In letters to senior UNDP officials, Wallace said that UNDP local staff were dominated by North Korean government employees who managed the agency's programmes and finances in violation of UNDP rules.
The North Korean government's insistence that the UNDP pay cash to North Korean government suppliers, and the agency's failure to oversee projects it funds in the country or to audit its programmes were also in violation of UN rules, Wallace said.
The charges have been rejected by the UNDP which says there is "no justification for the extreme allegations" made by Wallace.
In a statement on Monday Kemal Dervis, the UNDP administrator, said the agency was "doing its best in very difficult circumstances".
David Morrison, a UNDP spokesman, said the agency welcomed the external audit, stressing it is committed to operating in a transparent manner.
"The external auditors can come in anytime they want and look at anything they want," he said.
Morrison said the agency has spent about $3 m annually over the last 10 years on programmes in North Korea, in addition to about $600,000 in office costs, which include local salaries and supplies.
The development projects focus on food production, rural and environmental sector management, economic management and social sector management.
Morrison rejected the assertion that UNDP "has been doling out buckets of cash," saying the agency does the vast majority of its spending in euros through checks and bank transfers, using cash only for travel purposes and minor expenses.
He also said UNDP international staff have visited nearly all their project sites in the past two years to ensure funds are being used appropriately.
The agency's executive board is expected to meet Thursday to discuss the programme's mandate over the next three years.