First of all Categories should be sorted if you have a lot of them. This requires manual setting in the code for the sidebar. Full details are in the Codex here.
Too bad this theme doesn't support hierarchical display of categories and I'm now getting quite a lot.....! If hierarchical is set it's important that a dummy post is there at the parent category otherwise all children categories will not be shown.
For this site I have now "turn-off" the display for hidden posts so you don't even know hidden posts for certain level of users exist, this is a great design.