A WAO report investigated homelessness in the wake of the implementation of the Housing (Wales) Act 2014, which placed a duty on councils to help prevent at-risk people from becoming homeless.
The Welsh Government stumped up £11.5m grant funding between 2015 and 2018 to help councils with their new duties, with an extra £6m a year promised in 2018-19 and 2019-20.
But the WAO found that the overall level of funding on homelessness and housing advice services had fallen in real terms.
In 2015-16, the 22 Wales local authorities spent £27m on homelessness and housing advice, compared to £33m in 2009-10. Taking inflation into account, this is a fall of 26.3%.
The report warned that the number of people living in temporary accommodation was rising and prevention services were becoming less effective.
A WAO survey of 750 citizens also revealed provision of temporary housing and services for those at risk of becoming homeless were rated as the poorest quality service provided by their local authority.
The report recommended local authorities review their services to secure funding for prevention.
It said: “Reviews should consider use of Supporting People [government funding for housing for vulnerable people] as well as general council fund monies to support delivery of the authority’s homelessness duties.”
Auditor general Huw Vaughan-Thomas said: “Local authorities continue to focus on managing people in crisis rather than stopping them getting into crisis in the first place.
“To truly prevent homelessness public bodies need to take a long-term view and work with other organisations to really tackle the issues that cause homelessness.
“This requires a focus on, for example, better educational attainment, access to employment, well-planned transition when leaving care and access to welfare benefits.”