In a report tabled in the Parliament today the CAG also found that often food was being prepared in unhygienic conditions exposing children to health hazards.
The auditor also observed a trend as per which the enrolment of children in schools providing mid-day meals is showing a "consistent" decline which it said indicates that more and more people are seeking better education and not just food.
The audit, it said "evidenced an institutional exaggeration of figures" regarding students taking meals, "irregular diversion or theft of grains, inflated transportation costs and fudging of data which point to widespread leakages."
The data it suggested should be examined through independent checks and a system of surprise checks should be introduced.
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In its report the CAG also said that from 14.69 crore in 2009-10, the number of children enrolled in schools covered by the MDM scheme has come down to 13.87 crore, while enrolment of children in private schools had gone up from 4.02 crore to 5.53 crore.
The audit also found was that most states had not formulated any criteria to identify poor children belonging to disadvantaged sections, whom the scheme aims to benefit. As a result this objective remained on paper only, it said.