The Loddon Shire's practices have come under the microscope as the Victorian Auditor General's office analysed practices going back five years.

Auditors found numerous examples of fraud controls that needed to be tightened at the rural council to Bendigo's north-west.

They included a councillor who appeared to have voted on a grant decision despite heading a committee that had requested the $20,000 for facility upgrades, and records of other decisions auditors said were not extensive enough.

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Their report does not suggest fraudulent activity took place and the council says its contents do not necessarily reflect current practices.

Local government minister Shaun Leane says he will write to the council and five others examined in the report seeking assurances they will address issues raised.

"We expect councils to maintain a standard of good governance that the community rightfully expects," he said.

"It is important that all councils have effective controls for their grant programs to prevent fraud and give their communities confidence."

The auditors examined six councils and found all had fraud controls that were not always well designed, or operating as intended.

"In some cases, they are missing," they said.

Auditors gave all councils nine recommendations but singled out Loddon Shire with an extra request to examine its ward-based grant funding system.

They say it may not be delivering the best value for money.

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Loddon Shire pays for some grants through two funds.

One earmarks $50,000 for each ward and pays for projects pitched by community planning groups.

The other is a $500,000 fund used to pay for a single project that strategically benefits the community. The council rotates funding between wards.

Auditors criticised the arrangements, saying that "by using both of these programs to fund primarily capital projects, Loddon is not assessing these projects against competing projects that go through its annual budgeting process".

"Loddon advised us that while it manages capital bids through its annual budget process, a lack of staff has impacted its ability to develop a project pipeline to help it develop and prioritise capital projects," the auditors said.

The council has agreed to evaluate the arrangements, though mayor Dan Staub said they had been in place for nearly 20 years without being challenged by the community.

"The program has delivered significant community-led projects over many years," he told auditors.

Cr Straub cautioned that changes would need to be balanced against potential clashes with other demands from the community.

The small rural council relied heavily on volunteers, who had recently been consulted for a volunteerism strategy.

"The overwhelming response from volunteers [was] that there is too much bureaucracy," Cr Straub said.

"We therefore need to find a balance between the recommendations of this audit alongside the willingness and capacity of our volunteers."

The council has agreed fully or partially with all 10 recommendations for improvements and given timelines for reviews to take place.

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