The civil service must transform how it plans, recruits and manages its workforce if it is to successfully address challenges and deliver value for money, the audit office said.
Substantial restructuring and rationalisation has seen almost 4,000 staff leave the service between 2015 and 2019, primarily due to a voluntary exit scheme.
Comptroller and auditor general Kieran Donnelly said significant staff attrition, and the need to maintain existing services has led to an ever-increasing reliance on temporary staffing solutions.
The report finds that agency costs in 2018-19 increased by 155% when compared with 2016-17.
Mr Donnelly said: "It is important to recognise that Northern Ireland Civil Service (NICS) staff have continued to deliver vital services to the people of Northern Ireland during unprecedented challenging circumstances, including preparing for the exit from the European Union and responding to the Covid-19 pandemic.
"However, the NICS is now at a critical crossroads, struggling to deal with providing 'business as usual services'."
Mr Donnelly's report examines the degree to which the workforce is sufficiently equipped in terms of staffing numbers (capacity) and appropriate skills, knowledge and expertise (capability).
It highlights that the NICS has faced unprecedented challenges in recent years.
Overall vacancy levels subsequently rose to 6.9% at March 2019, with the 1,420 total staffing vacancies exceeding the combined workforces of the three smallest civil service departments.
Temporary promotions have also increased significantly in the four-year period to March 2019, from 631 to 1,844, meaning 8.2% of the overall workforce was temporarily promoted at that time.
The report also finds that current recruitment processes are cumbersome, slow, and do not provide sufficient assurance that the right people are placed in the right posts.
It notes that appointments are generally made to grades rather than specific job roles and skills and experience most relevant to positions are not always tested.
Many specialist activities, in areas such as project management, contract management and service delivery, are therefore being carried out by general service staff with the report highlighting existing skills gaps in several of these areas.
Mr Donnelly concluded that more needs to be done to prioritise the identification and development of the skills, knowledge and experience which are key to the delivery of modern public services.
He said: "To function effectively, Northern Ireland Civil Service departments require the right people, in the right place, at the right time.
"My report has found that, at a NICS-wide level, there has not been a strategic focus on ensuring this is the case."
He said a real opportunity existed for a new head of the Civil Service and the permanent secretaries to use this report's findings and recommendations to substantially transform the service and its culture and improve outcomes for citizens.
Responding to the report, a Department of Finance spokeswoman said: "The Civil Service fully recognises the need for fundamental change and will build on the progress it has made through its soon to be launched Civil Service Reform agenda in line with the commitment within New Decade, New Approach.
"The Audit Office report acknowledges that the Civil Service has delivered vital services against a backdrop of unprecedented and challenging circumstances and has made progress in many of the areas highlighted in this report.
"This progress includes reducing vacancies through recent large scale external recruitment exercises; new approaches to workforce and recruitment planning; new learning and development programmes including those to enhance commercial skills in the areas of contract and project management; and the introduction of a range of diversity initiatives."