The verifyusers is a program that accepts a username and password and verifies it somehow and then outputs either OK or ERR.
You may find a number of programs have been provided with your distribution have a look in
The following are all programs you can use as the authenticator program.
The ncsa_auth program is based around the same format as the .htpassword files.
I think the error you are getting is basically saying you MUST have the authenticator program configured and working before you can use proxy_auth.
If you create a .htpasswd file you could then do.
auth_param basic program /usr/lib/squid/ncsa_auth /etc/squid/my-htpassword-format-file
auth_param basic children 5
auth_param basic realm Squid proxy-caching web server