Ministers were accused of leaving "glaring holes" in fraud controls on welfare-to-work firm A4e as one of its contracts was axed.
The National Audit Office (NAO) said vital evidence was missed in risk assessments of the company, which holds Government contracts worth more than £70 million a year.
The Department for Work and Pensions (DWP) did not request internal audit reports, including a paper highlighting nine cases of possible fraud and seven of improper practice by A4e staff.
The findings emerged after it was announced that the company's Mandatory Work Activity (MWA) contract to help up to 1,000 jobless people in the South East find work was being ended.
Employment minister Chris Grayling said a review by the DWP had not uncovered any fraud, but did identify "significant weaknesses in A4e's internal controls".
"The documentation supporting payments was seriously inadequate, and in a small number the claim was erroneous," Mr Grayling said.
"The process established prior to March fell significantly short of our expectations. As a result, the Department has concluded that continuing with this contract presents too great a risk and we have terminated the MWA contract with A4e for the South East."
The NAO said reported fraud across all contracted provider employment programmes was "relatively low", with 126 reported cases investigated since 2006.
The DWP established that "false representation", or fraud, took place 24 times, with the total estimated loss over six years coming to £773,000. Nine cases were referred to the police. Most allegations related to the New Deal and none were reported in relation to the Work Programme, which replaced it in 2011.
Margaret Hodge, chairman of the Public Accounts Committee, said she was "truly shocked" by the "glaring holes" in the Government's prevention of fraud. But Mr Grayling said the Government had learned the lessons of the New Deal, which "lacked strong enough controls".