MURABAH, PROFIT, CURRENT DEPOSIT & RIA

Murabaha
◦ From Murabha auditor shell perform the following audit procedure
 Select a sample of transactions and obtain their respective agreements and obtained bank
statement for the transaction selected and trace the amount disbursed under murabaha from
these statements.
 Obtained and review the sample agreement prepared by Islamic financial institution and
approved by Shariah Supervisory Board for compliance with Islamic Shaiah rules
 Compare the level of Murabaha receiveables to previous year in order to ensure that figure is
materially correct.
 Agree the balance from the individual ledger account to the ageing analysis and vice versa.
 Obtain Murabaha receivables reconsoliation at the year and date and check subsequent
receipts of murabaha receivable in accordance with the respect underline contracts.
 Confirm the adequacy of specific and collective provision for impairment by reviewing
correspondence with customer and lawyers. Examine large balances individually and
compare them to Prior year balances.
 Review murahaba receivable confirmation for any lines make inquries of Management and review the
facility agreement disbursed and review board minutes for any evidence of receivables being sold.
Review confirmation receives from the lawyers. The auditor shell also obtained representation from
management in this regard.
a. Obtain external confirmation from third party from Murabaha receivables- this is a major procedure
usually achieved by direct contact with third parties.
b. A positive confirmation request is one in which the conforming party respond directly to the auditor
indicating with weather they agree or disagree with the information of request.The positive method is
generally preferable as it is designed to encourage definite replies from parties contracted.
a. A negative confirmation request is one in which the confirming party respond directly to the auditor
only if they disagree with the information included in the request. The negative confirmation provides
less persuasive evidence and shell only be used if the following are present.
I. The risk of material misstatement has been assessed as low.
II. The auditor has obtained sufficient appropriate audit evidence on the operating effectiveness of relevant
controls.
III. The population consists of a large number of small homogeneous account balances.
IV. A very low exception rate is expected
V. The auditor is not aware of incidence or condition that would cause customers to disregard the request.
Profit
◦ The following audit procedures are performing for profit.
◦ The most common procedure the auditor perform on prophet and is income analysis which is
verifying the income from Murabaha repayment schedule, Musharka profit schedule and
Ijarah rental schedule. The auditor perform this analysis on the basis that controls are effective
for process of calculation of Murabaharepayment, Musharka profit/ income andIjarayh rental
income which is the case in most large Islamic financial institution whereby the Islamic
financial institution has strong and Large core banking system to process 1000 transaction on a
daily basis. In such instances profit income and lease rental income or calculated by the
system based on the parameter that input the core banking system source’s code. Furthermore
it is expected within the Islamic financial institution of amortisation of fee income or reversal
of provision for impairment against Islamic Financing facilities.
◦ Income analysis is performed by obtaining the profit income from Islamic
financial institution disagregated by month and obtain the average Finance in
facility balances this aggregated by product. The profit income and average
financing facility balance is computed on a per month, per product basis.
These details are then compared to expectation set by the audit team based on
fast experiences, where applicable and industry average amongst numerous
other factors. Analysis of profit income is perform in a similar manner where
the auditor obtained profit income and average balance of various deposits and
financing related items which are used to assess the cost of fund.
◦ where the order team is unable to explain variances the obtain explanations
from and make inquiries of management in this regard. Auditor make clarify
variances for two financing agreements customer documentation and
correspondence, where and if, applicable. The auditor obtains Management
representation in this regard to confirm inquiries made of management that the
auditor could not verify the documentation.
◦ For income from Murabaha prepare monthly yield analysis compare with previous month of previous
year also ensured that the change is in line with LIBOR and the related outstanding balance.
◦ For income from non-trading investment determine that changes in the value of investments is properly
recorded in the equity income statement. Ensure that the gain on investment property is correctly
calculated and the market value used is sported by independent valuation.
◦ For gain on sale of available for sale investment for major re compute the gain on sales.Trace the value
of sales to supporting document. Checks mathematical accuracy of the calculation for investment
banking fee (other income).For placement/brokerage income, check rates from private placement
memorandum and
◦ Determine that disclosures have been made in accordance with the requirement of FAS 5 and the
applicable Islamic financial reporting standard.
Current Deposit
◦ Current deposits are mostly on the basis of Qard 49. The primary objective of auditor’s procedures will
therefore be to establish whether these deposits exist at the balance sheet date and have been completely
recorded and accurately reported.
I. For current account deposits ensure that these deposits are not subject to profit.
II. To verify that existence and rights and obligation the auditor shell circulate confirmations on sample bases to the
current account holders account. A confirmation may be positive or negative based on the risk assessment by the
auditor generally current deposit are less risky area and negative confirmation may sufficient. However a better
practice in this regard would be to stratify the entire population on the basis of amount and send a positive
confirmation to large depositors and depositers having smaller balances may be sent a negative information.
Contents of confirmation include account title account type and account balances. An auditor shall also perform
substantive analytical procedure of a deposit.For this purpose at trend analysis of the current deposits will be carried
out and any unusual movement in deposits need to be inquired from the management the auditor corporate the
explanation given by the management with the deposited trend in the industry.
RIA
◦ RIA( also known as balance sheet equity of investment account holders) represent funds received by the
financial institution on the basis of Mudaraba to be invested in specified product as directed by the
investment account holders. The asset funded by these funds are managed in the fiduciary capacity by the
Islamic financial institution against which the Islam financial institution earns a Mudarib share. However
these asset are not included in the statement of financial position as the Islam financial institution does
not have the right to use our sale them except within the condition laid down in the underlying Mudaraba
contract. The primary objective of the auditor procedure will therefore be to establish whether these
payables exist at the balance sheet date and have been completely recorded and accurately reported.
◦ Obtain an examine reconcciliation of significant investment position to custodian statement or other
relevant documents
◦ Inspect the relevant contracts and check the classification between RIA and URIA is correct . Also check
that relevant funds specified for RIA and URIA are invested in specific projects.
◦ In case of RIA where those deposits can only be used for specific projects. When any distribution of
profit is made, verified that the criteria for distribution of profit is met .
◦ Perform analytical review by comparing the balances with prior year and investigate any significant
movements.
◦ Confirm the existence of RIA as at balance sheet date by reviewing its underlying contracts and vouch
the amount per contract to the Islam financial institution underlying records.
◦ Compare expenses payable to expense charge in the statement of comprehensive income prior year
charge and payable balance and to expectations .where differences arise compared to expectation ,the
auditor must explain variance through inquiries of management .
◦ inquire of management weather they are any outstanding claims or obligations arising before the year
and the ensure these are adequately provided for .
◦ Review of board minutes and lawyers' confirmation for any evidence of non-current liabilities which
have not been recorded . The auditor must also obtained representation from the management in this
regard.
Thank you