The report asked the California attorney general's office to examine whether the deal was legal because it was awarded without competitive bids and to investigate the role of the consultant, Logicon.
An exclusive six-year, $95m (£66m) contract for database software signed last May, has failed to produce any project savings. Indeed no software has yet been deployed according to California State Auditor Elaine Howle and by June the state will have spent $17m with nothing to show for it.
The state signed an Enterprise Licence Agreement to provide 270,000 employees with access to Oracle's Enterprise Edition 8i database in the hope it could save up to $111m over the life of the contract.
The aim was that purchasing software from a single source would enable discounts and cuts in administrative costs. However, the contract was invalid because it did not comply with state regulations for non-competitive bidding.
Officials denied the deal violated state requirements for single-source contracts, saying the package was not referred to politicians for approval because of time constraints and because the contract was expected to save the state money on software already in use.
The auditor's report was blunt about the officials who negotiated the deal and the consultants they employed.
It described the negotiating team as "inexperienced and unprepared, with no expertise in software contracts and no in-depth knowledge of Oracle's business and contracting practices".
The team "limited the involvement of its legal counsel in the contract to a few hours of review just before it was signed, and in general, limits its legal counsel's role in all IT contracts. "Therefore, many of the contract terms and conditions necessary to protect the state's interests are vague or missing altogether," the report said.
It identified a conflict of interest with Logicon employed as a consultant although it was also a reseller of Oracle databases. Logicon said the deal could save the state more than $100m over the next decade if the state bought the Oracle software from them.
The auditor's report said those promises were wildly inaccurate and based on erroneous data about the state's need for Oracle products.
Oracle insists the deal will save California up $163m over the next 10 years.
"Oracle Corporation's software sale to the State of California last year allows the state, as well as local governments, to access Oracle technology at an exceptionally attractive price, said a company spokesman.
The complex financing of the deal means the state could have to pay at least $50m if it tries to walk away from the contract.