1) Not sure if you've done this bit but first, create the database in SQL Server first.
2) Then create a login account in SQL Server that has rights to create tables etc in this database (e.g. called CE_USER).
3) Then when setting up your new ODBC DSN, at the first screen, point it at the SQL Server machine. On the second screen, select "SQL Server Authentication using a login ID and password specified by the user" and specify the SQL Server username and password you created in step 2 above (e.g. CE_USER).
4) Now on the third screen, change the default database to the name of the database you created in step 1 above.
Once you have the DSN set up, go to the Crystal Config Manager, stop CMS and when specifying the audit ODBC DSN, select the data source created above. It should ask you for SQL Server Login details. Uncheck Use Trusted COnnection and specify the username and password created in step 2 above. CLick the OPTIONS button and ensure the "Database" is set to the name of your new CE AUditing database.
That should be it. You will know it worked when you restart CMS and you see a table called CMS_AUDITTABLE appear in your CE auditing database.