Damon was first elected mayor of Cordell in 2004 and lost a bid to replace Ryan McMullen as Oklahoma House District 55 representative in 2009.
Cordell is about 100 miles west of Oklahoma City.
The audit, which was requested by the Cordell City Council, revealed Damon collected as much as $30,500 between 2007 and 2012 by working as acting city manager in addition to collecting his mayoral salary.
He also received as much as $230,000 in his capacity as general manager of the city's utilities trust during the same time.
State law prohibits an elected official from collecting a salary from a government position beyond the scope of his elected duties.
Smith said he hoped the investigation could be completed within the next 30 to 60 days.