Audit of the Targeted Use of Grants: The Importance of Complying With Donor Conditions

Thanks to grants, nonprofit institutions and organizations can implement large-scale initiatives, attract new resources and partners, acquire new knowledge, and strengthen their operational processes, which in the long term contributes to sustainable development of such organizations and their initiatives. However, obtaining funding is only the first step. It is important not only to use these funds effectively but also to confirm their targeted application. This is precisely the purpose of an external independent audit of the targeted use of grants, which provides assurance regarding the transparency of expenditures and their compliance with donor requirements.

What Is an Audit of the Targeted Use of Grants?

It is an independent review of the use of earmarked funding that assesses how an organization spends resources received to implement activities clearly defined in the corresponding donor agreement. Its main goal is to confirm that actual financial and project activities comply with the grant agreement and donor rules.

It is important to understand that this type of audit differs from a financial audit. The latter covers the organization’s activities as a whole, while the former focuses specifically on verifying expenditures within the scope of a particular grant-funded project.

Key Donor Requirements for the Use of Grants

Grant agreements typically impose clear donor requirements on grantees regarding the spending and reporting of funds, including:

• Transparency and justification of expenses — all expenses must relate to the project, correspond to the approved budget, and be supported by financial and other documentation.
• Compliance of financial reporting with the agreement — reporting to donors must follow the donor’s financial reporting rules and instructions.
• Timely submission of reports — late submission can negatively affect donor trust and the possibility of obtaining future funding.
• Compliance with procurement rules — acquisition of goods and services within the project must follow donor-established or donor-acceptable procedures.

Stages of Auditing the Targeted Use of Grants

The verification of grant fund usage occurs in several key stages:

1. Preparation — analysis of the grant agreement, identification of compliance parameters, review of internal policies and procedures of the organization.
2. Collection and verification of supporting documents — review of invoices, contracts, source documents for goods and services received, payment orders, bank statements, payroll and other documents.
3. Analysis of expenditure compliance — verifying whether expenses relate to planned project activities and correspond to donor-approved budget lines.
4. Verification of procurement documentation — analysis of compliance with donor or organizational procurement rules in selecting suppliers.
5. Formulating conclusions and recommendations — preparation of an audit report with the auditor’s opinion regarding the compliance of project financial reporting with donor requirements, as well as a management letter with recommendations to address identified deviations and improve internal control systems.

Importance of Engaging an Independent Auditor

The importance of auditing grant projects by an independent specialist lies in increasing trust in the results and conclusions of the review, avoiding conflicts of interest, and obtaining recommendations based on extensive professional experience. Additionally, donors usually explicitly require that audits of grant funds are performed by an external independent auditor.

This approach ensures:

• Objective assessment of financial reporting — independent experts review documents impartially and verify compliance with the grant agreement.
• Identification of potential risks — auditors help detect issues early and provide advice on eliminating or mitigating them.
• Strengthening the organization’s reputation — the role of audit in ensuring transparency increases donor and partner trust.

Common Violations in the Use of Grant Funds

The most common mistakes discovered during audits include:

• Use of funds for non-target purposes, which may result in reimbursement obligations or the return of unspent funds.
  
• Lack of proper documentation — if expenses are unsupported or documents contain inaccuracies, both auditors and donors may question the transparency of spending.
  
• Reporting errors — often caused by non-compliance with grantor conditions, such as misclassifying expenses or using incorrect exchange rates.
  
• Late submission of reports, which may delay funding or result in more serious consequences.

How to Pass a Grant Project Audit

Preparation for an audit is ensured through the functioning of the organization’s financial monitoring and internal control systems during project implementation. It is essential to ensure timely and high-quality documentation so that all expenses are supported by properly executed contracts, payment orders, completion certificates, invoices, etc.

Special attention should be paid to meeting reporting deadlines.
The use of automated grant expense accounting systems significantly simplifies managerial accounting, preparation of financial reports, and other financial data required during the audit.

Benefits of Conducting an Audit of the Targeted Use of Grants

Compliance with audit standards for grant projects provides several advantages:

• Ensuring accountability — completing the audit is typically the final step in reporting to the donor.
  
• Strengthening donor trust and organizational reputation — auditor confirmation of transparency enhances the chances of receiving new funding.
  
• Reducing financial risks — the audit helps identify and eliminate issues early or mitigate their consequences.

Oksana Koliada

author