How can the Government award the contract to Contractor A if the audit questioned Contractor B's rates and cannot be determined fair and reasonable?
The FAR addresses the process for obtaining a waiver when an offeror will not provide certified cost or pricing data, but does not do so for situations where the contracting officer simply cannot determine a price to be fair and reasonable. However, we can take a clue from DoD's Commercial Item Handbook:
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"Even with the aid of uncertified cost information, a contracting officer may be unable to conclude that the price a sole-source supplier asks is fair and reasonable. (This also could be true even in traditional procurements using certified cost or pricing data and cost analysis.) When the contracting officer cannot conclude that the price of a commercial item is fair and reasonable, after exploring the various market alternatives that would effectively meet the agency’s needs with the requiring activity and other members of the acquisition team, the contracting officer should consider any suitable noncommercial items. If there are none, the contracting officer should escalate negotiations in accordance with agency procedures. If the price still cannot be determined to be fair and reasonable, the item ordinarily should not be acquired. If, however, it is not in the Government’s best interest to forgo or delay the procurement, then it is essential that the contracting officer document the difficulty he or she had in determining the price to be fair and reasonable. The contracting officer then may make the award. Careful file documentation will enable subsequent buyers to fully understand the circumstances surrounding the prices paid, should there be a need for future acquisitions of the same item (my emphasis).
Even though the guidance above is taken from the Commercial Item Handbook, it also addresses noncommercial items. I couldn't find any relevant guidance in the Air Force Supplement to the FAR, but recommend you check with your cognizant Contract Policy office to see if there are any local procedures that should be followed.