Funder Auditing Your Grant? How to Prepare Your Books

A letter arrives saying the funder intends to review how the grant money was spent, and the reaction in most finance offices is the same. Before anything else, be clear about what this is. A funder audit is a contractual review carried out under the terms of your grant agreement. It is not a CRA audit of your charity, and it is not a statutory audit or review engagement of your financial statements. It tests one grant against one agreement, and preparing for it is a bookkeeping job. This guide covers what gets tested and what to have ready.

What is a funder audit, and what is it not?

A review of one grant against one agreement, conducted by or for the funder under a clause you agreed to when you signed. The distinction matters because the three things get confused constantly.

A CRA audit examines your charity's compliance with the Income Tax Act across its whole operation. A statutory audit or review engagement is an assurance service on your financial statements, and whether you need one comes from your incorporating statute, your bylaws or a funder agreement, not from CRA. A funder audit is narrower than either: did the money go where the agreement said it would.

That also shapes who does what. Your bookkeeper prepares the records and the reconciliations the reviewer works from, but cannot independently assure their own work. Who may perform the review is set by the grant agreement and the terms of the engagement, and whether a particular firm can both prepare records and carry out a review depends on the engagement, on who takes responsibility for management decisions, and on the professional rules that apply to it. Settle that with the funder and the firm rather than assuming either answer.

Scope varies. Some funders send a questionnaire, some ask for a sample of transactions, and some send a reviewer on site for two days. Read the notice carefully, because it usually says which.

What does a funder actually test?

Whether the costs were eligible, correctly allocated, in the right period, and supported by documents. Six areas cover most of it.

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Allocation is where reviews spend the most time, because it is where judgment lives. A salary charged 60% to the grant needs something behind the 60%, and a timesheet accounting for all of a person's time is far stronger than one that records only the funded hours.

Cutoff is the quiet one. A cost incurred a week after the grant period ended is ineligible no matter how legitimate it was, and a cost incurred inside the period may still fall outside a claim where the agreement required it to be paid first.

What documents should be ready?

The agreement, the ledger detail, the source documents behind a sample, and the working papers that connect them. Assemble them before the reviewer asks rather than during the visit.

Have these in one place: the signed agreement and any amendments; the approved budget and every approved reallocation; the general ledger detail for the grant code over the grant period; source documents, meaning invoices, contracts, receipts and proof of payment; timesheets or effort records supporting allocated salaries; the written allocation basis for shared costs; bank records; board or management approvals where the agreement required them; and every claim and report submitted, with the reconciliation behind each.

Organise it the way the review will run, which is usually by budget line and then by transaction. A reviewer given a folder that mirrors the report finds what they need without asking you for it.

Where records are held electronically, make sure they can be produced in readable form. Under the Income Tax Act, books and records must be kept at an address in Canada and be accessible to CRA, and electronic and properly created scanned records are acceptable. A funder will usually have its own requirements on top of that, set out in the agreement.

How do you reconcile before they arrive?

Run the same reconciliation the reviewer will run, and fix what it finds. Anything you discover first is a correction; anything they discover first is a finding.

Start by reconciling the ledger to every claim and report already submitted. Where a figure has changed since a claim went out, know why. Then re-run the eligibility check on a sample of your own, particularly on the categories the agreement treats carefully.

Test your own allocations next. Pick two allocated costs and try to prove the percentage from the underlying records without explaining it verbally. If you cannot, the reviewer will not be able to either.

Where the reconciliation surfaces something wrong, correct it properly with a dated entry and a reason, and tell the funder before the review rather than during it. Self-disclosure changes the tone of a review substantially.

If the books are not current, the reconciliation is not the first job. Bringing them up to date is, and our guide to catch-up bookkeeping covers doing that in the right order.

What findings come up, and how do you pre-empt each?

Undocumented allocations, missing source documents, cutoff errors, and reports that do not tie to the ledger. All four are preventable in advance and expensive afterwards.

Undocumented allocation comes up repeatedly. The prevention is a written allocation basis, set once, with the calculation attached, and timesheets that cover all of a person's time rather than the funded portion.

Missing source documents usually means a credit card statement standing in for a receipt. A statement proves a payment was made; it does not prove what was bought. Keep the itemised document.

Cutoff errors come from a claim that does not match what the agreement and the claim form allowed. Accrue in the ledger when the accounting criteria are met, claim on the funder's terms, and keep the reconciliation between the two. Accruals posted monthly are records; accruals reconstructed at closeout are estimates, and a reviewer can tell the difference.

Reports that do not tie to the ledger come from building the report in a spreadsheet beside the books rather than from them. Our list of common pitfalls covers more of what tends to break.

What happens if costs are disallowed?

The amount is normally recovered from a later payment or repaid, and the cost becomes an unrestricted expense of your organisation. It is a correction with a cash consequence, not a penalty in itself.

Handle it in the books cleanly. Reverse any receivable and revenue recognised on the disallowed amount, recode the underlying cost out of the grant to unrestricted operations, and record any amount you have to repay as a liability rather than netting it against revenue.

Ask for the finding in writing with the reasoning, and check it before accepting it. Reviewers work from the agreement, and a finding sometimes rests on a reading of a clause that your correspondence with the funder contradicts. Produce the correspondence.

Then look at the cause. A pattern of disallowances in one category points at a misunderstanding about the agreement that will repeat on the next grant unless it is fixed at the source.

Charities that come through funder reviews well are generally the ones whose grant records were built for it from the start, rather than assembled when the letter arrived. That structure is what ongoing bookkeeping support should put in place, and it is the same file that makes the next year-end handover straightforward.

Frequently Asked Questions

Is a funder audit the same as a CRA audit?

No. A funder audit is a contractual review of one grant under the terms of your agreement. A CRA audit examines your charity's compliance with the Income Tax Act across its operations. They test different things, are triggered differently, and have different consequences.

Do we need audited financial statements for a funder review?

That depends entirely on your agreement, and it is a separate question from whether your incorporating statute requires assurance. CRA does not require a charity to have audited financial statements. Check what your agreement asks for well before the review.

Can our bookkeeper perform the funder audit?

Not as an independent review of their own work. A bookkeeper's job here is to prepare the records, the reconciliations and the explanations the reviewer relies on. Whether the same firm can take on any part of the review depends on the grant agreement, the engagement terms and the professional rules that apply, so confirm it before assuming.

How far back can a funder look?

Usually the grant period, plus whatever record retention the agreement imposes afterwards. Some agreements allow a review for several years after closeout, which is one reason the closed grant file matters.

What if we cannot find a document?

Say so, and explain what you do have. Reconstructing a document after the fact is worse than acknowledging a gap, and a reviewer will treat a candid gap differently from an invented replacement.

Should we tell the board about the review?

Yes, at the outset, along with anything you expect the review to find. A board that hears about a disallowance from the funder rather than from management has a governance problem on top of a financial one.

This article covers preparing your books for a funder or grant audit as at September 2026. It does not address CRA charity audits, statutory audit or review engagement requirements, or the assurance thresholds set by incorporating statutes. Scope, records access and repayment terms are set by each grant agreement.

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