In 1990 the council agreed to act as guarantor on a £4.2 million loan, which was needed to restore the theatre, a move which is now costing the council more than £1,000 a day.

The council is locked into the much-criticised agreement until 2013.

The new report by district auditor, Brian Willmor, found the council had acted legitimately in its dealings with the theatre but criticised it for failing to conduct either a risk assessment or an audit of the accounts before agreeing.

He said: "Neither members nor officers appear to have considered the full potential financial consequences of the guarantee."

He recommended that in future the council conducts risk assessments and ensures all reports are produced on time and relayed to councillors.

The report also states that the council should ensure decisions are fully documented and be open to scrutiny.

But council leader David Williams, who called in the district auditor in an attempt to clear the air over the controversial agreement, claimed last week that the report gave the council "a clean bill of health".

He said: "The financing of Richmond Theatre was complex and is easy to misinterpret.

"The criticisms in the report are about procedures, not about the transaction itself. There is no criticism whatsoever of any councillor in this."

Coun Williams said the council's support for Richmond Theatre was a common practice and other authorities provided funding to enable similar to survive.

He added: "I am very happy to accept the report and I hope the public will accept it too."

But Conservative group leader, Councillor Tony Arbour, said: "I don't believe this report gives the council a clean bill of health at all.

"The only thing it says is that there were no serious irregularities. It certainly does not say that the council carried out its decision legitimately."