Hi
I think you would be OK doing ADC to Arduino audio detection, and also DAC Arduino to sound generation, albeit crude.
I'd forget about using the Arduino to pass through the data and process it-- it isn't fast enough and the code will not be compact enough.
this is not meant to be a DSP, it's a programmable controller, so think of it as something to send control signals and you will be fine. There are more elegant design solutions for digital audio.
D