The situation
A SaaS company based in Manchester had grown rapidly after a Series A funding round. In the space of 18 months, turnover went from £3 million to £11 million and headcount from 15 to 45. The company had breached two of the three Companies Act audit thresholds and needed its first statutory audit.
The challenge was timing. The lead investor’s term sheet required audited accounts within four months of the financial year end. The company had never been audited before, had a lean finance team of two people, and was running on Xero with limited internal controls documentation.
What they needed
The CFO was clear about the priorities:
- Get the audit done within the four-month window to satisfy the investor covenant
- Don’t disrupt the product and engineering teams – the company was mid-sprint on a major release
- Help the finance team understand what an audit involves so they could prepare properly
- Identify any accounting issues early, especially around SaaS revenue recognition and development cost capitalisation
- Keep the fee proportionate – this was a growing company, not a multinational
What we did
We started with a pre-audit planning visit six weeks before the year end. This gave us time to understand the revenue model (annual SaaS subscriptions with monthly billing), the cost structure (AWS hosting, development team salaries, sales commissions), and the accounting policies the finance team had been applying.
We identified two issues early:
- Revenue recognition. The company was recognising subscription revenue on invoicing rather than spreading it over the contract term. For a December year end, this meant November and December invoices for annual subscriptions were overstating revenue. We helped the finance team set up a deferred revenue schedule before year end so the adjustment was already in the trial balance when fieldwork started.
- Development costs. The company had been expensing all development costs. Some of the work qualified for capitalisation under FRS 102 Section 18 – specifically, a new product module that had reached the development phase and met the six capitalisation criteria. We worked with the CTO to identify the qualifying costs and helped the finance team set up the intangible asset correctly.
Fieldwork took eight working days. We used the company’s Xero data export to run automated testing on the full transaction population rather than sampling, which gave us better coverage in less time.
The outcome
The audit was completed three weeks after the year end – well within the four-month covenant window. The audit opinion was unqualified.
- Revenue was correctly restated with deferred revenue of £340,000 properly recognised
- Development costs of £180,000 were capitalised as an intangible asset, improving the balance sheet position for the investor reporting
- The management letter included practical recommendations on internal controls, segregation of duties, and expense approval processes appropriate for a company at their stage of growth
- Total disruption to the product team: one 45-minute meeting with the CTO about development cost documentation
What the client said
“We were dreading the audit. It turned out to be one of the most useful exercises we’d done all year. The revenue recognition fix alone saved us from an awkward conversation with our investors.”
CFO, SaaS company, Manchester
