(Learning Objectives 1,3: Describe fraud and its impact; evaluate internal controls over cash reciepts and cash payments)

The case is based on actual situation experienced by one of the authors. Augusta Constrution, headquartered in Topeka, Kansas, built a motel in Kansas City. The construction foreman, Pete Garcia, hired the workers for the project. Garcia had his workers fill out neccessary tax forms and sent the employment documents to the home office.

Work on the motel began on May 1 and ended in December. Each Thursday evening, Garcia filled put a time card that listed the hours worked by each employee during five-day work week that ended at 5pm on Thursday. Garcia faxed the time sheets to the home office, which prepared the payroll checks on Friday morning. Garcia drove to the home office after lunch on Friday, picked up the payroll checks, and returned to the construction site. At 5pm on Friday, Garcia distributed the paychecks to the workers.

a. Describe in detail the internal control weakness in this situation. Specify what negative result could occur because of the internal control weakness.

b. Describe what you would do to correct the weakness.