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Nationals Senator Bridget McKenzie is facing calls to resign from the cabinet over the way she handed out sporting grants to clubs in marginal electorates before the 2019 election campaign.Credit:Alex Ellinghausen

But Mr Morrison said he would"continue to support"the Nationals deputy leader,insisting no rules had been broken and that the program she oversaw had "changed the futures of local communities".

Senator McKenzie,now Agriculture Minister,faces calls from the opposition and crossbench MPs to quit her position on the frontbench over the damning audit and will face fresh scrutiny over the affair when Parliament resumes next month.

Leading law firm Slater and Gordon is also investigating a class action,arguing tens of millions of dollars in grants were misappropriated.

It has also emerged a handful of Liberal MPs had raised concerns internally before the May election that the program would be treated as a National Party"slush fund"and had asked party officials to ensure funding was distributed fairly.

Taking questions over the issue for the first time on Monday,Mr Morrison said federal cabinet had signed off on the $100 million program but the individual grants were decided by Senator McKenzie and Sports Australia.

"Sports Australia write the cheque and ultimately authorise all the payments that go out in accordance with the rules,which is what the Auditor-General found was followed,"Mr Morrison said.

He said Senator McKenzie's personal intervention had increased the number of Labor-held seats that received grants and the auditor had found no rules were broken.

"The Auditor-General report is a very serious report and we take very seriously and we act on the recommendations ...[but] I stress,Sports Australia made the cheques and authorised those payments based on the decisions taken in accordance with the rules."

Prime Minister Scott Morrison is standing by Agriculture Minister Bridget McKenzie over her handling of sports grants.Credit:AAP

The Australian National Audit Office report said it was not evident what the legal authority was for Senator McKenzie to approve grants,with Mr Morrison asking Mr Porter to"clarify"and"address"the legal issues raised.

The audit recommended changes to the way the government corporate bodies,such as Sport Australia,make decisions when a minister has discretion to approve grant funding.

Labor small business spokesman Brendan O'Connor accused the government of corruption and scolded Mr Morrison for allowing it to happen on his watch.

"There's no doubt that having looked at what's been said by the auditor,that we have a problem with the way in which the government has dealt with this matter,"Mr O'Connor said on Monday.

"It's clear that they have politicised and corrupted the process for political gain.

"That has been dismissed this morning by Scott Morrison. But the fact is Scott Morrison clearly would have known the way in which grants were dealt with because he was the campaigner-in-chief for the Liberal Party at the last election."

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