Mohammad Shahid1, Ahmad Khaliq2, Rusni Hassan3 Abstract. Sharia Auditing in Islamic Financial Institutions (IFIs) poses several challenges, for example, lack of standardization, harmonization in Sharia standards, and incompetent Sharia auditors. Addressing these challenges is critical to ensuring the sustainability and growth of IFIs in Malaysia. This study aims to discuss the problems and challenges of Sharia auditing in IFIs. This study used a qualitative method by distributing questionnaires to 40 practitioners from several IFIs engaged in Islamic audit services through a purposive sampling procedure. The research findings show that the awareness of the Sharia audit is satisfactory in the absence of a separate audit report. In addition, Sharia audit should be integrated into college accounting; comprehensive Sharia audit framework and standards; regulatory/professional bodies; and professional certification in Sharia audit. Keywords: Sharia Audit, Sharia Audit Challenges, Islamic Financial Institutions, Malaysia Abstrak. Audit Syariah di Lembaga Keuangan Islam (LKI) menimbulkan beberapa tantangan, misalnya kurangnya standarisasi, harmonisasi dalam standar Syariah dan auditor Syariah yang tidak kompeten. Mengatasi tantangan ini sangat penting untuk memastikan keberlanjutan dan pertumbuhan LKI di Malaysia. Penelitian ini bertujuan untuk membahas masalah dan tantangan audit syariah di IFI. Penelitian ini menggunakan metode kualitatif dengan menyebar kuesioner kepada 40 praktisi dari beberapa LKI yang bergerak di bidang jasa audit Syariah melalui prosedur purposive sampling. Temuan penelitian menunjukkan bahwa kesadaran audit Syariah cukup memuaskan dengan tidak adanya laporan audit yang terpisah. Selain itu, audit Syariah harus diintegrasikan ke dalam akuntansi perguruan tinggi; kerangka dan standar audit syariah yang komprehensif; badan pengatur/profesional; dan sertifikasi profesi dalam audit Syariah. Kata kunci: Audit Syariah, Tantangan Audit Syariah, Lembaga Keuangan Syariah, Malaysia Sharia Audit Challenges in Malaysian Islamic Financial Institutions Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Volume 15 (1), Jan-Jun 2023 P-ISSN: 2087-135X; E-ISSN: 2407-8654 Page 41 - 58 1,3Institute of Islamic Banking and Finance (IIiBF) International Islamic University Malaysia 2Department of Finance, International Islamic University Malaysia E-mail: 1shahidazminadwi@gmail, 2ahmadkhaliq@iium.edu.my, 3hrusni@iium.edu.my Author: Mohammad Shahid Received: 11 April 2023 Accepted: 20 June 2023 Published: 30 June 2023 42 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 15 (1), Jan-Jun 2023 Introduction The ascent of IFIs has taken an exceptional measurement for development and improvement for hardly any decades. The market's growth elements coordinate speculation toward the colossal development openings in the promising Islamic segments. However, Islamic finances have increased tremendously since its emergence in the 1970s. In December 2019, global Islamic financial and managed assets reached $2.88 trillion, with an annual growth of 14%. In over 80 countries worldwide, there are over 1500 IFIs (IFDI, 2020). As for Malaysia, Islamic banking assets have reached USD 254 billion, with total deposits of Islamic banks now accounting for 38.0% of total bank sector deposits in December (BNM, 2019). This exceptional improvement in the Islamic financial industry was activated by the solid demand for Sharia banking administrations to ensure all the exchanges utilized by Muslims and non-Muslims comply with Sharia. Subsequently, a legitimate check and equalization framework in the industry is essential to shield the tremendous amount of assets under its administration. Hassan (2019) highlighted issues concerning the general competence of each Member of the Sharia Board, where basic banking and financial skills seem to be missing. The professional members of the Sharia Board who lack adequate expertise could adversely affect Sharia governance and impede public trust. The competencies of members of the Sharia Board are, thus, essential in ensuring a successful IFIs Sharia governance process. It was also illustrated that the members of the Sharia Boards should strengthen their capacity and willingness to ensure the quality of Sharia (Omar, 2019). Similarly, a stand-alone Sharia audit framework must be established to cover the growing number of IFIs in Malaysia. It was further emphasized that, except for Sharia knowledge, relevant qualifications are needed for this function (Isa et al., 2020). Salleh et al. (2019) stated that Sharia audit practices have a performance gap that leads to low expectations and inadequate performance. He is of the view that the improvement of Sharia auditors' efficiency performance gap in the Sharia audit practices depends on tackling the issue of standards and low results. He contended that the non- existent standards caused insufficient legal and professional complications in Sharia Auditors' roles and responsibilities. Furthermore, the development of the Sharia audit in Malaysia is still far from anticipated. The problem is not only the obstacle of Islamic banking but also, more importantly, that the regulator cannot create rules that allow the administration of Islamic banks to perform the proper Sharia audit. http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 Mohammad Shahid. Sharia Audit Challenges in Malaysian Islamic Financial Institutions 43 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Nevertheless, some Islamic banks initially developed an internal Sharia. Division to perform Sharia audits to improve Sharia audit quality (Muhammad, 2018). There is a need to carry out an effective internal Sharia audit, which urges the relevant regulatory authorities to establish solid and sound guidelines and frameworks to ensure that the IFIs’ audit is executed appropriately. A practical audit function is crucial to support the tracking and improving credibility and transparency of the Islamic financial sector by the regulators (Laili et al., 2019). The following literature depicts that Sharia audit has not been taken seriously in Malaysian IFIs in terms of auditors’ competency independence and has not had an independent Sharia audit framework. Further, Sharia audit transparency is questionable due to the absence of external audit procedures and conflict of interest in compensating auditors through IFIs. However, in the past, the state would have paid them. In conclusion, conducting Sharia audits create several difficulties for IFIs, which can impede their capacity to operate effectively and sustainably. The lack of standardization and harmonization in Sharia standards and practices is one of the highest obstacles for IFIs in Malaysia conducting Sharia audits. Sharia compliance requirements may vary based on the interpretation of Sharia and its underlying principles, leading to inconsistencies and discrepancies in Sharia audits. This can make it more challenging for IFIs to ensure compliance and increase the risk of legal and reputational repercussions. A shortage of qualified Sharia auditors is an additional obstacle in Sharia audits, which can result in delays and inconsistencies. This can also increase the cost of Sharia audits for IFIs, which can have a negative effect on their financial performance. Sharia audit necessitates an in-depth knowledge of Sharia and its principles, as well as financial management practices, making it a highly specialized field. In addition, the lack of integration between Sharia auditors and the internal audit functions of IFIs can result in redundant efforts and inefficiencies. Addressing these challenges is necessary to ensure the sustainability and growth of IFIs in Malaysia and preserve their reputations as credible and trustworthy financial institutions within the Islamic finance industry. Interestingly BNM Sharia Governance Framework (SGF 2019) amendment may help to bridge the existing gap in Sharia auditing. This study aims to discuss Sharia audit issues and challenges faced by IFIs, such as the absence of a Sharia audit framework, incompetency, and independency of Sharia auditors. http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 44 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 15 (1), Jan-Jun 2023 Literature Review Sharia Audit Challenges Sharia audit in IFIs has been the subject of scholarly discussion for many years. Sharia audit is the process of examining the conformity of IFIs with Sharia principles, which is necessary for the growth and development of Islamic finance. The role of Sharia audit in ensuring compliance with Sharia principles is a central issue in the academic debate on Sharia audit within IFIs. Some scholars argue that the Sharia audit is an indispensable instrument for ensuring that IFIs adhere to Sharia principles. They believe that the Sharia audit helps prevent Sharia non-compliance risks, which could potentially harm the reputation of IFIs and the industry as a whole. Some scholars, on the other hand, argue that the effectiveness of Sharia audits in ensuring compliance with Sharia principles is limited. They say that the Sharia auditing process can be subjective because different Sharia scholars may interpret Sharia principles differently. In addition, they contend that the current Sharia audit framework is not standardized and that there is a lack of uniformity in the Sharia audit process among IFIs. In the academic debate on Sharia audit in IFIs, the independence of Sharia auditors is an additional topic of discussion. Some scholars argue that Sharia auditors should be independent of the management of IFIs to ensure objectivity and prevent conflicts of interest. They believe that independent Sharia auditors are better able to identify potential Sharia non-compliance risks and provide more reliable opinions on the Sharia compliance of IFIs. Other scholars, however, argue that the independency of Sharia auditors may not be practical, as it could result in a shortage of qualified Sharia auditors and make Sharia audits excessively expensive. They propose that the effectiveness of Sharia audit can be improved through the creation of Sharia audit standards, which can help to standardize the Sharia audit process and ensure the quality of Sharia audit opinions. In conclusion, the academic discussion on Sharia audit in IFIs continues. However, that adherence to Sharia principles in Sharia audit is an indispensable tool for ensuring IFIs’ efficacy. In addition, there are there significant obstacles that still exist in IFIs, an independent Sharia audit legal framework, Sharia auditor's independence, and competency as follows. Absence of Sharia Audit Legal Framework Given the increasing demand for Islamic banking and finance, the Sharia audit should be focused more on such a way to ensure IFIs, under the guidelines http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 Mohammad Shahid. Sharia Audit Challenges in Malaysian Islamic Financial Institutions 45 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 of Sharia maintain their accounting and financial reporting. Hence, a Sharia audit standardized framework is vital, as well as competent Sharia auditors. Furthermore, increasingly skilled and experienced Sharia auditors will better deal with the issues of the Sharia audit and help to develop sound management in the IFIs. Thus, regulators, the government, Sharia scholars, and the Muslim community should make an all-out effort to advance this area (Karim & Shetu, 2020). Khalid et al. (2020) emphasize that the regulators should provide a comprehensive Sharia audit framework for the effective governance of the internal Sharia audit. Similarly, Isa et al. (2020) also stress that a different Sharia audit framework is needed to cover the growing number of IFIs in Malaysia. It is also revealed that with Sharia knowledge, relevant qualifications are also required for this function. Likewise, Puad et al. (2020) highlighted that the current Sharia audit needs improvement, especially in scope and process. However, scholars have expressed different views on the Sharia audit method. Hence, the regulatory function is essential in shaping the Sharia audit process, as most scholars believe that the current norm available is inadequate to direct the Sharia auditors in their position. In addition, Sharia audit activities in Malaysian Islamic banks (IBs) are not appropriately conducted due to the lack of Sharia audit process and regulations and experts to carry out this task (Ghani & Rahman, 2015; Mohd Ali et al., 2018). IFIs are still trying to set up an effective audit process and system for Sharia audits. IFIs rely on a conventional audit system for audit functions that are inadequate in scope despite the requirement to achieve Sharia objectives (Ali & Kasim, 2019). Ghani et al. (2015) also said Malaysian IBs apply conventional auditing frames while conducting the Sharia audit. However, the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) do not comply with the Sharia provisions. IBs added conventional bank auditing procedures tools to include Sharia compliance elements. In the traditional audit, an audit plan and evaluation of risk-based problems, an audit of contracts, policy, and procedure, and an analysis of the suitability of internal control are established by the Institute of Internal Auditors (IIA). Although Islamic banks need an auditing process to include a peculiar Sharia audit compliance for Islamic banking operations (SGF, 2010, Principle 7; IFSB, 2009, pp. 3; Hassan & Haridan, 2019). Due to the non-availability of a particular Sharia audit framework, the Sharia audit mechanism is repeated by the conventional system. Nonetheless, takaful operators prefer to concentrate restrictively on the audit, while the Sharia http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 46 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 15 (1), Jan-Jun 2023 audit should have a broader reach. Most of the Takaful operators in Malaysia are now undertaking a joint audit. The Sharia audit is not conducted properly, provided that the scope of the Sharia audit is not set as expected. As they deal primarily with organizational matters and the application of the Sharia is only workable when Sharia issues arise and when internal controls within the organizations concerned are not comprehensively handled. Another problem is the credibility of the Sharia auditor. To have a qualified Sharia auditor, the Sharia auditor must have Sharia and accounting / financial expertise. An auditor could not be aware of the risks associated with Sharia except with Sharia knowledge. In conducting an audit, the possibility of identifying and assessing non-compliant Sharia risk is given. Since the auditor has no audit capacity, he could not perform the function properly without an accounting, financial, and Sharia context (Puad et al., 2020). On the other hand, Kasim et al. (2013) explored the practitioners' perspectives on Sharia audit issues and challenges. The study has three significant findings: (1) Practitioners mostly adhere to conventional norms, while they equate the norms of AAOIFI. (2) Sharia and accounting/auditing skills are limited to auditors. (3) Self-examination practices challenge their integrity. Arwani (2018) underlined many issues regarding Sharia adherence audits in the IFIs. Firstly, the Sharia standards for audit, despite the AAOIFI's efforts, concentrate on dollars and cents rather than a more comprehensive definition of Sharia auditing concerning the Sharia goal. Secondly, regarding the 'real' owner, who can perform the audit best? The Sharia audit feature is delegated to a third-party auditor, Sharia Board, Internal Sharia inspection, and Audit Governance Committee based on the AAOIFI model. Thirdly, the independence of the Sharia Board as well as the responsibility for the issuing and approval of the product to be marketed and yet also the inspection/audit of the IFIs concerned by Sharia. Nevertheless, Takaful operators often strive to comply with all available requirements and regulations, although the audit procedures for Sharia are not specified. However, there are issues with Sharia risk assessment. Hence, Sharia Auditors are required to have knowledge of Sharia or to have an active involvement with the Sharia Department and Committee. In addition, the procedure does not evaluate risks accurately and participates in the Sharia Committee reporting and tracking processes. Failure to consistently follow the Sharia conformity report may lead to inconsistencies in its decisions. Therefore, a clear Sharia audit framework is mandatory to strengthen current practices and make them more coherent (Puad et al., 2020). However, it is featured http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 Mohammad Shahid. Sharia Audit Challenges in Malaysian Islamic Financial Institutions 47 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 that the development of the Sharia audit in Malaysia is still far from anticipated. The problem is not just the issue of Islamic banks but, more importantly, the regulator's failure to establish rules that can allow the government of Islamic banks to carry out proper Sharia audits. Some Islamic banks initially developed a Sharia internal division to conduct Sharia audits to increase Sharia audit quality (Muhammad, 2018). The necessity of an effective internal Sharia audit also gives the relevant regulators the urgency to establish solid and sound guidelines and frameworks for the IFIs to implement the Sharia audit correctly. An influential role in monitoring and effectively increasing the credibility and transparency of the Islamic financial industry is essential to help the Islamic financial sector (Laili et al., 2019). Based on this academic debate, Sharia audit practices have a performance gap that leads to 'deficient expectations' and 'deficient performance' It is due to the lack of Sharia audit standards, non-availability of standards arise from insufficient legal and professional standards on Sharia Auditors' roles and responsibilities. To improve Sharia auditors' efficiency, the 'performance gap' in Sharia audit practices must be tackled timely (Salleh et al., 2019). Hence, to strengthen the structure of Sharia governance and Sharia compliance in Islamic banks, understanding the existing functions of the Sharia audit within the Islamic banking industry is essential (Isa et al., 2020). IFIs can easily comply with the rules and procedures that the Sharia target certainly accomplishes added value. Thus, IFIs must do their job concerning the Sharia Principle. Further, Sharia audit functions Should be designed and performed correctly in IFIs by a comprehensive, established, and well-functioning Sharia control system to ensure the preservation of Sharia. Sharia Auditors’ Incompetency As for the incompetency of Sharia auditors, Ali & Kasim (2019) stressed that only 5.9 percent of Sharia auditors those who are trained in both Sharia and accounting. Bosi & Joy (2017) are concerned that incompetent auditors in Sharia and accounting may have a negative effect on the growth of the Islamic Financial Industry. Furthermore, Suraya et al. (2018) explored that the majority of IFIs’ Sharia auditors are inexperienced and do not have technical or academic qualifications in banking or Sharia. In the same vein, there is an incongruency of personal expertise and experiences, as most auditors are qualified either in accounting or Sharia (Ali & Kasim, 2019; Mohd Ali et al., 2018; Or Aishah Mohd Ali et al., 2015). Also, most of the auditors in the industry even do not have any qualification degree http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 48 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 15 (1), Jan-Jun 2023 either in Sharia or in accounting. Further, the number of accounting backgrounds is highest than those having Sharia qualifications (Arwani, 2018; Shafii et al., 2014; Ahmad & Al-Aidaros, 2015). A review by Haridan et al. (2018) highlighted issues concerning the general competence of each Member of the Sharia Board, where basic banking and financial skills seem to be missing. The incompetent professional members of the Sharia Board who lack adequate expertise may adversely affect Sharia governance and hinder public trust. The competencies of Sharia Board members are crucial in ensuring a successful IFIs Sharia governance process. The research suggests that members of the Sharia Board should strengthen their capacity and willingness to provide Sharia quality. Shafii et al. (2013) recommend that the qualifications of Sharia auditors should be determined at the institutional level by the IFIs because their competence quality is concerned. The Sharia auditors must incorporate the experience of accounting and Sharia. The attachment of the Sharia audit feature to the internal audit department does not challenge the issue of independence, as Sharia audit results are submitted to the Islamic Bank audit committee. So, to conduct the Sharia audit efficiently, internal auditors may invite the Sharia team to take part in the internal Sharia audit team. Internal Sharia auditors with IFIs auditing experience must have the Sharia qualifications offered by Bank Negara Malaysia-approved institutions. Najeeb et al. (2014) are concerned that OIC countries will likely lose substantial economic benefits by continuing to import accounting credentials from the West and, thus, losing significant foreign currency reserves in payment outflows. Their study proposed that Malaysia may take the initiative to create an Association of Chartered Sharia Accountants and Auditors (ACSAA), an accountancy body that offers holistic Sharia auditing services and Sharia accounting and advisory services, who are professionally qualified and can serve as auditors. Members of this organization can be known worldwide for their outstanding Sharia-compliant accounting and audit services and could export students worldwide. There is a Malaysian High Commission. This body needs comprehensive training for its members and students in international accounting and auditing principles (such as GAAP and IFRS), Islamic accounting and the related principles (AAOIFI standards principles, IFSB guidelines, etc.), and transactional regulations pertinent to Sharia (Usul Fiqh, Fiqh al-Muamalat, Islamic contract law). http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 Mohammad Shahid. Sharia Audit Challenges in Malaysian Islamic Financial Institutions 49 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Sharia Auditors’ Independence Isa et al. (2020) highlighted that the Sharia audit should enhance its independence by providing approved functional reports and autonomy, as stated in the internal audit charter. That would be critical because it would influence the extent of Sharia auditors' authority and independency in conducting audits and reporting on audit results. In addition, IFIs also must evaluate the need for an internal auditing unit to be established and funded as part of their employee's internal training platform. Furthermore, IFIs also resolve conflicts of interest in a professional industry; it is noticed that in the past time that the state-federal system paid auditors because it is commonly hard to criticize and reform while he is getting salaries from those institutions (Suraya et al., 2018; Bosi & Joy, 2017). Rahman et al. (2018) identified four internal processes of Sharia audit: preparation, execution, reporting, and follow-up. It can be argued that the audit phase of internal Sharia audit activities is close to the procedure and methodology of the operational audit. The differences are ascertained as goals and types of risk. The studied Banks’ internal Sharia auditing feature applies RBIA and COSO. Three key interrelated components of RBIA include the criticality of Sharia risk exposure, consistency or adequacy of controls and reducing risk in place, as well as Sharia risk management in minimizing possible losses. The auditors had been able to conduct a thorough and successful audit review on all three elements as more emphasis was being put on high-risk areas. A comprehensive audit that covers the end-to-end audit process is also relevant. Likewise, the Sharia Audit feature should look at research that goes beyond reliable authorities' written and defined requirements, such as the achievement of Maqasid al-Sharia (Higher Sharia objective). Notably, compared to operational audit practice, audit objectives and assessed risks differ. Decisions on Sharia would be made based on deliberations by SC, the bank's highest Sharia authority. This matters for SC's independence and reputation, as stakeholders will rely on their Sharia compliance report for decision-making. Similarly, Haridan et al. (2018) stressed evidence that members of the Sharia Board with less technical expertise appear to delegate their work to the respective IFIs internal officers. Typically, internal officials will conduct the evaluation and send the findings for approval to the Sharia Board. Hence, it seems that the decisions of the Sharia Board are taken without due diligence because they relied heavily on internal officers' suggestions. It appears that compliance http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 50 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 15 (1), Jan-Jun 2023 of Sharia audit with Sharia auditing standards, the training and competencies of Sharia auditors, and their independence is still problematic and questionable. Consequently, this calls for urgent attention should be taken as it may adversely affect stakeholders’ trust in the IFIs’ operations and activities concerning Sharia compliance (Omar, 2019). Methods This study is qualitative, whereby a questionnaire survey data collection is applied. There were five sections in the self-developed instrument. Section A contains ten (10) items to examine awareness of Sharia audits in IFIs in Malaysia. Sections B to C included the Sharia audit challenge (10 items), and Industry Experts' Recommendations on Sharia Audit (6 items). The respondents were required to indicate the relative importance of all items in Sections A to C on a four-point Likert scale (1: Strongly Disagree; 2: Disagree; 3: Agree; 4: Strongly Agree). The questionnaires were developed based on previous studies and the SGF 2010. Several practitioners and academics have pre-tested the questionnaire for the relevance of the items as subject-matter experts. In the meantime, in this study, practitioners are directly referred to as the SGF 2010 control functions. Sharia control functions are included under SGF (2010): Sharia audit, review, risk management, and research. The purpose of this research was split into four sections: the Sharia department, Audit Department, the Risk department, and Compliance Department, which are involved directly in the Sharia audit function. They are the most relevant people as they can reflect the reality of working practices in their everyday work. The words were not ambiguous in the items and related to existing methods. The internal consistency of the items was assessed, and the findings demonstrated that all items met Cronbach's alpha value of 0.7, as Nunnally (1978) suggested. Hence it was also above 0.6, which is a commonly accepted value in exploratory studies (Litwin, & Fink, 2003). Precisely, the internal consistency of the items is – Awareness of Sharia Audit – 0.719, Sharia audit Challenges – 0.623, and Industry Experts' Recommendation on Sharia Audit Practices – 0.78. The questionnaires were dispersed to four departments: audit, Sharia, Compliance, and Risk. The respondents (practitioners) have been selected because they represent individuals who have been involved in day-to-day operations and activities in the control domain of Sharia that fit the scope of this study. A total of 40 questionnaires http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 Mohammad Shahid. Sharia Audit Challenges in Malaysian Islamic Financial Institutions 51 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 were distributed, and 23 questionnaires were returned. The Respondents’ profiles are stipulated in Table 1. (Table 1). Table 1: Response Rate Questionnaire distribution Total Distributed 40 Received (23) Incomplete (00) Total usable responses 23 Response rate 57.5% This section presents the demographic variables of the respondents. Table 2 shows the summary of the respondents’ profiles. It begins with the gender; the result indicates that 14 male (60.87%) respondents have higher participation than their female (9) (39.13%) counterparts in the study. The findings of the age category show that 13 respondents (56.52%) are within the age of 30 -40 years and were the majority, followed by 5 (21.74%) aged below 30. The following category variable is the ‘highest qualification’. The findings revealed that nine respondents (39.13%) had a bachelor’s degree while the 12 respondents (52.17%) had a master’s degree, and the remaining respondents 2 (.8.70) had a Ph.D. degree. Another category is ‘Education Background’. The findings depict that nine respondents (39.13%) have a Sharia qualification, and four (17.39%) are from accounting qualifications. Whereas 5 are finance and two are economics qualified, respectively. Three respondents are from other backgrounds. It indicates that the Sharia background dominates practice. The following variable is the ‘work experience’ of the respondents. It was found that three respondents (13.04) had more than ten years of work experience and were the majority, followed by the nine respondents (39.13%) having 5- 10 years of work experience, the least were seven respondents (47.83%) are having 1-5 years work experience. The findings demonstrate that most Sharia audit practitioners have satisfactory work experience. Following is ‘Organisational Affiliation.’ The results show that 16 respondents (69.57%) are from Islamic Banking and were the majority, followed by seven respondents (30.43%) and the least respondents from Insurance/Takaful organizations. The results show that respondents are dominantly found in Islamic banking organizations. The last but not the last category is the ‘designation’ of the respondents who participated in the study. The outcomes demonstrate http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 52 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 15 (1), Jan-Jun 2023 that ten respondents were from Sharia Department (43.48%), subsequent eight respondents (34.78%) were from audit departments, next is 2 -2 related to Compliance and risk (8.70%) Department and one was from other departments (4.35). The findings reveal that most of the respondents are from the Sharia department. Table 2: Profile of Respondents Variables Frequency Percentage Gender: Male 14 60.87% Female 9 39.13% Total 23 100.0 Age: Below 30 5 21.74% 30 to 40 13 56.52% 41 to 50 5 21.74% Total 23 100.0 Highest Qualification Degree Bachelor 9 39.13% Masters 12 52.17 PhD 2 8.70% Total 23 100.0 Education Background Sharia 9 39.13% Accounting 4 17.39% Finance 5 21.74% Economics 2 8.70% Others 3 13.04% Total 23 100.0 How long have you been providing Sharia audit or services related to Sharia audit? 1-5 Years 11 47.83% 5 to 10 9 39.13% More than 10 Years 3 13.04 Total 23 100.0 http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 Mohammad Shahid. Sharia Audit Challenges in Malaysian Islamic Financial Institutions 53 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Results and Discussions Awareness of Sharia Audit As for the awareness of the Sharia audit, the survey findings revealed that understanding of the Sharia audit in Malaysia is satisfactory; the educational program and unique training program contributed substantially to this awareness, as 80% of the respondents are aware of the Sharia audit through these means. The findings are in line with the study of Isa et al. (2020), which discovered the level of awareness of Sharia audit is standard among Sharia scholars. In contrast, it is at a rudimentary level among the practitioners in Malaysia. These new findings are perhaps because the discipline of Sharia audit has received much attention from scholars, academicians, professionals, and other stakeholders operating within the framework of Islamic finance. Similarly, auditors are expected to respond to this new development, as they are equally likely to build up their expertise and competence in this field, eventually improving their professionalism in the current practices accordingly. Regarding the timing, the findings show that the majority of the respondents support that the Sharia audit should be conducted Quarterly. Competent professionals should conduct Sharia audits and have a degree in Sharia and accounting or at least a professional qualification as part of the competency requirements. To preserve public trust and assurance, Sharia auditors should discharge their duties diligently. It is also required for them to have a necessary qualification. About the experience, findings encapsulate that Sharia auditors’ experience is good. In response to the question of knowing the Sharia audit concept, most practitioners gained through Job training. Besides this, the question “Who should perform the Sharia audit” majority opines that internal auditors should perform it. Following the answer to the question “Who should appoint Sharia auditors for IFIs” most of the practitioners favored the Sharia Advisory Council (SAC) of the Central Bank. In a nutshell, the overall findings of the ‘Awareness on Sharia Audit’ are satisfactory. However, the study unveiled that the practice must be optimized to portray the Sharia audit accurately. Challenges Associated with Sharia Audit The survey discovered that there are various challenges linked with the Sharia audit. The pressing among them are competent and well-trained personnel to execute Sharia audit functions. The findings indicate that the Sharia audit practice in Malaysia is overwhelmed by a lack of competency, expertise, and http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 54 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 15 (1), Jan-Jun 2023 proper qualifications in Sharia. This finding is congruent with the studies by Isa et al. (2020) and Karim & Shetu (2020), and their research demonstrate that the number of competent and expert Sharia auditors in IFIs needs to be fulfilled. Looking into the rapid growth of IFIs across the globe, and Malaysia as the major hub of IFIs, there is no doubt that the need for competent Sharia auditors needs the proper attention of the various stakeholders. In addition, the findings disclosed that the absence of an independent Sharia audit framework as well as particular standards and guidance are challenges weakening Sharia audit practices, for Sharia audit either from the external or internal body and the only BNM incomplete daft being available so far, is lacking to address the issue of Sharia audit comprehensively. The findings align with the studies of Karim & Shetu 2020, Khalid & Sarea 2020, and Isa et al. 2020. Furthermore, the current study presents that the respondents also perceived the practice of Sharia audit to be relying heavily on the conventional framework, which is ingrained with capitalistic ideology due to the absence of its framework. Even though there are not many Sharia issues concerning a traditional framework for Sharia auditing. However, developing a Sharia audit framework in light of Sharia will undoubtedly improve stakeholders' confidence that the IFIs operate according to the Sharia principles. Meanwhile, some of the respondents agree to appoint Sharia auditors internally, majority of them have decided to appoint external auditors for transparent auditing. This supports the studies of Suraya et al (2018) and ISRA (2016). In the same vein, the findings divulged that the scope of the Sharia audit must be much broader than the conventional audit, which specifies the range of audit engagement and the procedure to follow. The Sharia audit shall cover financial statements; people; processes; products, IT systems, and the organization's structure. These will enable the IFIs to have a sound internal control system for effective Sharia compliance. These findings disclose that internal Sharia auditors are perceived to be dependent on their respective organizations, and their independence could be questionable as employees performing the functions of Sharia audit. Similarly, internal Sharia auditors have no autonomy to communicate their reports directly to the final users. Still, it has to go through other committees before it reaches the final users, and the objective of independent judgment could be violated. As for the Sharia audit process harmonizing in IFIs, it is observed that most of the respondents agreed with this statement. http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 Mohammad Shahid. Sharia Audit Challenges in Malaysian Islamic Financial Institutions 55 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Consequently, the ongoing challenges necessitate immediate attention to BNM being the main regulatory body of Islamic banking practices. It is worth noting that the challenges have existed for over three decades and could hinder the Sharia audit to great untrustworthiness. They may even have a negative impact on the sustainability of its practice in the future. Conclusion This study discussed Sharia audit issues and challenges in IFIs, for instance, the non-existent Sharia audit framework independency and competency of Sharia auditors. The study adopted a qualitative method and collected data through a survey. The findings showed that an independent Sharia audit framework needs to be established to accommodate the increasing number of IFIs in Malaysia. Further, it is also asserted that awareness of Sharia audit is satisfactory. The findings also revealed that most of the study's respondents do not have relevant Sharia qualifications for the said function, despite the eagerness of Malaysia to enhance the functions of Sharia audit in IFIs. The practical implication for this is that it will enable the IFIs, in general, to fulfill their functions effectively and in line with the Sharia principle, which will benefit the society (Ummah) at large. Hence, the study will help the practitioners to understand the type of competency qualification expected from them. The study will also give the practitioners an accurate picture of Sharia audit, enabling them to improve in various aspects concerning its practices. The practical implication is that practitioners can fulfill their responsibilities with due care and professionalism. As highlighted by the study, the regulators and the policymakers may find this study contributing towards tackling the challenges weakening the practice of Sharia audit. The practical implications are that there will be hope anew, that the Sharia audit is developed professionally, just as its 'conventional audit' counterpart. Finally, the study offers insights into the educational sector that the integration of Sharia audit into its audit curriculum has been overdue for a long time. The practical implication is that the universities will produce competent and knowledgeable students with both auditing and Sharia qualifications at once. This will surely help to have competent Sharia audit practitioners in various IFIs in Malaysia and worldwide in general. http://journal.uinjkt.ac.id/index.php/iqtishad https://doi.org/10.15408/aiq.v15i1.26014 56 http://journal.uinjkt.ac.id/index.php/iqtishad DOI: https://doi.org/10.15408/aiq.v15i1.26014 Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics) Vol. 15 (1), Jan-Jun 2023 References Ali, N. A. M., & Kasim, N. (2019). Talent management for Sharia auditors: case study evidence from the practitioners. International Journal of Financial Research, 10(3), 252-266. Arwani, A. (2018). Issues And Challenges Of Sharia Auditing In Islamic. Media Riset Akuntansi, Auditing & Informasi, 18(2), 169–186. BNM. (2019). BNM Annual Reports 2019. https://www.bnm.gov.my/o/annual- report/index.html. Bosi, M. K., & Joy, M. 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