easyJet plc Audit Committee Terms of Reference June 2008

1. Introduction

1.1. These Terms of Reference have been produced to identify and formalise the roles, tasks, responsibilities and rights of the Audit Committee, (‘the Committee’), for compliance with the UK guidance on corporate governance, (the ‘Combined Code’), and to assist the Committee in achieving best practice in corporate governance. The board of directors of easyJet plc is referred to as ‘the Board’.

1.2. The current guidance, (the Combined Code, Turnbull and Smith), is focussed on the Board’s responsibility to review the effectiveness of all internal controls of a company including operational, financial, compliance and risk management.

1.3. The Board has delegated the responsibility for the review of the quality, timeliness and effectiveness of internal financial controls to the Committee which is reflected in these terms of reference. The responsibility for consideration of the operational, compliance and risk management internal controls will remain with the full board of directors.

2. Objectives

2.1. The primary function of the Committee is to assist the Board in fulfilling its oversight responsibilities by reviewing :

the financial reports and other financial information in advance of publication;
on a continuing basis, the systems of internal controls regarding finance and accounting that management and the Board have established;
the auditing, accounting and financial reporting processes generally.

2.2. The Committee's primary duties and responsibilities are to:

serve as an independent and objective party to monitor the quality and timeliness of the financial reporting process and monitor the internal financial control system;
review and appraise the audit efforts of the external auditors;
provide an open avenue of communication among the external auditors, financial and senior management, and the Board;
to confirm and assure the independence and objectivity of the external auditor.

3. Membership

3.1. The members of the Committee shall be at least three non-executive directors. All of the members will be independent of management and free of any business or other relationship (including, without limitation, cross-directorships or day to day involvement in the management of the business) which could interfere with the exercise of their independent judgement.

3.2. The current members are David Bennett, Sir David Michels and John Browett.

3.3. The Chairman of the Committee, as appointed by the Board, is David Bennett.

3.4. One member of the Committee should have significant, recent and relevant financial experience

4. Secretary

4.1. The secretary of the Company shall be the secretary of the Committee.

5. Meetings

5.1. Attendance
The quorum of the Committee shall be two members.

An agenda, together with relevant papers are to be issued to all Committee members and the external audit partner in advance of meetings giving them sufficient time to consider the papers.
No one other than Committee members shall be entitled to attend Committee meetings. The Board Chairman, other directors, Chief Executive Officer, Group Finance Director, Head of Internal Audit and a representative of the external auditors shall attend meetings at the invitation of the Committee.
The Committee may ask members of management or others to attend meetings and provide pertinent information as necessary.
At least once a year the Committee shall meet with the external auditors without executive directors present.

5.2. Frequency

Meetings shall be held not less than three times a year and at any other time as needed.
The external auditors may request a meeting if they consider that one is necessary.
The meetings will be called to give sufficient time for the members to give attention to the information to be considered and for the Board to follow up any recommendations if necessary.

5.3. Minutes
Minutes of meetings of the Committee shall be prepared within two weeks of the meeting and circulated to all members of the Board and to the external auditors.

6. Authority

6.1. The Committee is authorised by the Board to investigate any activity within its terms of reference. It is authorised to seek any information it requires from any employee and all employees are directed to co-operate with any request made by the Committee.

6.2. The Committee is authorised by the board to obtain outside legal or other independent professional advice and to secure the attendance of outsiders with relevant experience and expertise if it considers this necessary. Expenditure on this will be approved in advance by the Chief Executive.

7. Responsibilities: evaluating the internal audit function

7.1. In December 2006, an internal audit function was established.

7.2. The Committee is entitled to receive all reports produced by the internal audit function. It will review reports produced by the internal audit function. It will review the internal control scope of work and can make suggestions as to future projects to be carried out. In addition, the committee shall:

monitor and review the effectiveness of the company’s internal audit function in the context of the company’s overall risk management system.
approve the appointment and removal of the head of the internal audit function
consider and approve the remit of the internal audit control function and ensure it has adequate resources and appropriate access to iniformation to enable it to perform its function effectively and in accordance with the relevant professional standards. The committee shall also ensure the function has adequate standing and is free from management or other restrictions.
review and assess the annual internal audit plan
review promptly all reports on the company from the internal auditors
review and monitor management’s responsiveness to the findings and recommendations of the internal auditor; and
meet the head of internal audit at least once a year, without management being present, to discuss their remit and any issues arising from the internal audits carried out. In addition, the head of internal audit shall be given the right of direct access to the chairman of the board and to the committee.

8. Responsibilities: evaluating the external audit processes

8.1. The Committee shall:

consider the selection, evaluation and appointment of the external auditor, the audit fee, and any questions of resignation or dismissal of the external auditors;
discuss and agree with the external auditor before the audit commences the nature of the scope of the audit, timing and nature of reports and agree the terms and scope of any engagement to review and report on interim reports or preliminary announcements;
review whether the auditor has met the agreed audit plan and shall seek to understand the reasons for any changes, including changes in perceived risks and the work undertaken by the external auditor to address those risks;
seek to ensure co-ordination with the activities of the internal audit function
consider the robustness and perceptiveness of the auditor:

- in the handling of the key accounting and audit judgements identified;
- in the responses to questions from the Committee; and
- in the auditor’s commentary on the systems of internal control;

obtain feedback about the conduct of the audit from key people involved;
review from time to time the cost effectiveness of the audit to ensure completeness of coverage, reduction of redundant effort and the effective use of resources;
review the independence and objectivity of the external auditor taking into account the volume of non audit performed by the external auditors, which shall include:

- seeking reassurance that the auditors and their staff have no family, financial, employment, investment or business relationship with the company or that would conflict with the company;
- seeking from the auditors, on an annual basis, information about policies and processes for maintaining independence and monitoring compliance with relevant requirements, including current requirements regarding the rotation of audit partners and staff;
- monitoring the auditor’s compliance with applicable ethical guidance relating to the rotation of audit partners, the level of fees that the company pays in proportion to the overall fee income of the audit firm, office and partner and other related regulatory requirements; and
- agreeing with the Board and monitoring the company’s policy for the employment of former employees of the auditor;

discuss problems and reservations arising from the interim and final audits, and any matters the auditors may wish to discuss (in the absence of management where necessary);
review audit representation letters before consideration by the Board, giving particular consideration to matters that relate to non-standard issues;
review the external auditor’s management letter and management’s response;
review and approve requests for any management consulting engagement to be performed by the external auditor and be advised of any other study undertaken at the request of management that is beyond the scope of the audit engagement letter.

9. Non-audit work by the external audit firm

9.1. The Committee shall set and apply a formal policy specifying the types of non-audit work :

from which the external auditor is to be excluded;
for which the external auditor can be engaged without referral to the Committee; and
for which a case-by-case decision by the Committee is necessary.

9.2. In setting policy, the Committee should consider:

whether the skills and experience of the audit firm makes it a suitable supplier of the non-audit services;
whether there are safeguards in place to ensure that there is no threat to objectivity and independence in the conduct of the audit resulting from the provision of such services by the external auditor;
the nature of the non-audit services, the related fee levels individually, and in aggregate, relative to the audit fee; and
the criteria which govern the compensation of individuals performing the audit.

9.3. The current policy regarding non-audit work by the auditor firm is shown below.

Categories of work from which the external auditor

(a) …is to be excluded:	Subject to (b) below, all non-audit work.
(b) …can be engaged without referral to the Committee:	Only if in the best interests of the Company.
(c) …can be engaged, but for which a case-by-case decision by the Committee is necessary:	Nil.

10. Oversight of financial reporting

10.1 The Committee in its oversight function is responsible for the review of the company’s financial reporting processes and the quality of its financial reporting, this extends to all published financial reporting, for example interim reports, earnings releases and preliminary announcements.

10.2 The Committee should pay attention to critical accounting policies and practices, and the clarity of disclosures.

10.3 In all public reporting, (once the external auditors have substantially completed their audit work where applicable), review the reports and financial statements being issued. This must be done sufficiently in advance of release to allow adequate consideration of the issues raised and should include discussions with the external auditors and a consideration of the following:

the use of reserves and accruals;
significant estimates and judgements used in the preparation of the financial statements and materiality thresholds for decision making and reporting;
internal and external auditors' methods for risk assessments and the results of those assessments and the emergence or elimination of high risk areas;
changes in the scope of the audit as a result of such risk assessments;
the effect of any external environmental factors (economic, industrial or otherwise) on financial reporting and the audit process;
significant prior period/budget variances;
methods used to account for significant unusual transactions in emerging areas not yet covered by standards;
significant uncertainties and contingent liabilities, (including litigation that may have a significant impact on the financial statements);
transactions with related parties;
‘going concern’;
disclosure of directors remuneration;
corporate governance reporting;
profit forecasts and the assumptions on which they are based;
any changes in accounting policies and practice;
major judgmental areas;
significant adjustments resulting from audit;
compliance with accounting standards (and in particular accounting standards adopted in the financial year for the first time);
compliance with Stock Exchange and legal requirements.

10.4 The Committee should receive from management:

timely, periodic reviews of the financial statements and related disclosure documents prior to filing with the LSE;
presentations concerning any changes in accounting principles or financial reporting policies from prior year, the accounting treatment of significant transactions, and any significant variations between budgeted and actual numbers in a particular account;

information regarding any "second" opinions sought by management from an outside independent accountant with respect to the accounting treatment of a particular event or transaction;
management's response to the assessments provided by the external auditor.

11 Review of internal financial controls

11.1 The Committee must determine that management has implemented policies ensuring that the company’s financial risks are fully identified, managed and monitored and that controls are adequate, in place and functioning properly to safeguard the companies assets, (either from loss or theft), maintain proper accounting records and ensure the reliability of financial information used, both in the business and for publication.

11.2 The Committee should review on behalf of the Board the company’s system of internal financial controls and make recommendations to the Board.

11.3 The Committee should review the company’s procedures for detecting fraud and whistle-blowing and ensure that arrangements are in place by which staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting, financial control or any other matters.

11.4 The Committee should review the proposed statement on the directors’ review of the group’s system of internal financial control prior to endorsement by the Board.

11.5 The external audit partner should report to the Committee periodically on:

what they perceive as the major risks and the adequacy of the internal financial controls and the related findings and recommendations of internal and external audit and management’s responses;
the issues relating to the overall effectiveness of internal financial control and in particular:

- any risks/weaknesses identified which could have a significant effect on the financial statements and the timeliness and effectiveness of corrective action;
- any frauds or regulatory breaches discovered;
- any failures to implement Committee recommendations accepted by the Board;
- any significant delays or disputes involving executive management;
- any other matters they consider significant.

11.6 The Committee should review this information considering what the significant risks are, the quality and scope of the ongoing assessment of identification, evaluation and management and the frequency and the changes since the last assessment in the nature and extent of the risks.

12 Whistleblowing and Fraud

12.1 The committee shall review the company’s arrangements for its employees to raise concerns in confidence about possible wrongdoing in financial reporting and other matters. The committee shall ensure that these arrangements allow proportionate and independent investigation of such matters and appropriate follow up action; and;

12.2 review the company’s procedure for detecting fraud.

13 Relationship with the Board

13.1 The Committee should make a formal annual report to the Board summarising its activities and effectiveness, conclusions and recommendations of the past year and its agenda for the coming year which the Board considers as a separate agenda item.

13.2 Board agendas will include as a regular item a progress report from the Committee, containing not only recommendations it may have, but also commentary on the implementation of recommendations within its remit that the Board has already approved.

13.3 The Committee shall annually review its terms of reference and its own effectiveness, and recommend any necessary changes to the Board.

13.4 The Committee shall prepare a report on its role and responsibilities and the actions it has taken to discharge those responsibilities for inclusion in the Company’s annual report and accounts. Such a report should specifically include:

summary of the role of the Committee;
the names and qualifications of all members of the Committee;
the number of Committee meetings and attendance by each member; and
the way the Committee has discharged its responsibilities.

13.5 The results of the review of the effectiveness of internal financial controls should be summarised in a presentation to the Board that will set out as a minimum:

key controls designed to mitigate financial risks including the assessment of the control environment;
the results of the review in summary form;
significant financial control problems noted during the period and how they have been resolved.

13.6 Where disagreements between the Committee and the Board can not be resolved, the Committee shall report the issue to the shareholders as part of the report on its activities in the Company’s annual report.

13.7 If the Board does not accept the Committee’s recommendation regarding the appointment, reappointment or removal of the external auditor, the Committee shall include a statement explaining its recommendation and reasons why the Board has taken a difference stance in the annual report.

13.8 The Committee Chairman shall attend the AGM and shall answer question, through the Chairman of the Board, on the Committee’s activities and responsibilities.

14. Other Matters

14.1 The Committee shall

have access to sufficient resources in order to carry out its duties, including access to the company secretariat for assistance as required
give due consideration to laws and regulations, the provisions of the Combined Code and the requirements of the UK Listing Authority’s Listing, Prospectus and Disclosure and Transparency Rules as appropriate.