Swell Computers manufactures desktop and laptop computers. The components of the financial statements are (1) net income = $50,000, (2) total assets = $1 billion, and (3) total revenues = $3 billion.

Determine the preliminary judgment about materiality (i.e. calculate the preliminary materiality). Justify your decisions (i.e. explain why you chose the particular base).

Swells auditors set tolerable misstatement for inventory at $1.25 million. The year-end inventory balance totaled $4.5 million of which the auditors tested a sample of $1 million. Determine and discuss the fairness of inventory if $250,000 worth of misstatements were found within the testing sample. Assume 50% sampling error.

During the course of the audit, Swells CPA firm detected misstatements that resulted in an overstatement of net income by $1.5 million. Evaluate the audit findings. Justify your decisions.