City Auditor Otis H. Troupe has issued a report severely criticizing the Washington Teachers' Union and the D.C. Board of Education for what he called mismanagement of more than $1 million in government funds designated for teacher health insurance.

Troupe said the union had fallen months behind in recent years in paying insurance premiums and has used D.C. government contributions to teacher benefit plans for "other union activities," as well as for a health program that should have been charged to union members.

In his report, issued Friday, Troupe said school board members were remiss in not monitoring how the union spent taxpayer contributions to teacher benefit programs, and he recommended the union repay at least $675,000 the auditor claims was improperly spent by union officials.

School board officials have told Troupe in response to the audit that they are not obligated to collect the $675,000 from the union on behalf of taxpayers.

Union President William H. Simon and past president Harold Fisher Jr. blamed each other yesterday for problems in the union's accounts, and they accused Troupe of releasing what they described as a misleading report.

"While it was true that I probably made some mistakes, I took action to straighten things out," said Simon, who presided over the union for most of the period in question and requested the audit last year when he was trying to regain the union presidency from Fisher.

Fisher replaced Simon as union president in 1985 and was ousted by Simon this year after a bitter election campaign laced with charges of financial mismanagement. "I think the only thing that happened during my administration was that this is such a complex issue I wasn't able to get it out clearly to my members," he said.

Troupe's audit examined various union insurance programs beginning in 1982, when the school board agreed to pay the full cost of optical and dental benefits for the system's 5,000 teachers.

According to Troupe's report, the D.C. government's contributions for premiums for the dental program were placed in the union's general account, instead of a separate fund, and the union soon began to fall behind in its payments to the insurance carrier, sometimes by as much as five months.

Troupe said the union's failure to make timely payments suggested the money was being used "to subsidize other union activity," although he said auditors were unable to determine what activity that might have been.

The report focused on a surplus that developed in the union dental program managed by Prudential Insurance Co. Despite the union's late payments for premiums, the surplus grew to nearly $1 million because the carrier's payments on claims by teachers consistently were less than accumulating premiums.

According to Troupe, the union improperly drew on the surplus, which was financed solely by tax dollars paid by the school board, to pay premiums on the dental plan. In addition, the union used the surplus to pay for a prescription drug program whose cost should have been borne solely by teachers, Troupe said.

Troupe called the union's payment methods a "serious breach of ethics" that he said "reflects a serious financial problem or a deliberate misapplication of specific-purpose funds."

Simon acknowledged yesterday that insurance funds were "commingled" with the union's general account. "This was my ignorance in the beginning because this was the first time we ever had such a plan," he said, adding that late payments to Prudential were "just a matter of trying to get the records straight."

Fisher said he had authorized Prudential to use surplus funds from the dental plan to pay premiums on the union's prescription drug program, but he denied using the money for other union activities. He considered use of the surplus to be a loan and said he believed it was proper.