Final answer:
In auditing a sole proprietorship, challenges arise due to the mixing of personal and business finances, reflecting a lack of segregation of net worth and capital, and the structure's unlimited liability.
Step-by-step explanation:
In an audit of a sole proprietorship, a common difficulty is the lack of segregation of personal net worth and business capital. Sole proprietorships are businesses owned and operated by one individual, where personal and business finances can often become intermingled, causing challenges in financial reporting and transparency. As the business is not a separate legal entity from the owner, the owner's personal assets are at risk should the business incur debts or legal issues, signifying unlimited liability.
Furthermore, raising financial capital for expansion or establishment can be tenuous as it frequently relies on the owner's personal savings, credit cards, or involvement from private investors like angel investors and venture capital firms. Unlike corporations, a sole proprietorship does not issue stock, hence it does not have proper measures for dividends, since profits are not distributed in that manner.