Beginning January 1977, all revenue sharing recipients that receive $25,000 or more must have independent audits of their entire financial operations conducted at least once every 3 years. The Office of Revenue Sharing (ORS) estimates that about 11,000 governing entities which receive 98 percent of the revenue sharing funds must complete these financial and compliance audits. In reviewing the cost and status of revenue sharing audits, the General Accounting office (GAO) visited the State and 54 local governments in California, Kentucky, Massachusetts, Nevada, Ohio, Texas, and Vermont. Corrective actions taken by 12 States and 19 public accounting firms which had been cited by ORS for material auditing deficiencies were evaluated. Completed audits at ORS headquarters and other relevant records were checked. Because GAO's research was completed in March 1979 before the first 3-year period was over, the extent of compliance with the amendments could not be projected. The revenue sharing requirements are improving the quality of State and local audits by upgrading financial audit operations and strengthening internal controls to prevent fraud. Most officials favored the requirements because they help strengthen accountability, provide more citizen awareness, and improve audits. Although six States will obtain their first independent audits, some agencies with substandard practices will not be able to complete acceptable audits in a timely manner. GAO therefore recommends that Congress amend the Revenue Sharing Act to provide waivers to those agencies with problems, provided they submit evidence that corrective actions are being taken. The Treasury Department concurred with GAO's recommendations. GAO also found major weaknesses in ORS's system of controls to monitor the audit status of revenue sharing recipients. In response, ORS has improved its statistical control procedures and established September 1980 as the deadline for submitting audit reports. Appendixes contain the text of suggested legislative revisions on waivers and a letter from a Treasury official commenting on GAO's review. (Author abstract modified) ABI mjm