A Nottingham head teacher has been suspended from his job after evidence of fraud was discovered at his school.
The school said it was prepared to pay back money
Governors at Bluecoat School, Aspley, have begun disciplinary action against Max Kay and site manager Kevin Darby.
The auditor found what he described as "fraudulent activity" involving government-funded building contracts.
Police said they were considering a criminal inquiry. The school's governors have said they will repay any money that has been misused.
Complaints by Mr Darby led to an independent inquiry about how the school was being run.
It rejected most allegations but the auditor discovered "fraudulent activity" involving a £10,000 government grant.
It found the grant, intended to pay for building work, was actually diverted to the school's appeal fund - a breach of the government's financial controls for schools.
The fund was set up to secure donations towards a school extension.
In response, a statement from the school said: "The governors have accepted their responsibility...and will be in formal contact with the Department for Children, Schools and Families about a refund of the money in January."
Today Mr Kay and Mr Darby were both told they were being suspended on full pay pending disciplinary proceedings into possible gross misconduct.
Both have been warned they could be sacked.
Mr Darby has not worked since February because of illness. His advisers have already contacted the police.
Bluecoat is a Church of England school which has consistently good results in school league tables.