Senior cabinet member Bridget McKenzie reportedly awarded a shooting club nearly $36,000 without declaring she was a member.
The Auditor-General found the former sports minister allocated most of $100 million in sports grants to groups in seats the Coalition was targeting at the last election.
The Nationals deputy leader approved the windfall for her clay target shooting club in a regional Victoria electorate that was then held by independent MP Cathy McGowan, Nine newspapers reported on Wednesday.
The Auditor-General found 73 per cent of the projects Senator McKenzie approved were not recommended by Sport Australia.
Senator McKenzie granted on February 25 last year – less than three months before Scott Morrison's upset election win – $35,980 to the Wangaratta Clay Target Club from the Community Sports Infrastructure Grant.
She made the announcement alongside Nationals candidate Mark Byatt who was contesting the seat that was eventually won by independent MP Helen Haines.
Senator McKenzie failed to disclose she was a member of the club when her senator's register of interests was last updated on November 21.
Senator McKenzie has refused to apologise, while Mr Morrison and Deputy Prime Minister Michael McCormack are backing the under-fire minister.
Treasurer Josh Frydenberg, whose electorate was awarded more than $700,000 from the sports grants program, also defended his colleague.
"Grants right across the electorate, for Labor and Liberal members, and National party members alike, applied through the proper processes, received the grants, they were all eligible and the money is being well spent," Mr Frydenberg told 2GB radio.
Former Labor sports minister Ros Kelly stepped down from the ministry and then parliament in 1995 following a similar scandal.