment.
• The audit fees paid to the auditor should also not impair, either in fact or appearance, the auditor’s professionalism, judgment or independence.

• The auditor can use the work of an external expert if specialized skill or expertise is required to support the audit.
• The use of the expert should not diminish the auditor’s responsibility for audit reports issued or opinions expressed.

• Islamic banks should submit an application to the Bank for approval to appoint an auditor for each financial year no later than two months before the Islamic bank’s annual general meeting of the preceding financial year.
• An application to the BNM should be made using the form enclosed in Attachment I in the guidelines along with the complete information required. The application should be addressed to Pengarah, Jabatan Penyeliaan Perbankan.
• An application should not be submitted to the Bank unless the Board is reasonably satisfied that the requirements and expectations of this circular are met.
• If during the course of an audit, the auditor no longer fulfils any of the qualifying criteria or terms of the audit engagement, the Islamic bank should immediately report that fact to the BNM.

Read the Malaysian Guidelines for Islamic Banks Appointing External Auditors in full here.