Oxfordshire County Council spent £25m in 2014-15 on direct payments to support about 1,770 social care users.
But an internal review has found "insufficient controls in place" to ensure money was not being misused.
Payments were spent on utility bills, household repairs, food and parents paying themselves high salaries.
Updates on this story and more from Oxfordshire
The report added: "The deputy director has confirmed these example items may not be relevant to meet assessed eligible need."
The  authority's website said direct payments were intended to pay for "a variety of care and support services".
It said: "Unless there are exceptional circumstances, you can't use the money to employ a close relative or person living in your home.
"You must not use your direct payment to pay for [...] items such as food, drinks, utilities, gifts or for other everyday items."
A report to the authority's Audit and Governance Committee said some expenditure had not been approved "but was not stopped nor recovered".
It added the current system "does not adequately clarify what is or isn't acceptable" and "does not require evidence to support payments".
"Finance queries had gone unanswered and also questionable expenditure not challenged," it said.
Labour councillor and committee member John Tanner said he would be pressing for more investigation into direct payments, because they were "wide open to abuse".
A council spokesman said investigations were continuing into the possible misuse of "a very small proportion" of the £25m budget.
He said steps would be taken to recover any misspent money and a new direct payment policy was being developed to make it clear how it should be used.
Last year, David Cameron wrote to council leader Ian Hudspeth and said he was "disappointed" at proposed cuts to Oxfordshire frontline services.
In response Mr Hudspeth said the council was trying to cope with £72m in funding cuts and increased demand for its services.

England's Paul Casey (68) and South Korea-born New Zealander Danny Lee (69) are joint second on seven under.
Simpson, the 2012 US Open champion, survived another windy day to post a nine-under 201 total at Colonial Country Club in Fort Worth.
The 31-year-old also saw a 15-foot birdie putt lip out at the final hole.
Americans Stewart Cink (66) and Kevin Kisner (70) are three off the pace, while defending champion Jordan Spieth (68) and Masters champion Sergio Garcia (71) are both five shots behind.
Northern Ireland's Graeme McDowell dropped shots at three consecutive holes on his front nine as he shot a two-over 72 to fall seven strokes adrift.
World number 14 Casey, without a PGA Tour victory since 2009, began the day in a group with Garcia one behind a four-way tie for the lead.
The 39-year-old had three birdies in four holes at the start of the back nine, sending his tee shot to within four feet at the par-three 13th.
After finishing with a 23-foot putt for a birdie at the last, he said: "Weeks I've putted well I've always had a chance to win, or won. We can't predict the future but I'm very excited with how I've been playing."
Former world number one Spieth played the final seven holes with trainer Damon Goddard carrying his bag after regular caddie Michael Greller fell ill in the oppressive heat and humidity.
"Michael went down with heat exhaustion," said Spieth, who finished with two birdies in the last three holes and is in a share of eighth.
"When we were walking down the 11th, he said: 'This is my last hole.' I thought he was acting a little strange, a little quiet."
Money given to people to pay for their care was spent on items such as mobile phone bills and Apple computer equipment, a council audit has found.
[NEXT_CONCEPT]
American Webb Simpson carded a three-under-par 67 to open a two-stroke lead after the third round of the Dean & Deluca Invitational in Texas.