Chairman's Introduction

This year has seen the Audit Committee continue its work of reviewing the effectiveness of Halfords' corporate governance framework with particular emphasis on the quality of financial reporting, internal control, and risk management systems.

I reported last year that we had appointed an in-house Head of Internal Audit and I am pleased to report that this year's internal audit plan has been delivered by a well-resourced, experienced and independent in-house team, assisted by external specialists where necessary. As we report below, the internal audit function has strong and direct links into the Audit Committee.

This report explains how the Audit Committee has discharged its responsibilities, and takes into account the three specific areas highlighted in the revised Corporate Governance Code:

• Significant issues considered in relation to the financial statements
• External Audit effectiveness and appointment
• External Audit objectivity and independence and the impact of non-audit work

Membership and remit of the audit committee

Membership

All the members of the Audit Committee are independent Non-Executive Directors. Having been the Deputy Chief Executive and Finance Director of the House of Fraser Plc, David Adams is considered by the Board to have recent and relevant financial experience and so the requisite experience to chair the Committee. Each of the other independent Non-Executive Directors has, through their other business activities, significant experience in financial matters. Dennis Millard, the Chairman, senior members of management and advisors are invited to attend meetings as appropriate. The Audit Committee meets according to the requirements of the Company's financial calendar. The meetings of the Audit Committee also provide the opportunity for the independent Non-Executive Directors to meet without the Executive Directors present and to raise any issues of concern with the auditors. There have been three such meetings in the period ended 28 March 2014 and nothing of note was reported.

Remit

The Audit Committee's responsibilities include:

• making recommendations to the Board on the appointment of the External Auditors, including on effectiveness, independence, non-audit work undertaken (against a formal policy) and remuneration;
• reviewing the accounting principles, policies and practices adopted throughout the period;
• reviewing and approving external financial reporting for adoption by the Board;
• assisting the Board in achieving its obligations under the Code in areas of risk management and internal control, focusing particularly on compliance with legal requirements, accounting standards and the Listing Rules;
• ensuring that an effective system of internal financial and non-financial controls is maintained; and
• approving a formal whistleblowing policy whereby staff may, in confidence, disclose issues of concern about possible malpractice or wrongdoings by any of the Group's businesses or any of its employees without fear of reprisal, and includes arrangements to investigate and respond to any issues raised.

The Audit Committee's full Terms of Reference are available on the Company's website or on request from the Company Secretary.

Principal activities during the year

General

The Audit Committee met three times during the year with the following timetable:

May 2013

• Review of Year End Finance Director's Report
• Recommend the Preliminary Statement to the Board for Approval
• Recommend to the Board the approval of the Annual Report
• Review of External Auditors' Report
• Review Statement of External Auditors' Independence
• Review of Internal Audit Full-Year Report
• Approval of the External Auditors' Non-Audit Fee Policy
• Review of Group Whistleblowing Policy
• Review of Group Register of Risks and Controls

November 2013

• Review of Half-Year Finance Director's Report
• Recommend the Interim Statement to the Board for Approval
• Review of External Auditors' Half-Year Report
• Review of Internal Audit Progress Report
• Approval of External Auditors' Non-Audit Fee Policy
• Review of Committee Terms of Reference

January 2014

• Consideration of Cyber Security
• Review of External Auditors' Annual Strategy and Fees
• Review of Internal Audit Progress Report and Annual Strategy
• Review of Group Whistleblowing Policy

Significant Issues in Relation to the Financial Statements

In order to discharge its responsibility to consider accounting integrity, the Committee carefully considers key judgments applied in the preparation of the consolidated financial statements. The Committee's review included consideration of the following key accounting judgements:

Impairment of goodwill and intangibles (autocentres)

Following the acquisition of Nationwide in 2010, the Group holds significant goodwill in the Halfords Autocentres business. With pressure on its like-for-like revenues (-0.1% for the year ending 28 March 2014) combined with a subdued aftercare market where customers are still looking to defer vehicle maintenance, there is a risk that the business may not meet either the growth projections expected by the business or those necessary to support the carrying value of the intangible asset (see note 10 of the financial statements).

The Audit Committee has received detailed reports from Halfords' finance team and External Auditors addressing this issue. Consideration has been given to ensuring that cash flow models, discount rates, customer retention rates, sensitivity models and centre profitability are all reasonable. The Committee concluded that it is satisfied with the accounting treatment of impairment of goodwill and intangibles.

Valuation of inventory

With the continuing pressure to provide up-to-date products to customers and with the change in ranges observed at the end of FY13 and through FY14, there is a risk that inventory provisions made will be inappropriate or incomplete (see note 12 to the financial statements). Management have recently implemented a revised methodology for assessing inventory provision. Range reviews are regularly undertaken to ensure that all discontinued inventory is identified.

The Audit Committee has received detailed reports from Halfords' finance team and External Auditors addressing this issue. After consideration of the accuracy of the new provisioning model, the completeness and accuracy of range reviews, and the reflection of these reviews within the provision, the Committee concluded that it is satisfied with the accounting treatment of the valuation of inventory.

External auditors

Effectiveness of external audit

The effectiveness of the external audit is considered throughout the year through, amongst other factors, assessment of the degree of the audit firm's challenge of key estimates and judgements made by the business, feedback from any external or internal quality reviews on the audit and the wider quality of communication with the Committee.

In addition at its meeting in January 2014, the Committee performed a specific evaluation of the performance of the external auditor considering the areas set out above and feedback from management. Following this, the Committee concluded that:

• The overall audit approach, materiality, threshold, and areas of audit focus were appropriate to the business; and
• The audit team possessed the necessary quality, expertise and experience to provide an independent and objective audit.

Approach to appointment or reappointment

KPMG LLP were appointed as External Auditors to the Group in 2009 following a formal tender process. Since that time, KPMG LLP have complied with the partner rotation requirement set out in Ethical Standards for Auditors. A partner rotation is now due and KPMG's Peter Meehan is expected to take up the responsibilities of Senior Statutory Auditor in the new financial year. Peter has been attending Audit Committee meetings throughout the year as part of his induction process and the Committee believe him to be a suitable appointment.

The Audit Committee has considered the new UK Corporate Governance Code guidance in relation to auditor rotation including the proposed transition rules which will be considered when recommending the appointment of the External Auditors in future years.

The Audit Committee considers that the relationship with the External Auditors is working well and is satisfied with their independence, objectivity and effectiveness and has not considered it necessary to require KPMG LLP to re-tender for external audit work. The Audit Committee has recommended to the Board, for approval by shareholders at the AGM on 29 July 2014, the reappointment of KPMG LLP as External Auditors.

Approach to safeguarding objectivity and independence if non-audit services are provided

The Audit Committee has established a policy to ensure that any non-audit services delivered by the External Auditors will not jeopardise objectivity and independence. The policy is consistent with Ethical Standards for Auditors.

The policy specifies:

1. 'The external auditors can be used to provide non-audit services subject to any non-audit engagement proposal provided by the External Auditors is formally approved by the Audit Committee before contractual arrangements are entered into, except for
2. Half year review; and
3. Internal support services supplied by the External Auditors in order to execute management's Internal Audit plan.

Other than for the above, for each separate service proposed to be provided by the External Auditors the Chief Financial Officer will prepare a note either to be tabled and minuted at an Audit Committee meeting or to be circulated via email to the Audit Committee members and the CEO giving a description of the work to be undertaken, the reasons why the External Auditors are involved in the proposal and how objectivity and independence has, and is seen to be, safeguarded.

Consent is required from the Audit Committee Chair on behalf of the Audit Committee before the External Auditors can be engaged for non-audit services.'

In addition, the External Auditors follows their own ethical guidelines and continually reviews its audit team to ensure that its independence is not compromised.

An analysis of the fees earned by the External Auditors is disclosed in note 3 to the financial statements.

Role and effectiveness of internal audit

The internal audit function principally reviews the effectiveness of the controls operating within the business by undertaking an agreed schedule of independent audits each year. The Audit Committee determines the nature and scope of the annual audit programme at the beginning of each year and revises it from time to time according to changing business circumstances and requirements. The Audit Committee also confirms that internal audit has appropriate resources available to it. The annual audit programme is derived from an audit universe including financial and commercial processes, governance issues, and key corporate risks.

Our internal audit function has undergone significant change the last two years. During the period ended 29 March 2013, the Company engaged KPMG to support the internal audit process in a non-managerial capacity. An experienced in-house Head of Internal Audit and Risk was appointed in October 2012 and following further recruitment, the internal audit programme for the year ended 28 March 2014 was planned and delivered by a well-resourced, experienced and independent in-house team, assisted by external specialists where necessary. We intend to continue with this resource model to deliver assurance.

Internal Audit reports on a day-to-day basis to Andrew Findlay, the Chief Financial Officer, but is independent in action and reporting of issues, with direct line of communication to the Audit Committee Chairman. The findings of the independent audits are reported initially to Executive management and any necessary corrective actions are agreed. Summaries of these reports are presented to, and discussed with, the Audit Committee along with details of progress against action plans as appropriate.

Broader ranges help us to equip families for their leisure time.

Whistleblowing

A Whistleblowing policy and procedure enables colleagues to report concerns on matters affecting the Group or their employment, without fear of recrimination. Posters publicising whistleblowing channels are distributed to all stores, autocentres, distribution centres and support centres.

Whistleblowing policy and procedure was reviewed and approved by the Audit Committee and was subject to an internal audit review during the year. The Company Secretary provides the Audit Committee with a regular summary of whistleblowing contacts and resolutions.

Anti-bribery and corruption policy

The Group's anti-bribery and corruption policy statement reinforces that the Halfords Board is committed to conducting its business affairs so as to ensure that it does not engage in or facilitate any form of corruption. It is Halfords' policy to prohibit all forms of corruption amongst our employees, suppliers and any associated parties acting on our behalf. The Group has a detailed Anti-Bribery and Corruption Policy and maintains Gifts and Hospitality Registers. Anti-bribery expectations are set out in standard purchasing terms and conditions. Face-to-face and online training has been provided to colleagues to raise the awareness of anti-bribery and corruption legislation.

The Audit Committee has requested that Anti-Bribery and Corruption safeguards are periodically reviewed by internal audit.

Internal control and risk management

Details of the Group's internal control and risk management framework are set out in the Corporate Governance Report.