You can do this several ways, it's really up to you, but here's what I do:
For copywork, when occasional errors are made, I let my dc just erase & fix them. For larger errors, they have to re-do the passage.
For dictation, I edit/correct the passage after child has wriiten it. I use the proofreading marks from Spelling Workout, and go over it with my dc. If there is just a small error (say, a comma needs to be inserted), or one spelling error, I let him erase & fix. Otherwise the entire sentence is rewritten underneath.
I present this as a normal part of the lesson, so that they don't feel it's a punishment to re-write the sentence. Out of 3 sentences given, my dc usually have to re-write one of them.
If your child is making repeated errors, or is frustrated with a dictation exercise, this is a good indicator that you're beyond his level, and need to choose something easier.
One other thing: I've never given an entire paragraph to a 7-year old for dictation. Is she pretty advanced? Just remember that the dictation level will always be below the copywork level for your children. Maybe you could choose one sentence from the paragraph for dictation.