Several years ago, Paul Rivera opened Tito's Tacos, a restaurant specializing in homemade tacos. The restaurant was so successful that Rivera was able to expand, and his company now operates eight restaurants in the local area.

Rivera tells you that when he first started, he handled all aspects of the business himself. Now that there are eight Tito's Tacos, he depends on the managers of each restaurant to make decisions and oversee day-to-day operations. Paul oversees operations at the company's headquarters, which is located at the first Tito's Tacos.

Each manager interviews and hires new employees for a restaurant. The new employee is required to complete a W-4, which is sent by the manager to the headquarters office. Each restaurant has a time clock and employees are required to clock in as they arrive or depart. Blank time cards are kept in a box under the time clock. At the beginning of each week, employees complete the top of the card they will use during the week. The manager collects the cards at the end of the week and sends them to headquarters.

Paul hired his cousin Anna to prepare the payroll instead of assigning this task to the accounting staff. Because she is a relative, Paul trusts her and has confidence that confidential payroll informa tion will not be divulged to other employees.

When Anna receives a W-4 for a new employee, she sets up an individual earnings record for the employee. Each week, using the time cards sent by each restaurant's manager, she computes the gross pay, deductions, and net pay for all the employees. She then posts details to the employees' earnings records and prepares and signs the payroll checks. The checks are sent to the managers, who distribute them to the employees.

As long as Anna receives a time card for an employee, she prepares a paycheck. If she fails to get a time card for an employee, she checks with the manager to see if the employee was terminated or has quit. At the end of the month, Anna reconciles the payroll bank account and prepares quarterly and annual payroll tax returns.

1. Identify any weaknesses in Tito's Tacos's payroll system.

2. Identify one way a manager could defraud Tito's Tacos under the present payroll system.

3. What internal control procedures would you recommend to Paul to protect against the fraud you identified above?