Who it's for: finance teams at growing SaaS companies facing their first statutory audit, whether because the company has grown, raised investment or joined a group.
What you'll get: why a first audit happens, the UK audit exemption thresholds as at October 2026, a timeline from six months out to sign-off, a PBC checklist, what's different about a first-year audit, a worked example of an audit adjustment, and the key risks and controls.
Reading time: about 13 minutes. Ideally read it six months before your year-end, not six days.
Why your first audit is different
A first audit isn't just a normal audit done once. The auditors have never seen your numbers, so they test your opening balances, document your systems from scratch and ask questions that later years skip. Teams that prepare early usually get through with a few adjustments; teams that don't can see it drag on for months.
The good news is that most of the work is the monthly discipline many teams already have: reconciliations, working papers and journal approvals. The audit just checks it all at once, with a slightly raised eyebrow.
Key terms
- Statutory audit: an independent examination of the annual accounts, required by the Companies Act 2006 unless the company qualifies for an exemption.
- Audit exemption: the rules that let many small UK private companies file accounts without an audit.
- Engagement letter: the contract with the auditor setting out scope, responsibilities, timetable and fee.
- PBC list ("prepared by client"): the auditor's list of schedules and documents you need to provide.
- Materiality: the size of error that the auditor judges could change a reader's view of the accounts. It drives how much testing they do.
- Opening balances: the balance sheet at the start of the first audited year. In a first audit, the auditor needs comfort over these too.
- Audit adjustment: a correction the auditor proposes to the draft accounts.
- Management letter: the auditor's report of control weaknesses and suggested improvements.
- Letter of representation: a letter signed by the directors confirming key facts to the auditor before sign-off.
Do you need an audit? UK thresholds as at October 2026
Under the Companies Act 2006, a UK private company can usually claim audit exemption if it qualifies as small. Based on gov.uk guidance as at October 2026, for financial years beginning on or after 6 April 2025 a company qualifies if it meets at least two of these three conditions:
| Measure | Financial years beginning on or after 6 April 2025 | Financial years beginning 1 January 2016 to 5 April 2025 |
|---|---|---|
| Annual turnover | No more than £15 million | No more than £10.2 million |
| Assets (balance sheet total) | No more than £7.5 million | No more than £5.1 million |
| Average number of employees | 50 or fewer | 50 or fewer |
There are important catches. Based on the same gov.uk guidance as at October 2026:
- Shareholders can demand an audit. Members holding at least 10% of the shares (by number or value) can require one, in writing, at least a month before the year-end.
- The articles may require it. Many venture-backed companies have articles or investment agreements that require an audit whatever the size.
- Subsidiaries usually need an audit unless they qualify for a specific exemption (for example, where the parent gives a guarantee under the Companies Act rules). Being part of a larger group can also affect whether a company counts as small.
- Some types of company can't claim exemption at all, such as public companies (unless dormant) and certain regulated businesses.
The rules on how to measure these tests, including how they work for growing companies and groups, have detail that matters. Gov.uk's page on audit exemption for private limited companies is the place to check the current position for your company.
Common reasons SaaS companies get their first audit: a funding round where investors require audited accounts, growth past two of the thresholds, becoming a subsidiary of a larger group, or preparing for a sale or a large debt facility.
The first audit timeline
This is laid out for a 31 December year-end. Shift the months to fit yours.
Six to four months before year-end (July to September): set it up
| Task | What "done" looks like | |
|---|---|---|
| ☐ | Appoint the auditor and agree the engagement letter | Signed engagement letter with scope, fee and timetable |
| ☐ | Agree the reporting framework (FRS 102 or IFRS) | Framework confirmed with the board and auditor |
| ☐ | Hold a planning meeting | Auditor understands the business, systems and key risks; you know the dates |
| ☐ | Write down key accounting policies | Revenue recognition, capitalised development costs, commissions, share options |
| ☐ | Start on opening balances | Prior year balance sheet reconciled and supported, account by account |
AI shortcut: give an approved AI assistant a plain description of how you sell (plans, billing terms, setup fees, discounts) and ask it to draft a revenue recognition policy in plain English under FRS 102 or IFRS 15. Then compare it to the standard and your contracts, and have the financial controller sign it off. It is a first draft, not the policy.
Three to one months before year-end (October to December): interim work
| Task | What "done" looks like | |
|---|---|---|
| ☐ | Host the interim audit visit, if planned | Auditor has walked through revenue, purchases, payroll and the close |
| ☐ | Fix gaps raised at the interim | Each point has an owner and a date |
| ☐ | Get the PBC list and assign owners | Every item has an owner and a due date |
| ☐ | Plan year-end cut-off procedures | Billing, purchasing and payroll cut-off agreed |
| ☐ | Brief people outside finance | Sales, HR, legal and engineering know what they'll be asked for |
Year-end to fieldwork (January to February): close and hand over
| Task | What "done" looks like | |
|---|---|---|
| ☐ | Complete a hard year-end close | All balance sheet accounts reconciled with signed-off working papers |
| ☐ | Prepare a draft set of accounts (or trial balance and notes, as agreed) | Draft agreed to the final trial balance |
| ☐ | Deliver the PBC items by the agreed date | Items uploaded to the audit portal, named to match the PBC list |
| ☐ | Run a daily query log during fieldwork | Every question logged, owned and answered within an agreed time |
| ☐ | Review proposed adjustments as they come in | Each one understood, agreed or challenged with evidence |
Completion (March onwards): sign-off
| Task | What "done" looks like | |
|---|---|---|
| ☐ | Post agreed audit adjustments | Ledger agrees to the final accounts |
| ☐ | Review the final accounts and notes | Numbers, notes and directors' report checked by finance and the board |
| ☐ | Directors sign the letter of representation and the accounts | Signed and dated |
| ☐ | File with Companies House on time | Filed before the deadline; check gov.uk for your filing date |
| ☐ | Respond to the management letter | An action plan with owners for each point |
| ☐ | Hold a lessons-learned review | Three changes for next year written down |
The PBC list: what auditors typically ask for
Every auditor's list is different, but most first-year lists for a SaaS company include these:
| Area | Typical items | Where AI helps |
|---|---|---|
| General | Trial balance, board minutes, articles, cap table, key contracts, group structure | Summarising board minutes for key decisions |
| Revenue | Deferred revenue roll-forward, billing system reports, sample of contracts, revenue policy | Listing non-standard contract terms |
| Debtors | Aged debtors, bad debt provision, post year-end receipts | Matching post year-end receipts to invoices |
| Costs and creditors | Accruals schedule, aged creditors, post year-end payments listing | Flagging post year-end invoices that relate to the old year |
| Payroll | Payroll reports, PAYE reconciliation, headcount, bonus calculations | Reconciling payroll reports to the ledger |
| Fixed and intangible assets | Fixed asset register, capitalised development costs and their support | Checking additions against invoices |
| Equity | Share capital, option schedule, share-based payment calculation | Comparing option schedule to the cap table |
| Tax | Corporation tax computation, VAT returns and reconciliation, R&D claims | Reconciling VAT returns to the ledger |
| Cash | Bank reconciliations, year-end bank statements; the auditor usually confirms balances directly with the bank | Bank reconciliation matching |
AI shortcut: give an approved AI assistant the auditor's PBC list and your folder index, and ask it to map each PBC item to the file that answers it and list anything missing. Then check the mapping yourself before you upload anything.
What's special about a first-year audit
- Opening balances. The auditor needs comfort that last year's closing balance sheet is right, because errors there flow into this year's results. If the prior year wasn't audited, expect extra testing on deferred revenue, accruals and fixed assets.
- Walkthroughs. The auditor will follow a few transactions from start to finish (a sale, a purchase, a payroll run) to understand your systems.
- Policies on paper. Things you've always "just done" need writing down, especially revenue recognition and what you capitalise.
- More questions. The auditor doesn't know your business yet. A one-page overview of how you sell, bill and get paid saves hours.
Worked example: an audit adjustment from cut-off testing
MonthEndClub Co Ltd has a 31 December year-end. During fieldwork, the auditor tests payments made in January and February to find costs that belong to the old year (a "search for unrecorded liabilities"). They find a legal firm's invoice for £8,000 plus VAT, dated 15 January, for contract work done in November and December. It wasn't accrued.
The auditor proposes an adjustment to bring the cost into the year to 31 December:
| Account | Dr | Cr |
|---|---|---|
| Legal and professional fees | £8,000 | |
| Accruals | £8,000 |
No VAT goes on the accrual. The VAT is reclaimed when the invoice is received and posted in January. In the new year, the accrual reverses and the invoice is posted as normal:
| Account | Dr | Cr |
|---|---|---|
| Accruals | £8,000 | |
| Legal and professional fees | £8,000 | |
| Legal and professional fees | £8,000 | |
| VAT input tax | £1,600 | |
| Trade creditors | £9,600 |
The effect on the year to 31 December: costs up £8,000 and profit down £8,000. Say the draft profit before tax was £250,000; after this adjustment it becomes £242,000. Many companies post all known adjustments, even below materiality.
The better outcome is not needing the adjustment at all. A year-end accruals request to budget holders, including legal, would have caught it in December.
If you report under US GAAP (ASC 606): the audit process is similar, but US audits follow US auditing standards, and US-listed companies also face Sarbanes-Oxley control testing. Revenue testing will focus on ASC 606 rather than IFRS 15 or FRS 102 Section 23, though the core steps are close.
Common mistakes and audit watch-outs
- Leaving opening balances until fieldwork. In a first audit, an unsupported opening balance can hold up everything.
- Revenue recognised on invoice, not delivery. Annual upfront billing booked straight to revenue is one of the most common first-audit adjustments in SaaS.
- No written policies. "We've always done it this way" isn't a policy. Write the key ones down before planning.
- Cut-off gaps. Year-end accruals missing costs from legal, contractors and hosting, as in the example above.
- Share options not accounted for. Companies with option schemes often haven't booked a share-based payment charge.
- Handing auditors AI-generated documents as evidence. AI-drafted summaries and policies are working tools, not evidence. Auditors need the source documents, and anything AI drafted is reviewed and owned by a person.
- Uploading audit files to unapproved AI tools. PBC folders contain payroll, cap table and customer data. Only use company-approved AI tools.
Tools that can help
Most auditors provide a secure portal for PBC items and queries. Your ledger (Xero, QuickBooks, Sage or NetSuite) gives trial balances and transaction listings. Excel or Google Sheets holds the working papers and the query log. Billing systems such as Chargebee or Stripe provide revenue and deferred revenue reports. An approved AI assistant helps with mapping, matching and first drafts. Tools don't replace the process; a clean monthly close is what makes the audit go smoothly.
Key risks and controls
| Risk | Control | How to evidence it |
|---|---|---|
| Opening balances can't be supported | Prior year balance sheet reconciled before planning | Signed-off working papers for every opening balance |
| Revenue in the wrong period | Written revenue policy; monthly deferred revenue roll-forward | Policy approved by the board; roll-forward agreed to ledger and billing system |
| Missing year-end costs | Year-end accruals request to all budget holders; post year-end invoice review | Accruals schedule with responses saved |
| PBC items late or incomplete | PBC tracker with owners and due dates | Tracker status shared weekly with the auditor |
| Fieldwork queries pile up | Daily query log with response targets | Log showing date raised, owner and date answered |
| AI errors or data leaks | Approved tools only; every AI output reviewed against source | Reviewer sign-off on any AI-drafted schedule |
Rates, thresholds and rules in this guide
Figures were checked against the pages below in October 2026. They change regularly (often each April or at Budget time), and we can't guarantee they're still current or right for your situation. Always check the official page before relying on them.
- Audit exemption for private limited companies (GOV.UK): small company thresholds, shareholder demand for an audit, companies that must be audited
- Preparing and filing Companies House accounts (GOV.UK): accounts filing deadlines
Key takeaways
- Check whether you need an audit early: thresholds, articles, investor agreements and group status all matter.
- Start six months out: appoint the auditor, write down policies and fix opening balances.
- Assign an owner and due date to every PBC item, and run a daily query log during fieldwork.
- Expect extra work on opening balances and walkthroughs in a first audit.
- Use AI to map, match and draft; source documents and sign-off stay with people.
FAQs
What are the UK audit exemption thresholds?
As at October 2026, gov.uk guidance says that for financial years beginning on or after 6 April 2025, a private company can usually claim exemption if it meets at least two of: turnover no more than £15 million, assets no more than £7.5 million, and 50 or fewer employees on average. There are exceptions, so check gov.uk for your company.
How long does a first audit take?
It varies with size and readiness. Fieldwork for a small SaaS company might take a few weeks, but planning, opening balances and completion stretch the whole process over several months.
What will the auditor focus on in a SaaS company?
Usually revenue and deferred revenue, capitalised development costs, share options, accruals and cut-off, and cash.
Can AI help us prepare for the audit?
Yes, for mapping the PBC list, matching post year-end payments, drafting policies and summarising contracts. A person checks every output against source documents, and only company-approved AI tools are used.
What happens if the auditor finds errors?
They propose adjustments. You review each one, agree or challenge it with evidence, and post the agreed ones. Control weaknesses go in the management letter for you to act on.
Related guides
- Year-End Close Checklist for SaaS Companies
- Keeping Audit-Ready Working Papers Every Month
- SaaS Revenue Recognition in Plain English (IFRS 15 / ASC 606)
- Accruals and Prepayments: A Practical Guide with Examples
More in Busy Season guides.
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This guide is general information about common practice. It isn't tailored to any business, and standards, tax rules and figures change. Check your own circumstances, the latest rules and, where needed, a qualified professional before acting.
Last reviewed: October 2026.