"except the shareholder is using the contribution for personal expenses, which only runs through the balance sheet."

Why? What are they trying to accomplish?

This often happens when someone thinks, by running it through their independent entity, they turn it into a business activity.

"Should they be excluded from the S corp altogether to prevent triggering future audit?"

They need to stop treating the corporation as their personal bank. It's called Commingling and it's known as Piercing the Corporate Veil. What they did is expose their personal life to the business of the corporation and the corporation's business to their personal life. One example is Lawsuit filing against assets recoverable for damages and settlement. And they just made it all discoverable in the case of IRS audit, bank review, worker comp compliance, you name it, they revealed it.

They formed a corporation for a reason. Then they took it out behind the shed and shot it to death.