What if Tether isn't backed by USD sitting in a bank? What if it's backed by Bitcoin instead? What if it's backed by all other USDT trading pairs on Bitfinex and not technically owned by Tether LLC?

What if the auditor's are simply doing what any good auditor would do. Attempt to follow the trail all the way to origin in order to validate and substantiate all funds claimed on books?

Simple cash-based audits are indeed simple. But I suspect the "cash" backing USDT is Bitfinex's holdings in cryptos, USD, and other fiats all around the world in any number of traditional banking institutions.