* Native band failed to show how it spent money: audit
* Aboriginal leaders set to meet prime minister on Friday
* Many of Canada's 1.2 million aboriginals live in poverty
By David Ljunggren
OTTAWA, Jan 7 A Canadian native band that successfully pressured the prime minister to hold a special meeting on aboriginal grievances cannot account for millions of dollars in federal funding, according an audit that critics say was leaked to discredit a growing protest movement.
Angry native activists, fed up with poor living conditions they blame on decades of neglect from Ottawa, have already blockaded rail lines and threatened to close Canada's borders with the United States as part of a protest campaign they are calling Idle No More.
The August 2012 report from accounting firm Deloitte said the Attawapiskat First Nation in northern Ontario had shown "no evidence of due diligence" in accounting for how it had spent federal money designed to improve housing and health.
Attawapiskat Chief Theresa Spence has been on a hunger strike for almost a month near Parliament Hill in Ottawa to demand better treatment for natives. She and other leaders are due to meet Prime Minister Stephen Harper on Friday to discuss social and economic issues.
The audit, released by the office of Aboriginal Affairs and Northern Development Minister John Duncan on Monday, was initially leaked to some media organizations over the weekend.
A spokesman for Spence said those responsible wanted to discredit the chief.
"They're trying to undermine the process here, the movement of the people. The people are speaking out," Danny Metatawabin told reporters. He said Spence - who has been Attawapiskat chief since August 2010 - would address the audit on Friday.
Successive governments - including the current Conservative administration - have for decades struggled to improve the life of natives, who want more federal money and a much greater say over what happens to the resources on their land.
Although Ottawa spends around C$11 billion ($11.1 billion) a year on an aboriginal population of 1.2 million, living conditions for many are poor, particularly for those on reserves with high rates of poverty, addiction, joblessness and suicide.
Critics of the current system say bands are not required to show enough evidence of how they are spending the money they receive. They also complain some groups insist on living in remote regions where there is little economic activity.
Deloitte, which surveyed the Attawapiskat First Nation's expenditures from April 1, 2005 to Nov 30, 2011, said a probe of 505 transactions showed 81 percent of files did not have adequate supporting documents and more than 60 percent had no documentation of the reason for payment. The band received a total of C$109 million in federal funding over that period.
"We were unable to determine if the funds were spent for their intended purpose. There is no evidence of due diligence in the use of public funds," Deloitte said in a letter to Spence, recommending the band implement better financial controls.
"The independent audit ... speaks for itself, and we accept its conclusions and recommendations," said Jan O'Driscoll, a spokesman for federal Aboriginal Affairs Minister John Duncan.
Ontario Finance Minister Dwight Duncan, a Liberal, accused the federal government of trying to discredit aboriginal leaders.
"Tough love the rallying cry of the cowards who 'leak' these 'audits'. Too much tough, not enough love, for our aboriginal brothers and sisters," he said on Twitter.
($1=$0.99 Canadian) (Reporting by David Ljunggren; Editing by Frank McGurty; and Peter Galloway)