The report says the Cabinet Office wasted nearly £4.77m by paying Compaq for work on the government Gateway, which was designed to give the public secure online transactions with a number of government departments.
The project was cancelled in 2000 when Compaq and the Government failed to agree on the contract.
A replacement for the Gateway project went live on 25 January 2001 with three pilot services: an employers' Net-based Inland Revenue service; a means of completing Customs & Excise VAT forms online; and a system for farmers to apply for aid.
But the auditors said the original "procurement did not run smoothly".
The Government had given Compaq, the preferred bidder, instructions to proceed with work to the value of £6.77m while the contract was still being negotiated.
This was because the Cabinet Office wanted to have the Gateway operational so that departments could use the system for transactions in 2001.
After the Compaq deal was cancelled, contracts were placed with various companies, led by Microsoft.
Full report: www.nao.gov.uk