STUDENTS Union leaders were breaking their rules by selling cheap beer to a nightclub at Wrexham FC.
But the man who runs the Centenary Club in Wrexham FC's Racecourse ground said he believed the deal was above board.
Dave Bennett said NEWI College Student Union manager Melanie McClave had told him they had permission to allow him to sell the alcohol.
But auditors Pricewaterhouse Coopers, in a secret document seen by the Daily Post, said the National Union of Students Services Ltd, who co-ordinate student union sales, had not given NEWI's SU authorisation.
The report said: "There are concerns over the union's contractual position with NUSSL, relating to the sale of alcoholic drinks to Centenary Club at Wrexham FC.
"NUSSL have confirmed that the students' union had not sought permission for such an arrangement, and even if it had done so, permission might have been granted for one-off events but would not have been readily given for on-going transactions."
As a result the union could face heavy penalties from the NUSSL for breaching conditions of sale, the report said.
Mr Bennett said: "I was shocked when all this came to light and have since stopped selling the alcohol about a month ago.
"I believe there is a witch hunt out to get the managers. Melanie told me she had permission granted and I ordered the beer from the breweries. It was only a few items for the students' union night on a Thursday. We held them every Thursday for about 12 months.
"I don't believe that she would have done anything wrong, and would not have let me have it if she did not have permission. I think her only mistake was not to get the permission in writing.
"To be honest I could have got the beer cheaper from Bargain Booze, but half of the takings from the Thursday nights were given back to the student union to put on bands and such like."
It is understood Ms McClave is on holiday at the moment.
The college said a £130,000 grant from the governing board will remain frozen until the union puts its house in order. The grant was immediately suspended after allegations of financial mismanagement by the union arose.
Yesterday a spokesman for the college refused to discuss the auditor's report.
The board want a financial consultant appointed. Monitors were also brought in to oversee last week's student union elections.
It is understood students are planning further demonstrations protesting against the union's management.
A student said: "We were disgusted after the report emerged. Student services and entertainments have been disappearing for years. There is nothing for us."
NEWI students' union current president, Chris Jones, said they were still in negotiations with the NUSSL over the sale of alcohol to the Centenary Club.
On other matters he said: "Due to staff sickness, bank reconciliations were delayed, but this matter has now been addressed and they are completely up to date."
"The students union is aware that there has been no finance and general purposes committee held. Vacancies on the executive committee were advertised for a bi-election to take place, but were not filled. Therefore as the position of treasurer who would normally chair this meeting is at present vacant, no such meeting could take place."
Responding to the auditor's concerns over the accuracy of the annual budget, Mr Jones said: "The budget was completed in haste in order to have part of the block grant released.
"Because of the time factor involved in completing the budget, there was a problem with the brought forward balances.
"This was purely a human error and the first time that the accuracy of the students union finances has ever been questioned. NEWI also had final audited accounts for that year end which did not relate to this year's figures."
Commenting on allegations auditors were unable to conclude whether union expenditure was recorded properly, he said: "In relation to cash income of the student union, as with all areas where the equipment concerned is not our own, i.e. vending and gaming machines, we do not empty the machines, neither do we hold the keys to the machines.
"We receive a percentage of the share of the takings."
Mr Jones said they were awaiting clarification over anomalies in expenses for journeys.
He added the union was unaware of the form needed for employees' cars but it had been obtained and sent to the Inland Revenue.
NEWI College hopes to apply for university status next year.