The findings appeared in an audit of a children’s hospital in Basra, but they referred to the wider reconstruction activities of the development agency in Iraq. American and Iraqi officials reported this week that the State Department planned to drop Bechtel, its contractor on that project, as signs of budget and scheduling problems began to surface.

The United States Embassy in Baghdad referred questions about the audit to the State Department in Washington, where a spokesman, Justin Higgins, said Saturday, “We have not yet had a chance to fully review this report, but certainly will consider it carefully, as we do all the findings of the inspector general.”

Bechtel has said that because of the deteriorating security in Basra, the hospital project could not be completed as envisioned. But Mr. Higgins said: “Despite the challenges, we are committed to completing this project so that sick children in Basra can receive the medical help they need. The necessary funding is now in place to ensure that will happen.”

In March 2005, A.I.D. asked the Iraq Reconstruction and Management Office at the United States Embassy in Baghdad for permission to downsize some projects to ease widespread financing problems. In its request, it said that it had to “absorb greatly increased construction costs” at the Basra hospital and that it would make a modest shift of priorities and reduce “contractor overhead” on the project.

The embassy office approved the request. But the audit found that the agency interpreted the document as permission to change reporting of costs across its program.