THE POTENTIAL AND LIMITATIONS OF FINANCIAL AND COMPLIANCE AUDITS ARE EXPLAINED AT THE OUTSET THROUGH AN EXAMINATION OF THE PROCEDURES USED IN THE AUDIT PROCESS AND THROUGH DISCUSSION OF THE RESPONSIBILITIES OF THE AUDITOR AND THE PROFESSIONAL STANDARDS THAT GUIDE HIS WORK. SOME WIDESPREAD MYTHS ABOUT AUDITING, WHICH HAVE PREVENTED MANY FROM TAKING ADVANTAGE OF ITS BENEFITS, ARE CHALLENGED. THE FOLLOWING SECTION COUPLES DISCUSSION OF THE 'MANAGEMENT LETTER' WITH COVERAGE OF THE FIELD OF PERFORMANCE AUDITING. WHILE MANAGEMENT LETTERS ARE FREQUENTLY FOUND BUT NOT EVERYWHERE REQUIRED COMPONENTS OF THE FINANCIAL AND COMPLIANCE AUDIT REPORT, THEIR SCOPE AND USE OVERLAP IN SOME AREAS WITH THOSE OF PERFORMANCE AUDITS. NEXT, A GUIDE TO ARRANGING FOR AN AUDIT IS PROVIDED. OVERSEEING THE PERFORMANCE OF THE AUDIT PROCESS AND USING THE RESULTS ARE THE MAIN TOPICS. MORE TECHNICAL THAN THE FIRST TWO CHAPTERS, THE GUIDE IS AIMED PRIMARILY AT LOCAL OFFICIALS RESPONSIBLE FOR ENGAGING AUDITORS AND MANAGING THE AUDIT PROCESS. IT INCLUDES READY-TO-USE SAMPLE FORMS FOR REQUESTING AUDITING SERVICES AND DRAWING UP AUDIT CONTRACTS. APPENDIXES INCLUDE A DESCRIPTION OF FEDERAL REVENUE SHARING REQUIREMENTS AND A SAMPLE COMPLETE FINANCIAL AND COMPLIANCE AUDITOR'S REPORT. ALSO INCLUDED IS A GLOSSARY OF ESSENTIAL TERMS, A LIST OF SUGGESTED FURTHER READING, AND A PRIMER ON READING LOCAL GOVERNMENT FINANCIAL STATEMENTS. (AUTHOR ABSTRACT MODIFIED). (SAJ)