Common Grant Audit Failures: UK Guide

Partner & Head of Grant Audits

Last reviewed: 20 July 2026

Most grant audits do not fail because of fraud or deliberate wrongdoing. In many cases, the issues identified are the result of simple mistakes, weak record-keeping, or misunderstandings about funding rules.

In our experience, organisations are often surprised by the nature of audit findings. Many assume that because expenditure was genuinely incurred for the project, it will automatically be accepted by the auditor. In reality, grant audit success depends not only on how money was spent, but also on whether compliance can be demonstrated through appropriate evidence and documentation.

Whether funding comes from government bodies, innovation programmes, enterprise agencies, universities, or regional development schemes, grant recipients are expected to show that all claims comply with funding requirements.

At Henderson Loggie, we have extensive experience supporting UK organisations receiving funding from a wide range of grant programmes, including Innovate UK, Scottish Enterprise, UKRI, Horizon Europe, the European Innovation Council and other UK and European funding bodies. While grant compliance requirements can vary between programmes, robust record-keeping and audit preparation are essential for all grant audits.

This guide explains the most common grant audit failures, why they occur, and how organisations can reduce compliance risks.

What Is a Grant Audit?

A grant audit is an independent review of grant-funded expenditure and project activity.

Its purpose is to confirm that:

Grant claims are accurate

Expenditure complies with funding rules

Costs are supported by evidence

Project activity aligns with approved objectives

Public funds have been used appropriately

A grant audit typically involves reviewing financial records, payroll information, contracts, procurement documentation, invoices and project records.

A key point often overlooked is that auditors are not simply reviewing whether money was spent. They are assessing whether expenditure was eligible, properly evidenced and incurred in accordance with the funding agreement.

Why Is Grant Audit Compliance Important?

Strong grant audit compliance helps organisations:

Protect grant income

Avoid financial corrections

Reduce repayment risk

Strengthen project governance

Maintain credibility with funders

Support future funding applications

When speaking to clients, we often explain that grant funding comes with responsibilities as well as opportunities. Even relatively small compliance issues can result in grant reductions if expenditure cannot be justified during audit testing.

The financial consequences can be significant, particularly where ineligible costs have been claimed over multiple reporting periods.

The Most Common Grant Audit Failures

Ineligible Costs Claimed Against the Project

One of the most common audit findings involves costs that were never eligible under the funding rules.

Funding agreements typically set clear boundaries around what can be claimed. Problems arise when assumptions are made rather than referring back to the guidance.

Common examples include:

General business overheads claimed incorrectly

Expenditure unrelated to project activities

Entertainment and hospitality costs

Capital expenditure where only revenue costs are eligible

Costs exceeding approved budget categories

In our experience, many organisations only discover these issues during an audit review, despite the restrictions being clearly outlined in the grant documentation.

Expenditure Incurred Outside Approved Project Dates

Timing is a frequent source of audit findings.

Many funding programmes specify when expenditure can be incurred and when claims must be submitted.

Issues can occur where:

Costs are incurred before project approval

Expenditure falls outside the project period

Claims are submitted after funding deadlines

Work is completed after the approved completion dates

Even legitimate project expenditure may become ineligible if it falls outside approved funding periods.

Insufficient Supporting Evidence

A cost may be genuine and project-related but still fail audit testing if supporting evidence is missing.

Grant audits depend heavily on documentation.

Common evidence issues include:

Missing invoices

Missing payment evidence

Incomplete supplier records

Missing contracts

Lost documentation

Weak filing systems

Inadequate project records

A useful principle is simple: if a cost cannot be evidenced, it may not be accepted.

Payroll and Staff Cost Errors

Staff costs often represent a significant proportion of grant expenditure and therefore attract substantial audit scrutiny.

Typical issues include:

Incorrect hourly rates

Unsupported salary calculations

Missing timesheets

Inaccurate project allocations

Unsupported employer costs

Employees charged to projects they did not work on

We regularly see payroll-related findings arise not because employees failed to work on the project, but because the organisation cannot clearly demonstrate the methodology used to calculate and allocate costs.

Weak Audit Trails

An audit trail is the documented path linking expenditure back to the grant claim.

Weak audit trails can make verification difficult even when evidence exists.

Common issues include:

Documents stored across multiple systems

Missing approvals

Poor document organisation

Unclear project coding

Weak version control

No link between expenditure and project objectives

A complete audit trail should make it easy for an independent reviewer to trace every claim back to supporting documentation.

Procurement Compliance Failures

Procurement requirements are frequently overlooked.

Many funding programmes require organisations to demonstrate:

Competitive supplier selection

Value for money

Fair and transparent procurement processes

Documented tender evaluations

Common procurement failures include:

Missing quotations

Insufficient supplier competition

Lack of procurement records

Failure to follow funding rules

These issues can result in costs being partially or fully disallowed.

Unsupported Cost Allocation Methods

Many organisations need to allocate shared costs across different activities.

Problems arise when allocation methods:

Are not documented

Cannot be evidenced

Are applied inconsistently

Differ from funding requirements

Have not been approved where necessary

Allocation methodologies should be logical, consistent and supported by evidence.

What Happens If a Grant Audit Identifies Issues?

A grant audit finding does not automatically mean an organisation has acted improperly.

However, findings may result in:

Costs being disallowed

Grant claims being reduced

Additional information requests

Funding adjustments

Repayment demands

The outcome typically depends on the nature, scale and materiality of the issue identified.

Can Grant Funding Be Reclaimed?

Yes.

If a funder determines that expenditure is ineligible or unsupported, they may seek repayment of grant funding that has already been received.

This does not necessarily mean the entire grant award is at risk.

In most cases, any adjustment is linked to specific costs or categories of expenditure that fail compliance testing.

Nevertheless, significant weaknesses identified across a project can have much wider financial implications.

How to Reduce the Risk of Grant Audit Failures

The most effective approach is to build compliance into everyday project management.

Organisations should:

Understand the funding agreement fully

Monitor expenditure regularly

Maintain complete documentation

Track project activity consistently

Review staff cost calculations

Retain procurement records

Conduct internal compliance reviews

In our experience, organisations that treat compliance as an ongoing process are significantly less likely to encounter major audit issues.

When Should You Seek Professional Advice?

Professional advice may be valuable when:

Managing large grant-funded projects

Preparing for a funder audit

Responding to audit findings

Designing cost allocation methods

Implementing compliance procedures

Managing multiple funding streams

Early input often helps identify risks before they become costly audit findings.

Conclusion

Most grant audit failures result from avoidable mistakes rather than deliberate misconduct.

Common issues include ineligible expenditure, missing evidence, payroll errors, weak audit trails, procurement failures and unsupported cost allocations.

When speaking to clients, we often emphasise that successful audits are usually the outcome of strong project administration rather than last-minute preparation. Organisations that maintain accurate records, understand funding requirements and review compliance regularly are generally best placed to protect valuable grant funding and minimise audit risk. Read our full guide on How to Prepare for a Grant Audit for more information.