It started with a giant novelty cheque but the "slush fund" scandal that has embroiled deputy Nationals leader Bridget McKenzie has become a serious political problem for the Senator and the government.

Prime Minister Scott Morrison has ordered an investigation into whether Senator McKenzie breached ministerial standards over a grant she gave to a club that she was a member of. Labor says she "must resign".

The Senator insists she will not go. "The minister isn't resigning," her office said in a statement on January 23. "She is actively engaging in the process and is confident there hasn't been [a] breach in ministerial standards."

So how did we get here?

In her previous role as minister for sport, Senator McKenzie – now Minister for Agriculture and deputy leader of the National Party – approved $100 million in grants for community sporting facilities shortly before the last election.

In a damning report, Auditor-General Grant Hehir concluded Senator McKenzie's office ran a "parallel" selection process to the merit-based one run by Sport Australia that focused on marginal electorates and resulted in a "distribution bias".

"The award of funding reflected the approach documented by the Minister’s Office of focusing on ‘marginal’ electorates held by the Coalition as well as those electorates held by other parties or independent members that were to be ‘targeted’ by the Coalition at the 2019 Election," the Auditor-General's report reads.

It then emerged Senator McKenzie failed to publicly declare she was a member of a Wangaratta shooting club for which she approved a $36,000 grant. Numerous other grants went to organisations of which other Coalition MPs are members or patrons.

And of the 684 grants approved by Senator McKenzie, 61 per cent were not among those ranked most deserving under the Sport Australia process. At the same time, almost 1400 other applicants missed out.

Separately, the Auditor-General found there was no "evident" legal authority for Senator McKenzie to be the one approving funding grants.

While Senator McKenzie, as sports minister, was allowed to issue directions to Sport Australia, no formal direction was made. Even if they were, eminent legal scholar Professor Anne Twomey has said a direction could not validly extend to deciding "who got the grants".

The audit was scathing of Senator McKenzie's approach to the grant program but it's the conflict of interest over the money for the clay target shooting club that could see her brought down.

Senator McKenzie did not declare the $180 gift of membership from the club on her register of interests. It is unclear whether she declared it on her private ministerial register of interests, which is not public.

A month after Senator McKenzie became a club member, she returned with $35,980 to help build new toilets and amenities.

Home Affairs Minister Peter Dutton has said Senator McKenzie only joined the club after she approved the grant and her boss, Deputy Prime Minister Michael McCormack, said on January 24 that she had "declared her memberships, as she was required to do".

In the days since the scandal broke, new details have emerged, including that Senator McKenzie gave more than $1 million to shooting clubs and associations as sports minister. She did not formally disclose that she was official patron of the Australian Clay Target Association during that time, but her office said Senator McKenzie's support for shooting organisations was "very public and well documented".

How did the scandal start?

In February 2019, the Liberal candidate for the South Australian seat of Mayo, Georgina Downer, was photographed presenting a $127,373 novelty cheque with her face and name on it to the local Yankalilla Bowling Club for upgrades to its green.

Ms Downer, who is the daughter of former Liberal minister Alexander Downer, told the ABC she was only presenting the novelty cheque, which represented the amount of money the club had received from the federal Community Sport Infrastructure Program, because she had helped the club with a letter of support.

She said she was not handing out Commonwealth money because the cheque was obviously not legal tender.

But Opposition Attorney-General Mark Dreyfus said Ms Downer's conduct was "inappropriate" because it appeared that a party candidate was handing out what was actually government money and he asked the Auditor-General, Mr Hehir, to investigate.

How were the grants supposed to have been allocated?

When the program was announced in mid-2018, Sport Australia published three weighted criteria. It said the programs would be assessed competitively against community participation (50 per cent), community need (25 per cent) and project design and delivery (25 per cent). The minister would then approve the grants.

Has Bridget McKenzie broken any rules?

The Senator has made a full-throated defence of her actions. She has noted all projects that received money were "eligible" to do so, as has the Prime Minister, Deputy Prime Minister and Treasurer.

"Right now, as a result of our investment, parents are watching their kids get active on a Saturday morning instead of going down to Bunnings and cooking sausages to earn money," Senator McKenzie said last week.

But merely because a project was eligible to receive the money does not mean it was deserving of funding.

Professor Twomey has warned that Senator McKenzie may have broken "rules" in three ways. First, by awarding public money on a political basis, she may have failed in her duty to act impartially. Second, she may have selected which organisations received $100 million without legal authority. And third, Professor Twomey writes in The Australian Financial Review, the whole scheme of the Commonwealth giving money to sporting organisations may be outside the constitutional provisions that separate state and federal responsibilities.

Has this happened before?

Something very similar happened in 1994 in the original "sports rorts" scandal, when Labor sports minister Ros Kelly came under scrutiny for awarding $30 million in sports facilities grants based on discussions that were recorded only on a whiteboard and then erased.

The then auditor-general, John Taylor, found in Ms Kelly's case that marginal Labor seats had received an average of twice the amount given to marginal Coalition seats and a parliamentary report concluded there was a "very strong" inference of political bias in Ms Kelly's decisions.

She resigned in the wake of the committee's report.

What is being investigated?

Mr Morrison has referred the Auditor-General's report and Senator McKenzie's failure to declare her membership of the gun club that received $36,000 to Philip Gaetjens, the secretary of the Department of Prime Minister and Cabinet and the Prime Minister's former chief-of-staff, for investigation.

"It's the right thing for me to do ... and I'll wait for that advice," Mr Morrison said.

And Attorney-General Christian Porter has commissioned the Australian Government Solicitor to determine whether Senator McKenzie had the legal authority to decide on the grants.

What happens now?

The question is whether Senator McKenzie's membership of the frontbench will survive the scandal.

Mr Dutton has backed Senator McKenzie, saying the government would not "listen to Twitter crazies".

But Mr Morrison has been more measured, saying he would wait for Mr Gaetjens to finish his investigation. "I'm not putting any pressure on him one way or the other," Mr Morrison said. "He needs to do his job, that's why he's there."