Auditors have a lot of discretion and they could use a number of different methods when the taxpayers are determined to have insufficient records. One would be to do a markup analysis. They can markup your purchases, your cost of goods sold. Another would be bank deposit analysis, analyzing your bank statements. Another would be an observation test at your place of business. They could also do an analysis of your credit card to cash ratio. They could also contact your vendors to circulate them, find out what the true purchases are, which would result in mark up. One of the others would be net worth or lifestyle analysis.