AS A RESULT OF DISCLOSURES ARISING FROM THE WATERGATE INVESTIGATION OF ILLEGAL POLITICAL CONTRIBUTIONS MADE BY COMPANIES INVOLVED WITH DEPARTMENT OF DEFENSE CONTRACTS, THE DEFENSE CONTRACT AUDIT AGENCY (DCAA) INITIATED SPECIAL REVIEWS OF NINE COMPANIES WHICH HAD CONFESSED TO ILLEGAL PAYMENTS. THE METHODS FOR MAKING IMPROPER PAYMENTS UNCOVERED BY THE AUDITS ARE DESCRIBED, FOLLOWED BY LAWS AND REGULATIONS WHICH PROHIBIT SUCH ACTIVITIES. PROVISIONS IN THE DCAA CONTRACT AUDITING MANUAL AND AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) AUDITING STANDARDS WHICH RELATE TO FRAUD ARE PRESENTED. ALTHOUGH THE DETECTION OF FRAUD AND SIMILAR WRONGDOINGS IS NOT A PRIMARY FUNCTION OF CONTRACT AUDITS, DCAA AUDITORS SHOULD BE AWARE OF THE POSSIBILITY OF FRAUD AND REPORT ALL IMPROPER TRANSACTIONS. DCAA POLICIES AND PROCEDURES CONCERNING COOPERATION WITH FEDERAL INVESTIGATIVE AGENCIES ARE OUTLINED. IMPORTANT AUDIT PROCEDURES TO IDENTIFY ILLEGAL AND IMPROPER TRANSACTIONS ARE SUMMARIZED. ALSO COVERED ARE FOREIGN MILITARY SALES CONTRACTS. REGULATIONS GOVERNING SALES AGENTS ARE DETAILED, COVERING FEES, COMMISSIONS, AND THE IDENTIFICATION OF BONA FIDE EMPLOYEES AND AGENTS. AUDIT PROCEDURES ARE SUGGESTED FOR DCAA AUDITORS TO ASSIST IN EVALUATING AGENTS' FEES. FINALLY, REVISED REGULATIONS ON AGENTS' FEES AND COMMISSIONS ARE PROPOSED. THE APPENDIXES CONTAIN THE U.S. CODE ON CAMPAIGN CONTRIBUTIONS, AICPA STANDARDS ON FRAUD, SELECTED SECURITIES AND EXCHANGE COMMISSION DISCLOSURE REQUIREMENTS, AND A CONTRACTOR'S STATEMENT OF FEES FORM. (MJM)