INFORMATION FOR THE REPORT WAS GATHERED DURING SIZE VISITS AND MEETINGS FROM FEBRUARY 1976 TO NOVEMBER 1976. RESULTS INDICATED THAT THE AIR FORCE SHOULD STRENGTHEN ITS INTERNAL AUDIT FUNCTION TO KEEP TOP MANAGEMENT BETTER INFORMED ON HOW OPERATIONS ARE CONDUCTED AND HOW RECOMMENDATIONS FOR IMPROVEMENTS ARE CARRIED OUT. THE INTERNAL AUDITING FUNCTION IS CURRENTLY LOCATED THREE LEVELS BELOW THE SECRETARY OF THE AIR FORCE. AS A RESULT, AUDITORS DO NOT HAVE MAXIMUM INDEPENDENCE IN PLANNING AND CONDUCTING AUDITS. IN CONTRAST, THE COMPTROLLER GENERAL'S AUDIT STANDARDS ADVOCATE THAT THE AUDIT FUNCTION BE AT THE HIGHEST PRACTICAL ORGANIZATIONAL LEVEL. AIR FORCE AUDITORS ARE LIMITED IN THEIR AUDIT WORK BECAUSE THEY CANNOT ALWAYS SELECT AREAS TO AUDIT AND ISSUE REPORTS BASED ON THEIR OWN CONCLUSIONS. IN ADDITION, CONTRARY TO DEFENSE DEPARTMENT POLICY, THE AIR FORCE AUDIT AGENCY IS HEADED BY A MILITARY OFFICER AND HAS MANY MILITARY AUDITORS. MOREOVER, MUCH OF THE AUDITOR'S TIME IS USED FOR INAPPROPRIATE FUNCTIONS. IT IS RECOMMENDED THAT THE SECRETARY OF DEFENSE RELOCATE THE AUDIT AGENCY UNDER THE SECRETARY OR UNDERSECRETARY OF THE AIR FORCE. ALL RESTRICTIONS ON THE AUDIT AGENCY IN SELECTING SUBJECTS AND REPORTING RESULTS SHOULD BE ELIMINATED, AND THE NATURE AND SCOPE OF AUDITS AND INSPECTIONS SHOULD BE MORE CLEARLY DEFINED. CIVILIANS SHOULD HOLD MOST AUDITING POSITIONS. ORGANIZATIONAL STRUCTURE OF AUDITS AND MANAGEMENT CONTROL OF THE AUDITING PROCESS SHOULD BE IMPROVED. FINALLY, CONGRESS SHOULD AMEND THE 1947 NATIONAL SECURITY ACT TO PLACE THE INTERNAL AUDIT FUNCTION OF THE THREE MILITARY DEPARTMENTS UNDER THE SECRETARY OR UNDERSECRETARY OF EACH DEPARTMENT. IN ITS COMMENTS, THE DEPARTMENT OF DEFENSE AGREED WITH MOST OF THESE RECOMMENDATIONS. IT DID NOT AGREE THAT A CIVILIAN SHOULD BE THE AUDITING DIRECTOR. TABLES ARE INCLUDED. FOR RELATED MATERIALS PRESENTED TO THE SENATE HEARING ON INSPECTOR GENERAL LEGISLATION, SEE NCJ 67353-57. (CFW)