Harper's aides denied the charge but the watchdog's intervention adds to uncertainty over the planned purchase weeks after senior officials hinted Canada may reduce the order or find alternatives to the F-35s because of lack of clarity about the final bill for the jets.
Harper and Associate National Defense Minister Julian Fantino also rejected accusations the government deliberately hid the true cost estimates for buying the 65 Lightning II fighter planes but accepted Ferguson's recommendations for closer scrutiny of the procurement process.
"The auditor general has identified a need for greater independence and supervision over some of the activities at the Department of National Defense," Harper said. "The government will put that supervision in place before we proceed."
Fantino said, "The government of Canada has taken action today to ensure that due diligence, oversight and transparency are firmly embedded in the process to replace Canada's aging fighter jets.
"That is why we have frozen funding for the acquisition and are establishing a separate F-35 secretariat outside of National Defense to lead this project moving forward," Fantino said after Ferguson's report was tabled in the House of Commons.
An independent review of the project and its costs is planned while the Ministry of National Defense continues to evaluate options for replacing old air force inventory.
Opposition critics accused Harper's government of lying to Parliament and of incompetence. Interim Liberal Leader Bob Rae asked Harper to resign.
"This prime minister has systematically misled the Canadian people on this issue," Rae told the CBC. "And he's not going to be able to get around this -- he can twist and turn all he wants, but he can't."
Canada announced in July 2010 it would buy the F-35 jets through its participation in the U.S.-led Joint Strike Fighter Program, but the Auditor General's report challenged that version, maintaining the aircraft was chosen as far back as 2006.
"When National Defense decided to recommend the acquisition of the F-35, it was too involved with the aircraft and the JSF program to run a fair competition," the report said.
"It applied the rules for standard procurement projects but prepared key documents and took key steps out of proper sequence.
"As a result, the process was inefficient and not managed well. Key decisions were made without required approvals or supporting documentation," the report said.
Initial costs to Canada for the purchase were estimated at $25 billion over 20 years. However, when queried by the parliamentary budget office last year, the government said the program would cost $14.7 billion.
Ferguson said the government missed an opportunity to set the record straight.
"We felt that that would have been a prime opportunity for National Defense to bring forward to Parliament the full cost of the project and they didn't do that," Ferguson said at a news conference after the House of Commons received the report.
Opposition critics and others skeptical of the F-35 program want a fresh start and an open competition to replace the old inventory of Canadian air force, particularly the CF-18 fleet.