Two constituents make up the engine's audio: Engineering and synthesis. Engineering refers to the developer-driven creation or recording of sound clips that serve as the basis for in-game sounds. Synthesis refers to the real-time renderer-driven alteration of sounds depending on location, material, and shape.
This article provides a good explanation of 3D sound synthesis, including localization cues. It states there are eight sources of localization cues: interaural time difference, head shadow, pinna response, shoulder echo, head motion, early echo reponse, reverberation, and vision. The vision localization cue will be implemented automatically by the graphics renderer. The others will be implemented by the audio renderer. Localization algorithm will need to perform in real-time.
Keywords: Holophonics, holoperistrom, 3d sound synthesis