Foreign Minister Murray McCully, who was the driving force behind the deal, said he welcomed the scrutiny by Mrs Provost.
"We have said from the outset that the Auditor-General is entitled to scrutinise any spending of public money, whenever she chooses, and we welcome her decision to carry out an inquiry into the Saudi Food Security Partnership," Mr McCully said.
READ MORE: Free trade - not legal threat - behind Saudi deal: McCully
"The Government is comfortable with the process that was followed in relation to the Agrihub, and the wider Food Security Partnership, and relevant departments, including MFAT, will provide all necessary support to the inquiry."
About $11.5 million has been spent on sending New Zealand sheep and equipment to businessman Hamood Al Khalaf's farm in Saudi Arabia, with $6 million of that spent on establishing a farm, including equipment and technology.
Mr McCully has said it was partly done to appease Mr Al Khalaf, who lost millions of dollars during a New Zealand ban on live sheep exports.
His ill feeling was a major obstacle in the way of a free-trade deal in the region, Mr McCully said, and negotiations were now able to move on. The farm would also act as a demonstration base for New Zealand agribusiness, and remove the threat of legal action, he said.
Opposition parties have labelled the deal a bribe, after a $4 million payment to the Al Khalaf Group was revealed, and that the farm and all animals and equipment would be owned by the group.
Labour's Trade and Export Growth spokesperson David Parker said the Auditor-General's announcement was "important, necessary and welcome", and that the deal had never made sense.
"The suppression of information has added to the suspicions. There are many disturbing aspects to this highly unusual arrangement," Mr Parker said.
"If, as appears likely, there has been improper conduct, or misrepresentation of the true nature of these payments, clarity from the Auditor General will help avoid any repeat and will go some way to restoring New Zealand's international reputation for fair dealing."
Documents relating to the Saudi farm deal were released this month. They revealed that Mrs Provost had reviewed an initial business case for the deal, at the request of Cabinet.
Her office judged the initial business case to be "weak", and later distanced itself from the deal, stressing its involvement had to be limited.
While the document release - which came after complaints to the Ombudsman from media and others - shed some light on the deal, they were heavily redacted.
Green Party co-leader James Shaw said today's announcement would mean the Government will "finally be made to answer questions about the Saudi sheep deal".
"Murray McCully is deeply involved in this deal and his position as Minister of Foreign Affairs is untenable while an investigation is ongoing. He must be stood down by John Key.
"It has been my position for some time now that this is a bribe designed to appease a single businessman and get our free trade deal over the line at any cost. The taxpayers sent 900 sheep and $11 million dollars into the desert and it is now finally time to find out why."
Labour leader Andrew Little backed the Greens' call for Mr McCully to be stood down while the inquiry took place, saying "nothing less than New Zealand's international reputation" was at stake.
However, NZ First leader Winston Peters, despite being strongly critical of the deal, said he did not believe the Foreign Minister should be stood down.
"The man could be innocent. The present circumstances don't point to that. But let's find out that he is guilty before we cast judgement."
THE SAUDI FARM - TIMELINE OF A DEAL
• In 2003, publicity around the treatment of live-sheep exports led to a voluntary moratorium.
• In 2007, the Labour Government banned the export of live animals for slaughter.
• In 2009, Agriculture Minister David Carter began negotiations with Saudi Arabia for a resumption of live-sheep exports.
• In 2010, the National Government extended the ban.
• February 2013, the Cabinet approved a proposal by Foreign Minister Murray McCully to pay $4 million to Mr Hmood Al Khalaf's business to secure it to run an agri-hub to promote New Zealand agriculture in Saudi Arabia and as a settlement of a long-running dispute over the ban on live-sheep exports, and $6 million to be paid to NZ businesses to deliver their services and help set-up the Saudi farm.
The Government also paid $1.5 million for 900 pregnant Awassi breeding ewes of Mr Al Khalaf's to be flown to the Saudi farm.
• May, 2015, after media reports on the deal, Mr McCully's office releases Cabinet papers that reveal the full cost of the deal, including the $4 million "facilitation payment" to Mr Al Khalaf. Previously, only the $6 million figure had been released.
• June, 2015, it is confirmed that lambs born on the Saudi farm suffered an extremely high death rate. The Government initially said a sand storm could be to blame, before Brownrigg Agriculture - a Hawkes Bay company that advocated on behalf of Mr Al Khalaf and later won a tender to set-up the farm - pointed to heavy rain and illnesses