The sound in a game can tell the player what exactly is going on, giving them clues and subtle hints on the kind of area there in. It can be used along with visual clues to aid the player. I've recently bought the latest Killzone game, and aside from the fantastic visuals (probably the best I've seen), the sound effects and music let the game reach a new level of involvement. A scene that really sticks out for me, sound wise, would be the 'boss' battle against a giant Helghan mech called the MAWLR. The mech itself is massive, so the sound and ambiance need to reflect that, and boy does it! The sound of the feet crushing metal and rock, the huge blast from the cannon really makes you feel like your underneath it. I think they also revamped the gun sounds too, they sound very realistic and solid, if that makes sense.
I think music can create a certain mood. Lack of music can also help with mood, especially in survival horror game, such as Silent Hill. In newer games, sounds are much more dynamic in the sense that they are created by the player, or other NPCs without them being scripted. This can add a whole new dimension and create very realistic environments and worlds. A game that comes to mind is Grand Theft Auto 4. The sounds from outside echo and re verb quietly inside, with cars driving past and people talking. It creates a very believable ambiance and makes the player feel very involved.