Proprietorship firm

1. The Tax Audit: Even if the Turnover is just above 1 cr SEction 44AB is Applicable on the client. However there is always an option of Presumptive Taxation which  further depends on the contention of your client.
 2. The Service Tax Payment: Since  it is a Proprietorship the payment of service tax to he credit of the goverment will become the personal liability of the Proprietor if remians unpaid, no matter the Proprietorship is dissolved
3.The Expense: Since it is unclear from the question of what is the nature of Expenses so mentioned, i can just say that if the amount is transferred to the account of a relative  it will fall under the ambit of Sec 40(A)(2) amd will neverthless be reported if tax audit is done. Therefore it is advisable that the expense be legit

All expenses are legit and paid in cash by relative. Only journal is passed in firm account against payments made to  relative

Example 

  Electricity dr

Wages dr 

Xyz expenses dr

         To relative

The client is unaware whether he should go for audit or not since he has not paid service tax for past 3-4 years.

So should ke go for audit? What are accounting treatment in both firm and relative ?

As far as accouting of expenses are concerned, one can book the expenses as journal entry (As in case of reimbursement of expenses) if those are expended actually for business purpose having supportives.