The Home Office has a legal obligation to try to find family members of unaccompanied children - but the Chief Inspector of Borders and Immigration, John Vine, found this was not done in 60% of cases sampled.
Tracing may enable children to be reunited with their families, Mr Vine's report said, and may also help the Home Office decide whether to grant the child leave to remain if the asylum claim fails.
Elsewhere, the inspection found that children were less than half as likely to be granted asylum in London as in the Midlands.
"Unaccompanied children claiming asylum are some of the most vulnerable people that the Home Office have to deal with," Mr Vine said. "The Home Office must ensure that all children's cases are decided in a timely fashion, and that law and policy are applied consistently and correctly."
Mr Vine said, overall, staff were committed to the welfare of unaccompanied children and worked effectively with local authorities to ensure that children were protected.
Most asylum interviews were conducted in a sensitive and appropriate manner, he added.
In 60% of the refusal cases sampled by the chief inspector, tracing either was not done, was insufficient or was considered but then not carried through.
Mr Vine said: "The Home Office must do more to ensure that it is meeting its obligations in relation to tracing."