Johns was arrested by London transport police on Sunday after being found in possession of an ecstasy tablet, which he claims was pushed into his jeans pocket by an unknown patron at a well-known venue.
He was released with a caution and has since returned to Australia.
Johns retired from rugby league in April after suffering another neck injury and has been working with the Wallabies as a part-time kicking coach. That association will now cease.
"It was highly unlikely that Andrew Johns was going to play a role with the Wallabies in the Rugby World Cup," O'Neill said on Thursday.
"His involvement with the Wallabies in Australian-based training has to date been very much on an ad hoc basis."
"Given the current circumstances, the Wallabies squad will continue 'as is' in France and Wales."
Johns was arrested but released without charge after being found in possession of an ecstasy tablet by transport police conducting routine searches at underground tube stations following the annual Notting Hill festival.
"I was having such a good time, seeing it was the last day before I flew home," Johns said in a statement.
"I stupidly forgot about the tablet and instead of getting rid of it I left myself in a situation I soon deeply regretted."
"I have been a very foolish person and realise I have brought great disappointment to my family, friends and many people, including lots of youngsters who have looked up to me over the years."
"It has left a black mark on my reputation which I will work very hard at erasing."