It has nothing to do with the sendmail proc at all.

You can't assign the result of an EXEC to a variable like that.

One way would be to rewrite dbo.usp.AuditTrail_rpt to return the result set in an OUTPUT parameter, if it's plain text.

If it's a table you might be better off to store the result set in a global temp table and use the @query parameter.

As a side note: I strongly recommend to use sp_send_dbmail instead of xp_smtp_sendmail...