Audio in Shenmue 2 does work, but as with other games the audio fading doesnt work. For example, go into the center quarter area where the old woman is in the flats (if you've completed the first disk you should know where that is). In this Quarter the background "chatter" doesnt fade, and consequently its actually louder than the footsteps & ingame/cutscene speech. Nearly blew my ears off when I first entered this area
As for music, admittedly I have never heard it, only the usual sounds of the area. So i'd say your correct about that :bouncy:
Other audio is fine (I completed the first disk and didnt notice anything apart from the aforementioned).
~P