Big Howie’s Hot Dog Stand is a fast-food restaurant specializing in hot dogs and hamburgers. The store employs 8 full-time and 12 part-time workers

Big Howie’s Hot Dog Stand is a fast-food restaurant specializing in hot dogs and hamburgers. The store employs 8 full-time and 12 part-time workers. The store’s weekly payroll averages $5,600 for all 20 workers.

Big Howie’s Hot Dog Stand uses a personal computer to assist in preparing paychecks. Each week, the store’s accountant collects employee time cards and enters the hours worked into the payroll program. The payroll program calculates each employee’s pay and prints a paycheck. The accountant uses a check-signing machine to sign the paychecks. Next, the restaurant’s owner authorizes the transfer of funds from the restaurant’s regular bank account to the payroll account.

For the week of May 12, the accountant accidentally recorded 100 hours worked instead of 40 hours for one of the full-time employees.

Does Big Howie’s Hot Dog Stand have internal controls in place to catch this error? If so, how will this error be detected?


Answer:
Big Howie’s Hot Dog Stand does have an internal control procedure that should detect the payroll error. Before funds are transferred from the regular bank account to the payroll account, the owner authorizes the total amount of the week’s payroll. The owner should catch the error, since the extra 60 hours will cause the weekly payroll to be substantially higher than usual. The owner should sign the paychecks, thereby restricting access to cash by employees who are responsible for record keeping.