Sir John Bourn accused ELWa - Education and Learning Wales - of "major failings" in the financial management of a range of projects. He detailed "a fundamental breakdown in the controls that should have been operated".
The quango, responsible for funding all post-16 education and training in Wales apart from higher education, has already had to produce an action plan to address its problems following a first report by the Auditor General in January.
In his second report to the Welsh Assembly, Sir John singled out an up-front payment of pound;4 million to finance the Pop Centre MP3 Cafe initiative in Rhondda. This was intended to bring "accessible learning opportunities" to one of Wales's most deprived areas. The report said there were a number of deficiencies in the contract that produced a failure to "provide an adequate safeguard for public funds or a sound basis for the management of the project". At ELWa's request, the company behind the project repaid pound;1.67m of the pound;4m in February this year and pound;276,000 in May.
The report also said "several of these serious weaknesses" have been identified in an audit of the other 17 projects within ELWa's pound;12m innovation development fund programme for 2001-2.
Sir John said: "These audit findings demonstrate a fundamental breakdown in the controls that should have been operated by the National Council. It is not acceptable that public business was conducted in this way and that the interests of the people of Wales were not better protected."
The National Council-ELWa said it accepted there had been "serious deficiencies" but it had been working to avoid future mistakes. It said its projects are now expanding and "improving learning opportunities significantly".
A separate independent report on ELWa's recovery plans was also published this week and was welcomed by Welsh education minister Jane Davidson as a positive indicator of the progress being made.