The inquiry, announced yesterday morning, centres on how the Queenstown Lakes District Council, and chief executive Mr Feeley, are handling a special housing area application by Mr Feeley's family trust.
The Rafa Trust's application is one of 13 applications for special housing area status that will be considered for endorsement at this Wednesday's full council meeting.
Auditor-general office spokesman Mike Heine said requests from the public over a perceived conflict of interest raised issues of ''trust and confidence'' in council processes.
The inquiry includes what involvement Mr Feeley had in developing the council's housing accord and related policy for special housing areas.
Mr Feeley hit back yesterday afternoon.
He told the Otago Daily Times it was his initiative to raise the Rafa Trust with the Office of the Auditor-general (OAG) and the council more than seven months ago.
''I am a little frustrated and disappointed that having been reviewed then - and their legal advisers having said that 'you are doing all the right things and we are comfortable with the approach' - the OAG are now revisiting the matters which could have been addressed back then.''
Mr Feeley said he welcomed the opportunity ''to confirm that there has been the utmost probity throughout'' and he hoped the matter would be concluded quickly.
In a statement, Queenstown Mayor Vanessa van Uden said the application was always going to be ''highly scrutinised'' and the council was comfortable with the inquiry.
''We view this as an opportunity to reassure our community that this matter has been dealt with appropriately.''
Arrowtown Village Association acting chairman Wayne Hulls called for the Rafa Trust's application to be put aside before Wednesday's meeting - at which councillors will decide which of the 13 proposals to refer to Housing Minister Nick Smith for approval.
He said his association had contacted the Auditor-general's office twice about Mr Feeley's trust.
''It may be all above board but even the Auditor-general said there's a perception problem,'' Mr Hulls said.
The council manager in charge of special housing areas, Marc Bretherton, could not be reached to confirm whether the Rafa Trust would be considered at Wednesday's meeting.
The Rafa Trust plans 20 properties, of between 250sq m and 500sq m, in McDonnell Road, opposite the Millbrook corner on the town's south side.
The idea of fast-tracked housing has been controversial in some areas of Wakatipu and the loudest clamour has come from Arrowtown.
The council agreed a housing accord with the housing minister in October last year aimed at building up to 1300 affordable houses in the area, with a particular focus on the Wakatipu Basin.
A week later, the council adopted a policy a week later and in early November it called for expressions of interest.
In late November, Mr Feeley advised the mayor his family intended to make an application.
At Mr Feeley's suggestion, the mayor advised the Auditor-general's office about the conflict, the steps he proposed to manage his interest and sought advice.
The Rafa Trust's application was made in December.
Mr Feeley resigned three years into his five-year appointment as head of the Serious Fraud Office in 2012 to take up the Queenstown job.
He was at the centre of an uproar over whether he was the victim of a smear campaign orchestrated by Whale Oil blogger Cameron Slater and then-justice minister Judith Collins, who was forced to resign from Cabinet.
Mr Feeley apologised to Ms Collins in 2011 for encouraging SFO staff to drink from a bottle of wine taken from the offices of collapsed finance company Bridgecorp.
- Additional reporting BusinessDesk
