Step 3: Build the circuit...
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The wattage of the resistors just means the maxium power the resistor can handle before it overheats and (literally) blows up. So yes, they should be able to be replaced with 1W resistors without any problems, even though it is a quite big overkill.
The batteries are at the top of the schematic and they are hooked up to the PNP transistor's emitter and the emitter of the NPN transistor and the speaker.