The Northern Ireland Audit Office (NIAO) reviewed a 2010 investigation by the department into the claims by a whistleblower.
In 2005, the office was informed of 15 allegations into the procurement arrangements of Roads Service in its supply, delivery and erection of road signs.
The Department for Regional Development was passed the allegations for investigation, as well as further allegations passed on until 2007- bringing the total number to 29 points of concern.
The NIAO found that the department failed to apply "professional investigative standards" of other reviews of serious whistleblower complaints.
The audit report found that consideration was not given to recurring themes across allegations made, including favouritism in relation to the letting and administration of signage contracts.
DRD does not accept that there was favouritism or any inference of such behaviour and contends that a High Court judgment in 2011 supports its 2010 report.
However, the NIAO claims that the High Court judgment, which examined only three of the allegations, is "not relevant to our review of the adequacy, quality and thoroughness of the DRD investigation".
Our findings in this case lead us to conclude that there were significant weaknesses in the conduct of DRD’s investigation leading to the 2010 report. As a result of these weaknesses, the credibility of the 2010 investigation is seriously undermined.
Kieran Donnelly, Comptroller and Auditor General
The NIAO said it was "concerned" that the investigation team "gave the benefit of the doubt" to Road Service officials in its analysis of the evidence.
"In our view, on the basis of the work done by the investigators, we do not consider that the allegations were investigated sufficiently," the statement continued.
The Northern Ireland Audit Office said the Department for Regional Development does not agree with the conclusion of their report.
The department did agree however that there is a strong case for a centralised and service-wide resource to be available for complex investigation cases.
The whistleblower, David Connolly, said the audit review did not go far enough, claiming DRD had been given too much sway over it.
"This report has been whitewashed. They (the government) have been able to influence the entire language of this to seriously affect some of the areas where they were being criticised," he said.
The former director of Signs and Equipment Ltd lost out on a lucrative government contract.
He alleged Roads Service changed the tender criteria for the award of road signage contacts worth up to £900,000 a year to ensure another supplier secured most of the work.
Mr Connolly also claimed Roads Service colluded with other government agencies to delay the awarding of the contract until another contractor met eligibility criteria.
He accused the Roads Service of wasting up to £2m over eight years by paying above the market rate and said some officials were too close to the firm which won the contract.
Stewart Dickson , Alliance Regional Development spokesperson, described the Audit Office Report as "a damning indictment."
"I sincerely hope that the Department takes on board the findings of this report and ensures that any future investigations are treated seriously and carried out in a full and professional manner," he said.