By Patrick Worsnip

UNITED NATIONS, May 9 (Reuters) - Auditors have nearly finished a preliminary report into U.N. operations in North Korea following allegations that funds were diverted to the Pyongyang government, a U.N. official said on Wednesday.

United Nations Secretary-General Ban Ki-moon ordered the audit after the U.S. envoy for U.N. financial management, Mark Wallace, said millions of dollars might have been used to benefit the communist leadership of the secretive state.

Wallace accused the U.N. Development Program late last year of violating rules by hiring North Korean government officials to carry out its work and by paying salaries in hard currency through the government.

A U.N. official familiar with the issue said the U.N. Board of Auditors was completing a preliminary report into it, but he could not say exactly when it would be ready.

The official, who asked not to be named because of the confidentiality of the matter, said the report would deal with what the auditors had discovered in New York. "It will say they had not been able to visit North Korea," he said.

Despite its name, the board is described by U.N. officials as external and independent because its members come from the national audit offices of member states. A current U.N. handbook lists French, South African and Philippine members.

The UNDP had some 20 projects in North Korea with a budget of $4.4 million. They included training for food management and biodiversity in a country that has suffered serious food shortages in recent years.

UNDP suspended operations there in March after Pyongyang rejected changes demanded by the UNDP board, including that the agency not pay in hard currency, not hire local staff through North Korean ministries and narrow the focus of its programs.

The last two UNDP officials left earlier this month.

North Korea, a U.N. member, has accused the United States of spreading "sheer lies about the DPRK's (North Korea's) 'diversion of UNDP's programme fund' ... in a bid to tarnish the international image of the DPRK."

The auditor's report, when completed, will be handed to the U.N.'s Advisory Committee on Administrative and Budgetary Questions, a 16-member body attached to the General Assembly.

U.N. chief spokeswoman Michele Montas denied on Wednesday charges in the Wall Street Journal last week that the audit had missed a 90-day deadline set by Ban for its completion.

The Journal started the deadline from Jan. 19, the day Ban ordered it. But in a letter published by the newspaper, Montas said it should run from March 19, when the auditors actually began work. It would be finished well in time, she said.

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