However Mr Morrison says an investigation has cleared Senator McKenzie of pork barrelling with the $100 million Community Sport Infrastructure Scheme ahead of the 2019 election.

With parliament set to resume this week, Mr Morrison on Sunday announced Senator McKenzie had resigned as deputy leader of the National Party and Agriculture Minister.

It came after nearly three weeks of political pressure, after a damning audit report found Senator McKenzie's office sidelined meritorious applications in favour of giving grants to marginal and targeted electorates.

An investigation by Prime Minister and Cabinet secretary Phil Gaetjens concluded Senator McKenzie breached ministerial standards by failing to declare she was a member of the Wangaratta Clay Target Club before awarding it a community sporting grant.

The club received $36,000 for a new toilet block, the month after the former sports minister had visited and been gifted membership.

Senator McKenzie did not declare that membership, as it was worth less than $300 - the threshold for declarations under the rules of the Senate.

Mr Morrison said Senator McKenzie had failed to manage the conflict of interest appropriately, by recusing herself and allowing another minister to make the grant decision.

But he also revealed Senator McKenzie had a second undeclared conflict of interest in her membership of Field and Game Australia.

The Northern Territory division of the shooting body received $500,000 under the grants scheme, while the Warrnambool branch received $50,000.

While the minister was not a member of either of those branches, she was a member of the umbrella organisation, and should have recused herself, Mr Morrison said. Mr Morrison did not mention the SA Field and Game Association Southern Branch, which also received nearly $48,000 under the scheme.

But Mr Morrison said the Gaetjens report had cleared Senator McKenzie of the most serious charge of pork barrelling.

Mr Gaetjens found there was no evidence Senator McKenzie had used the sporting grants to funnel money to seats the Coalition wanted to win at the 2019 election, Mr Morrison said.

This stands in stark contrast to the findings of the Australian National Audit Office, which uncovered "distribution bias" in the way Senator McKenzie's office doled out money.

"Applications from projects located in those electorates were more successful in being awarded funding than if funding was allocated on the basis of merit assessed against the published program guidelines," the audit said.

But Mr Gaetjens - who is Mr Morrison's former chief of staff - found "no basis for this suggestion that political considerations were the primary determining factor", Mr Morrison said.

"He notes that data indicates that applications from marginal or targeted seats were approved by the minister at a statistically similar ratio of 32 per cent compared to the number of applications from other electorates at 36 per cent," Mr Morrison said.

"The secretary has made very clear is that she has exercised that discretion and in his view, that has not been done with the political considerations that others have suggested."

The full Gaetjens report was cabinet-in-confidence, Mr Morrison said, meaning it would not be released publicly.

In a statement, Senator McKenzie said while she accepted the findings of Mr Gaetjens report, her support for the sport of shooting was "well known and disclosed through my public advocacy".

"I maintain that at no time did my membership of shooting sports clubs influence my decision making, nor did I receive any personal gain," Senator McKenzie said.

"However [I] acknowledge that my failure to declare my memberships in a timely manner constituted a breach of the Prime Minister's Ministerial Standards.

"I have always taken my role as a minister of the crown very serious and I understand that the community expects parliamentarians to abide by the highest standards."

However Senator McKenzie was defiant about her decision to reject the advice of Sport Australia on who to award grants to.

"Elected representatives are responsible for public expenditure and take advice, not direction, from the public service and others. The operation of ministerial discretion is important to our democratic process," Senator McKenzie said.

Senator McKenzie will remain in parliament on the backbench.

Deputy Prime Minister and Nationals Leader Michael McCormack will act as Agriculture Minister until the partyroom meets to determine a replacement on Tuesday.

Mr McCormack thanked Senator McKenzie for her work as deputy leader.

"Senator McKenzie's energy and enthusiasm in any of her roles are evident to all who meet her and I know she will continue in her efforts to serve the people of Victoria and Australia," Mr McCormack said.

Mr Morrison said Senator McKenzie had shown "a great respect for the statement of standards" by resigning.

"Standards, as I say, are about accountability," Mr Morrison said.

"They are about even in tough circumstances like this where the minister obviously did not stand to realise any pecuniary or any direct personal benefit, the standards require a disclosure of interest and, in particular, one where there involves a conflict of interest for a program they might be overseeing."

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The Australian National Audit Office began investigating the Community Sport and Infrastructure Grant Program at the request of Labor, after Liberal candidate Georgina Downer gave a $127,000 cheque to a South Australian bowling club as part of the scheme.

But Auditor-General Grant Hehir found the giant novelty cheque was just the beginning.

The minister's office ran its own "parallel" assessment process for determining where grants went with a colour-coded spreadsheet.

Labor has been calling for her scalp ever since.

However Senator McKenzie and her Coalition colleagues maintained no rules were broken, as all projects were technically eligible for funding.

There are also mounting questions about the involvement of the Prime Minister's office in the allocation of grants.

Labor leader Anthony Albanese on Sunday accused Mr Morrison of throwing Senator McKenzie under the bus.

"The sports rorts sage takes a twist with the player sacked for following the coach's instructions," Mr Albanese tweeted.

Senator McKenzie's resignation will likely fail to head off a Senate inquiry into the scheme.

Centre Alliance MP Rebekha Sharkie - who was the member for the seat that Georgina Downer announced the taxpayer-funded grant for - said "in the absence of a federal ICAC, the allegations of impropriety must be investigated by the Australian Senate".