Kim MacPherson said Thursday the department does not always comply with its own documented foster home standards.
She said a sample of foster family files found only two of 20 files contained all of the required documentation for approving a foster family.
"I am concerned that because of what we found, that children are vulnerable and the government needs to do a better job," she said in releasing her annual report.
MacPherson said the family development plan, which is used by a social worker on an ongoing basis to assess a family's competency to foster, was missing in nine of 20 cases.
When it comes to monitoring approved foster homes, MacPherson found only three of 18 files tested contained documents showing regular annual reviews.
Social Development Minister Madeleine Dube said she accepts the concerns of the auditor general and has begun efforts to make changes.
"I certainly directed my staff to work with the regional directors and to make sure that all the standards and procedures are being followed," Dube said outside the legislature.
Dube said in some cases, the files that were examined cover 20 years but only one or two documents were missing.
"There's nothing in her report stating that the quality for foster homes is not there," Dube said. "It's all about the evaluation and assessment documentation that is supposed to be in the file."
There are more than 1,100 children in foster care in the province.
MacPherson said the number of foster homes in the province has decreased by 41 per cent over the last eight years.
"An inadequate supply of foster families could result in adverse consequences to vulnerable children in need of care," MacPherson wrote.
"Siblings may get separated ... or be placed in a group home."
MacPherson also said funding for foster care families has not kept pace with inflation.
Dube agreed funding is an issue that needs to be addressed.
"I accept her recommendation and this is something I will bring forward to the budget process," Dube said.