Audit of grant funds: typical mistakes of grantees and what an auditor actually verifies

This material serves as a practical supplement to the article “Audit of Grant Funds: Less Fear, More Trust,” in which we explained why a grant audit is a tool for transparency rather than a punishment..

Why Grantees Fear Audits — and Why It’s Unnecessary

In our practice, we consistently see the same picture: the mere word “audit” creates tension long before anyone even opens a document.

The reason is simple — a lack of understanding of what exactly is being verified.

A grant audit is NOT equivalent to:

• →A tax inspection;
• →A search for someone to blame;
• →An automatic negative opinion.
• 
  

  In reality, it is a verification of three key things:

  1. Were the funds used for their intended purpose?

  2. Are the expenses supported by proper documentation?

  3. Were the terms of the grant agreement followed?

  Most issues arise not from misuse of funds, but from typical mistakes that grantees simply haven’t considered.

Typical Mistakes Made by Grantees During Project Implementation

1. Expenses Seem Logical for the Project but Lack Documentary Justification

One of the most common situations we encounter:

• An expense is factually related to the project;
• However, the reporting fails to explain why it was necessary.

For an auditor, it is not just about what was purchased, but how that specific purchase contributed to achieving the grant’s objectives.

2. Incomplete Package of Primary Documents

Common issues include:

• Payment exists, but the contract is missing;
• An act of acceptance exists, but there is no proof of payment;
• Documents are stored in different folders or held by different responsible individuals.

An audit always verifies the entire chain: Contract → Execution → Payment → Reflection in the Report.

3. Project Changes Were Agreed Upon but Not Recorded in Writing

Projects evolve, and that is normal. The problem arises when:

• Changes are agreed upon orally;
• Changes are approved, but without an addendum or official correspondence.

During an audit, only what is documented in writing is taken into account.

4. Discrepancies Between Financial and Narrative Reports

For example:

• The financial report lists certain expenses;
• The narrative report describes different activities or different dates.

For an auditor, even minor discrepancies are a signal to ask additional questions.

5. Lack of Internal Control Procedures

This occurs when:

• There is no person specifically responsible for the grant’s finances;
• Spending decisions are made on an ad hoc basis;
• Internal approval rules are non-existent.

While not a violation in itself, this is a high-risk factor that increases the likelihood of errors.

Key Documents an Auditor Verifies First

• → Grant Agreement and Annexes:

• Project objectives;
• Eligible costs;
• Implementation timelines;
• Reporting requirements.

• → Grant Financial Statements:

• Alignment with the approved budget;
• Detailed breakdown of expenses;
• Arithmetic and logical consistency.

• → Primary Documents:

• Contracts and agreements;
• Acts of acceptance/completion;
• Invoices;
• Payment documents (bank statements);
• Cash documents (if applicable).

• → Procurement Documentation:

• Justification for supplier selection;
• Compliance with procedures defined by the donor;
• Confirmation of market prices.

• → Evidence of Actual Implementation: 

• Performance/progress reports;
• Photo and video materials;
• Participant lists;
• Event results and outputs.

A Case Study from Audit Practice

In our work at Audit Invest, we have encountered a wide variety of scenarios. For instance, an organization once implemented a grant project with no substantive violations: the funds were used for their intended purpose, and all activities were successfully completed.

However, a significant issue arose due to the lack of documentary evidence for budget changes:

• A portion of the funds was redistributed between budget lines.
• The donor approved this via informal work correspondence but without a formal confirmation or addendum.

During the audit, we had to:

• Reconstruct the entire correspondence history.
• Prepare extensive additional explanations.
• Formalize the decision post-factum.

Key Takeaways for Grantees

It is important to keep in mind that a grant audit:

• Does not have a punitive purpose;
• Is not the same as a tax inspection;
• Evaluates transparency and compliance with the terms of the grant.

This is why proper preparation for an audit significantly reduces both stress and potential risks. We explored this in greater detail in our main article:

• →  “Audit of Grant Funds: Less Fear, More Trust,”

Conclusion

In practice, a grant audit is rarely associated with actual misconduct. Most often, it begins with the grantee’s anxiety regarding documentation or potential remarks from the donor. However, the auditor’s role is not to find fault, but to confirm the transparency, logic, and integrity of how the grant funding was utilized.

When a project has a clear structure, expenses are justified, and key decisions are recorded in writing, the audit process is calm and predictable. In such cases, the audit report is not a risk but a tool for building trust with the donor and a foundation for future cooperation.