A $1.2bn (£590m) contract for training Iraqi police was so badly managed that auditors do not know how the money was spent, the US state department says.
Training police and army is a key part of the US strategy in Iraq
The programme was run by a private US company, DynCorp. It insists there has been no intentional fraud.
Auditors have stopped trying to audit the programme because all the documents are in disarray and the government is trying to retrieve some of the money.
Training Iraqis to take over security is a key part of US strategy.
Correspondents say this case is the latest to highlight problems linked to private companies being awarded lucrative government contracts in Iraq.
Olympic pool and VIP trailers
The US government audit, due to be released in Washington, says the state department cannot say "specifically what it received" for most of the money paid to DynCorp, the largest single contractor to the department.
DynCorp had won a contract to provide housing, food, weapons and specialist training for Iraq's police force in February 2004.
But some of its spending included the acquisition of a $1.8m X-ray scanner that was never used, and the $4m purchase of 20 VIP trailers and an Olympic-size swimming pool with money intended to fund an Iraqi police compound.
Stuart Bowen Jr, the Special Inspector General for Iraq Reconstruction (SIGIR), blamed the problems on long-standing contract administration problems within the state department office that awarded the contract.
He said "lack of controls" and "serious contract management issues" within the Bureau for International Narcotics and Law Enforcement Affairs (INL) made it "vulnerable to waste and fraud".
Senator Joe Lieberman, chairman of the Senate Committee on Homeland Security and Governmental Affairs, said it could take the state department up to five years to review invoices and demand repayment from DynCorp for unjustified expenses.
"This scenario is far too frequent across the federal government," he said.
DynCorp had been asked to improve its management of government-owned equipment in Iraq twice before.