They immediately suspected he was smuggling and took him into custody.
Indonesian police have said the almost 3kg drug haul is the biggest seizure in the island's history.
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Australian security consultant John McLeod has since been working on Daly's behalf, saying Daly suffered from schizophrenia, diabetes and kidney failure.
He told Newstalk ZB he believed authorities were now convinced the New Zealander was genuine.
McLeod hoped to secure Daly's release at a hearing overnight.
He said serious questions needed to be addressed about how authorities in New Zealand could let such a vulnerable person travel, with such a vast amount of medication.
It was reported yesterday that as required under Indonesian law, Daly had a doctor's certificate for the year's supply of 14 different medicines in his possession, that he needs to treat his conditions.
Despite that, he was still being held under the direction of police who were concerned over the massive volume of what are considered controlled substances, with illegal possession carrying a maximum penalty of 12 years behind bars.
The Kiwi planned a nine-month trip in Bali, Thailand and Vietnam and planned to buy a campervan for travelling, despite only having NZ$3000.
After undergoing health checks at the Bali police hospital on Sunday, Daly appeared to faint. He was also worried, confused and suffering withdrawals from not being able to access some medications, McLeod said.
McLeod had since been working with local police to provide extra documentation in an effort to free Daly from Bali and return him to New Zealand.
He questioned why New Zealand pharmacists would dispense such a high quantity of medications given the countries Daly was planning to visit.
McLeod says questions need to be asked of our health system – and Health Minister.
"How does this happen? How does a man with a schizophrenic disorder and the mental capacity of a 10-year-old end up carrying almost 3kg of highly sought-after street drugs?"
He told Newstalk ZB he's confident Daly hasn't been duped into carrying someone else's drugs.
"There's no concern at all – the doctor's letter mirrors the medication that he has, and the quantity."
But the quantity of drugs Daly was carrying could've landed him in prison in any of the countries he was visiting, including Australia, McLeod said.
Capital punishment remains legal in Indonesia, with the death penalty often a punishment for drug trafficking and dealing.
The New Zealand Government needs to face up to what's happened, McLeod said.
"Their system has failed this bloke who could have faced the death penalty … it's not on [Daly], it's on your health system.
"How can a pharmacist issue 1450 sleeping tablets? All the drugs when piled together are bigger than a basketball."
McLeod said he hadn't heard anything from the New Zealand Embassy in Bali yet, but Daly had been in touch with his family back home.
But he said Daly had no comprehension of how tenuous his current situation was.
"He's talking about banana sundaes and cherries on top of ice cream.
"He has no comprehension whatsoever that, depending on what charges he faces, he's looking at up to five years in prison."
The next step was trying to convince authorities not to press charges – and if that succeeds Daly will be free to go.
But for now, Daly remains in McLeod's care with the threat of police charges looming.
When asked by Newstalk ZB today, Pharmacy Guild president Cameron Monteith said he wouldn't comment on how Daly was given so many pills until he knew exactly what had been prescribed.
Health Minister David Clark and Medsafe have been approached for comment.
