Your firm has been engaged to do the current year's audit of Humboldt Co., a medium-sized business involved in manufacturing headphones and speakers. Humboldt is publicly owned, and its three shareholders have requested that the annual financial statements be audited for the first time this year. One of the shareholders manages the business; the other two are not involved. You are reviewing Humboldt's preliminary general ledger trial balance, shown below, to begin the audit planning.

AccountBalance DR / (CR)

Cash10,009

Accounts Receivable 170,000

AFDA (30,000)

Inventory, FG 150,000

Inventory, WIP 80,000

Inventory, Purchased components 250,000

Inventory, Parts 65,000

a. When planning this audit, explain why it is important for Humboldt's auditor to understand its business, its environment, and its risks.

b. Determine an appropriate materiality level for preliminary audit planning purposes. Explain your reasons for selecting this materiality level.