Every Shariah compliant company and company issuing Shariah compliant security shall be subject to external Shariah audit for every financial year which may be undertaken by the existing external auditors or an independent external Shariah auditor.
According to the Shariah Governance Regulations, 2018 issued by the Securities and Exchange Commission of Pakistan (SECP), for the purpose of these regulations, the provisions of sections 223 and 247 of the Companies Act, 2017, shall be followed with regard to external Shariah audit and the external Shariah auditor, respectively and the audit firm shall preferably have expertise in Islamic finance.
The scope of External Shariah Audit shall include an independent and objective assessment of compliance of operations with the Shariah. The External Shariah Auditor shall assess compliance of a Shariah compliant company or company issuing a Shariah compliant security, financial arrangements, contracts, and transactions with the Shariah principles in light of the rules, regulations and directives issued by the Commission from time to time; pronouncements of Shariah Advisory Board; Shariah Standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), as adopted by the Commission, if any.
The External Shariah Auditor shall assess compliance of a Shariah compliant company or company issuing a Shariah compliant security, financial arrangements, contracts, and transactions with the Shariah principles in light of the requirements of the applicable Islamic Financial Accounting Standards as notified by the Commission and approvals and rulings given by the Shariah Advisor of a Shariah compliant company or company issuing a Shariah compliant security are in line with the regulations and in accordance with the rulings of Shariah Advisory Board.
The External Shariah Auditor shall prepare a report for the Board of Directors giving their opinion on the status of Shariah compliance of the company; the risks associated with the Shariah non-compliance; the capacity and quality of the company's s risk management system to measure, manage and mitigate the Shariah non-compliance risks; the adequacy and effectiveness of the company's Shariah governance framework including the activities of the internal Shariah review and audit function and the design, operating effectiveness and documentation of the internal Shariah controls and the relevant processes and procedures.
The External Shariah Auditor shall prepare a report for the Board of Directors giving their opinion on the level of awareness and sensitivity of the management and the Board of Directors in addressing the Shariah risks; and any other issues deemed significant by the external auditors with respect to Shariah.
The SECP said that every Shariah compliant company or company issuing a Shariah compliant security shall strengthen its internal audit department either by appointing an Internal Shariah Audit resource having relevant qualification or expertise in Islamic banking and finance or train at least one of its employees in the internal audit department for the purpose of Internal Shariah Audit from a reputable training institute. The scope and methodology of internal Shariah Audit shall be reviewed and approved by the Board of Directors.
The internal Shariah Audit resource shall follow the same reporting norms, as are applicable on the internal auditor. The duties of the internal Shariah Auditor shall include the verification of transactions entered into are consistent with the pronouncements, rulings and guidelines of the Shariah Advisor, directives, rules and regulations issued by the Commission and the pronouncements of the Shariah Advisory Board; financing agreements entered into are Shariah compliant and are on the formats as approved by the Commission and all the related conditions are met; offering documents, investments and contracts have been reviewed by the Shariah Advisor; product structure, process flow and operations are duly vetted by the Shariah Advisor; process for purification of income has been carried out and non-Shariah compliant income has been transferred in charity account and distributed to approved charitable institutions.
The duties of the internal Shariah Auditor shall include the findings are shared with the management and Shariah Advisor in respect of all the above items including irregularities, inadequacy in risk management, governance and internal controls which are necessary to avoid non-Shariah compliant business transactions and investments in the shares and other
instruments are as per approved list of the Shariah compliant companies and securities. The Internal Shariah Auditor shall submit an internal Shariah Audit report annually to the Board of Directors. The Internal Shariah Auditor shall maintain liaison with the Shariah Advisor and may seek his guidance in ensuring Shariah compliance, the SECP added.
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