An audit becomes a legal or regulatory requirement under specific circumstances. Understanding when an audit is required under US GAAP and what triggers that requirement is essential for companies set up in the US and trying to establish themselves there.
Financial statement audits plays a critical role in promoting transparency, accountability, and trust in business operations. US GAAP (Generally Accepted Accounting Principles) provides the framework for preparing financial statements. GAAP itself doesn’t mandate audits; instead, there are other regulations that mandate audits.
Let’s reduce your audit stress by understanding the role of U.S. GAAP and audit requirements as per different business entities in U.S.
Understanding the Role of U.S. GAAP VS Audits
Many people, especially those from non-technical backgrounds, often mistakenly believe that U.S. GAAP requires audits. In fact, U.S. GAAP governs how financial statements are prepared but does not specify that audits are mandatory. Instead, audit requirements come from external stakeholders such as regulatory agencies, lenders, investors, or contractual agreements.
U.S. GAAP informs accountants about the accounting standards, principles, and procedures that companies in the United States must follow when preparing their financial statements. Accurate statements prepared in accordance with GAAP can simplify the audit process, as they ensure consistency, transparency, and comparability in financial reporting.
Once you understand the importance of preparing financial statements in accordance with GAAP, the next step is to comprehend the audit requirements for your business and determine when to conduct an audit and then finally choose the right professional auditor for the same.
Audit Requirements as per Different Business Entities
Here are the most common scenarios where an audit becomes mandatory for entities preparing financial statements under U.S. GAAP:
- Public Companies (SEC-Registered Entities)
All publicly traded companies in the U.S. are required by the Securities and Exchange Commission (SEC) to file an annual audited financial statement from a PCAOB-registered accounting firm.
The audit requirements applicable to the following companies—
- Companies listed on stock exchanges (e.g., NYSE, NASDAQ)
- Companies registering for an IPO
- Certain large private companies are going public (filing Form S-1 or F-1)
All the above companies are legally required to submit audited financial statements (Form 10-K and 10-Q) to the SEC. If you don’t know how and where to file these forms, you can contact us for a better understanding.
What happens if you fail to submit these forms?
Failure to conduct these audits and submit the reports can result in severe penalties, including SEC fines, trading suspensions, or delisting from stock exchanges, as well as potential criminal charges for executives in cases of fraud. All this will apparently damage your business reputation in the market, which is why it is beneficial to hire an accounting firm before the filing deadline to reduce the above-mentioned risk for your company.
- Private Companies
In the U.S., private companies are typically owned by founders, management, or a group of private investors. Information about their operations and financial performance is not publicly available. And these companies are not legally required to have their financial statements audited under federal law. However, there are some other requirements that private companies must meet to conduct an audit.
Let’s understand the other requirements in the following points:
- The bank requires an audit if the loan size of your company exceeds $5 million to $10 million.
- Private equity or venture capital firms may require an annual audit, particularly for significant investments.
- In the case of mergers and acquisitions, an audit may be required during due diligence. Buyers, underwriters, or regulators may request audited GAAP financials for 2-3 prior years.
- Audit clauses may be included in franchise contracts, supplier agreements, and partnership/joint venture terms.
- Some sectors or states also mandate audits based on revenue or activity.
- Limited Liability Companies (LLCs)
Similar to private companies, LLC also requires no audit under federal law. However, an audit will be required if the LLC is operating under agreements with investors or banks or if it is operating in regulated industries.
LLC is taxed as a corporation and meets corporate audit triggers.
- Partnerships (General and Limited)
In the case of partnership firms, an audit is only required if it is there in the partnership agreement; it is generally required by the IRS under the Bipartisan Budget Act of 2015 (BBA) for large partnerships.
Partnerships with 100 or more partners must comply with additional reporting requirements under the BBA rules.
IRS imposed adjustments and penalties applied at the partnership level in case you fail to maintain auditable records may result in fines or additional tax liability. IRS regulations implementing the BBA partnership audit rules: see 26 CFR Part 301.
- Non-Profit Organizations
Audit requirements for NPOs vary from state to state and are influenced by their funding score. Most nonprofits must get an audit when they receive federal funding over $750,000 (Single Audit Act).
Let’s understand some common state-level audit thresholds –
| State | Audit required if |
| California | Revenue ≥ $2 million |
| New York | Revenue ≥ $1 million |
| Illinois | Revenue ≥ $300,000million |
| Florida | Contributions ≥ $500,000 |
F ailure to submit auditing reports can result in penalties, including ineligibility for grants, revocation of state registration, and fines for non-compliance or late filing.
Note: The IRS does not require an audit for Form 990 filers.
- Sole Proprietorships
In the United States, a sole proprietorship is not legally required to have its financial statements audited under federal or state law. This is because a sole proprietorship is not a separate legal entity from its owner, and its income and expenses are typically reported on Schedule C of the owner’s income tax return (Form 1040).
However, people still go for an audit in order to fulfill certain specific conditions:
- In case you have applied for a business loan, lenders require audited financial statements when the loan amount exceeds $1 1million
- If your sole proprietorship receives federal funding of $750,000 or equal to $750,000, an audit is required under the Single Audit Act.
- Some state/local grants also require audited financial statements, regardless of the structure
- Certain specific industries, such as healthcare, legal, insurance, and state licensing boards, require audited or CPA-reviewed financial statements as part of their compliance requirements
- Buyers or franchisors may require audited statements as part of due diligence
Voluntary Audits: Why do some companies choose to audit anyway, and why should you choose?
Voluntary audits send a strong message of transparency and professionalism for your business. Even when, in some cases, it is not required by law, some businesses in the U.S. still choose voluntarily to undergo audits because of the following reasons:
- To improve internal controls and financial accuracy.
- To increase credibility with stakeholders.
- To prepare for future growth, fundraising, or acquisition.
- To attract high-quality investors or partners.
Conclusion:
Understanding when an audit is required is crucial for compliance and strategic planning. If you’re unsure whether your business needs an audit—or if you’re preparing for one—consult with a licensed CPA or audit professional (an auditor registered with PCAOB standards) to assess your specific obligations.
At Mercurius, we have a team of seasoned professionals, including Certified Public Accountants (CPAs) and PCAOB-registered auditors. Our team has extensive experience working with clients who manage complex financial operations. We proudly serve a diverse client base across 60+ countries, with over 60% of our clients based in the United States.
If you’re looking to conduct a professional audit for your firm, feel free to Connect with Us!