He replaced Paul Sturrock, who was sacked on Thursday. Assistant boss Kevin Summerfield and defensive coach John Blackley have also left the club.
Left-back McAuley was one of Brian Laws' first signings in March 1997, with United paying £50,000 to Hartlepool along with fans favourite Paul Baker for his services.
He left Glanford Park in February 2000, joining Rochdale after three years in which he never won over large sections of the home support.
McAuley's first game in charge of the Owls will be the visit of Queens Park Rangers, managed by Scunthorpe-born John Gregory, on Saturday.