ENHANCING AUDIT QUALITY AND ISLAMIC FINANCE COMPLIANCE IN ISLAMIC FINANCIAL INSTITUTIONS: A CONCEPTUAL FRAMEWORK FOR EMERGING MARKETS

Abstract

Islamic financial institutions (IFIs) face an assurance problem that conventional banks do not: their financial statements must present a true and fair view while their products and operations must simultaneously conform to Islamic finance rules. This dual obligation generates audit risks-non-compliant income, mislabeled contracts, co-mingled funds, and governance opacity-that a single financial audit cannot capture. This paper develops a conceptual framework for enhancing audit quality and Islamic finance compliance in IFIs, with particular attention to emerging markets. Building on established audit-quality theory and Islamic finance governance standards, the framework integrates three assurance pillars-an internal Islamic finance audit function, the external financial audit, and the institution’s governance boards-into a coordinated dual-layer assurance system anchored in strong internal control. The paper then analyzes four drivers of audit quality-auditor competence, independence, standard harmonization, and disclosure transparency-and argues that each operates differently across the financial and compliance layers. Turning to application, it examines the regulatory challenges and resource constraints characteristic of developing banking sectors, using the Central Asian and Uzbek context as an illustrative case, and proposes proportionate, phased solutions. The analysis yields actionable implications for central banks, financial regulators, and audit practitioners seeking to build credible assurance ecosystems where Islamic finance is nascent. The paper’s contribution is an integrative, governance-anchored model that treats financial and Islamic finance assurance as complementary rather than parallel.