More than half of cities surveyed during a spot check on land acquisition were found to have broken the rules.
The latest survey carried out by the National Audit Office (NAO) found illegal land acquisition occurring in many cities and a few local governments faking figures about available farmland.
The audit was carried out in 11 provinces and autonomous regions including Hebei, Jiangsu, Ningxia and Hainan last year.
A spot check in 13 cities found more than half had problems with land use.
Seven cities acquired 2,600 hectares of collective-owned land without going through proper procedures and 12,700 hectares of land was occupied in the name of various kinds of "development zones" by five cities without approval, said NAO on Tuesday.
The office would not say which cities were responsible for which problems.
NAO said local governments took back 2,100 hectares of land after authorities pointed out the problems, and 336,500 square meters of illegal construction have been confiscated or dismantled.
The top audit agency also said four cities illegally allocated 238 million yuan ($35 million) from the land transfer fee to purchase or build office buildings and residential buildings for officials.
NAO also said "a few local governments" had offered fake figures on reclaimed farmland or made insufficient compensation of arable land after acquiring it for non-agricultural use.
By law, if a local government takes a piece of arable land for housing or industrial projects, it is supposed to return the same amount of arable land in order to maintain enough arable land to feed the country's large population.
NAO said 900 hectares of returned farmland was falsely reported. Another 1,953 hectares that was reported as farmland failed to reach certain standards.