An audit for the Australian aid agency, AusAID, is reported to show that Kiribati denied it access so it could check how money is allocated.
The Canberra Times reports that the Kiribati Government shut aid staff out of meetings that determine who receives scholarships to study in Australia.
An audit of AusAID's office in Tarawa warns the closed-door approach may expose the scholarship scheme to nepotism.
The report, by auditing firm Protiviti, says the aid agency is not assured that the Kiribati government selection decisions are equitable or merit-based.
AusAID reportedly attributed this to the absence of a clear and detailed understanding of the candidate-assessment process.
Yet despite knowing about the lack of transparency for at least three years, Australia continued to fund the scheme.
There have long been concerns that some Kiribati students awarded scholarships to study at the University of the South Pacific in Suva were undeserving.