The report says better safeguards are needed to ensure the money is directed towards key projects, such as re-building parts of Indonesia affected by the 2004 tsunami.
It calls for improved accountability, so the money administered by the national aid agency AusAID is not lost to fraud or corruption.
The audit also found that AusAID is using grant money to pay staff salaries and administration costs.
This is despite the A$1 billion in funding being originally intended solely for reconstruction and development.
The report also found that the funds have been spent a lot slower than anticipated with only A$70 million handed out up to March this year.
And it says AusAID's been the victim of 43 suspected fraud cases worth 917 thousand dollars between 2002-03 and 2004-05, most of them in Indonesia.