"The use of chlorine by Daesh, and its recruitment of highly technically trained professionals, including from the West, have revealed far more serious efforts in chemical weapons development," she said in Perth, using the Arabic acronym for ISIS.
Bishop described the group as one of the "gravest security threats we face today".
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The use of chlorine in homemade bombs has been reported in several parts of Iraq and Syria, with car and roadside bombs easy to rig with chlorine canisters.
"They seek to undermine and overthrow that order and as we have seen, are prepared to use any and all means, any and all forms of violence they can think of to advance their demented cause," she said.
"That includes use of chemical weapons," Bishop said.
"Daesh is likely to have amongst its tens of thousands of recruits the technical expertise necessary to further refine precursor materials and build chemical weapons," she said.
Bishop was speaking at the 30th anniversary of the Australia Group which is an informal alliance of countries that seek to prevent the export of materials that can be used in the development of chemical weapons.
She said that despite ongoing efforts, "we have not yet won the struggle against the ruthless and amoral individuals, organisations, and regimes that seek to develop and deploy such weapons".
"Chemical weapons often receive less public attention than nuclear and biological threats," she said.
"However, toxic chemicals were, by far, the most widely used and proliferated weapons of mass destruction in the 20th century," she said.
ISIS or IS is an al-Qaeda splinter group and it has seized hundreds of square miles in Iraq and Syria.
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