These patients had lengths of stay "which number months or years rather than days".
"Some people stay in an inpatient unit for long periods (for example, two years) because of problems with access to suitable accommodation, rehabilitation, and other services in the community," the report found.
Health Minister Dr Jonathan Coleman has labelled some of the findings "concerning", and says work is underway to ensure District Health Boards do better.
The report comes as opposition parties target the Government's record on mental health, with Labour leader Andrew Little saying his party will make improving the system a priority if in government.
Coleman insisted there was enough funding to address the highlighted problems.
The report focused on people experiencing mental health problems acute enough for them to be admitted to hospital, and considered how well they were treated after being discharged.
About 15,000 people needed to stay in an inpatient unit during 2015.
The report found, nationally, DHBs follow-up with only two-thirds of people within seven days. They have a target of 90 per cent.
In Parliament's question time, Coleman said the A-G audit was taken 14 months ago and there had been extensive work done since then.
"It is an important report...the points that it highlights are being addressed. And will be helped, of course, by the $224m of mental health funding allocated in the Budget."
Labour leader Andrew Little said the report made for disturbing reading, and the root cause was funding hadn't kept up with demand. Budget 2017 wouldn't make up that difference, he said.
He believed the identified report would have worsened since the A-G investigation. He said people could have died as a result of the identified failings, although it wasn't possible to be sure.
"We are in big trouble. I have made it a personal priority for me and Labour, because everywhere I go...family members come and tell me about the experiences they are having, the lack of support."
Green Party health spokeswoman Julie Anne Genter said the mental health system was broken and the A-G report showed systemic failure.
"We need to reinstate the mental health commission to ensure that a light is shone on what is happening in some of the dark corners of mental health services in this country," said Genter, who called for a full mental health inquiry.
The PSA, which represents mental health workers, said the report strengthened its call for an independent inquiry. National secretary Erin Polaczuk said underfunding played a bigger role than the A-G was able to identify.
"It's clear that empty rhetoric and the hollow promises of prioritisation of this government aren't enough."
Dr John Crawshaw, Director of Mental Health, appeared before Parliament's health committee this morning and - speaking generally and before the A-G report release - said he didn't think a review or inquiry was needed.
"I've had a number of discussions across the sector...and I've also had some of them saying to me that for them they would prefer we focus on improving what we are doing rather than conducting a review which may delay some of the progression.
"From my perspective, we have a significant piece of activity under way which is aimed at addressing and trying to improve the quality of the services."
