An auditor wishes to establish materiality for a client whose summary financial are as follows:

Total Assets $$500,000$

Total Liabilities $$450,000$

Gross Revenues $$1,000,000$

Cost of Good Sold $$600,000$

Operating expenses $$300,000$

Net Income $$100,000$

Additional information:

Of the $$500,000$ in assets, $$400,000$ are fixed assets that are held as colladeral for a bank loan valued also at $$400,000.$

Based on this fact pattern, explain how the auditor should establish materiality and tollerable misstatement.