Richard Yates, CPA, is auditing the Levitan Corporation's financial statements for the year ended December 31, 1999. In prior years, Levitan's financial statements were audited by other auditors. Levitan's unaudited Accounts Receivable, Inventory, and Plant Assets are \($2,500,000,\) \($7,750,000,\) and \($15,000,000,\) respectively, and all other assets total \($12,750,000.\) Total current liabilities are \($9,900,000,\) and net income is expected to be \($4,500,000\) on \($35,000,000\) of total revenues. Levitan Corporation is publicly traded on a national stock exchange.

Because Yates has not previously audited Levitan, he decides to audit all of the balance sheet accounts and to audit Accounts Payable, recorded at \($3,000,000,\) 100 percent, since controls are not reliable, and the balance represents a small number of individual accounts.

Required:

1. Determine a preliminary estimate of materiality for Levitan Corporation's financial statements taken as a whole.

2. What portion of the preliminary estimate of materiality should be allocated to Accounts Receivable, Inventor)', and Plant Assets, assuming Yates uses the relative magnitude approach to determine the allocation?