PNP transistor with audio signal output on collector is used to drive opto-isolator. How does it work?
Very odd circuit. 

It looks to me like the LED with Q1 and R1 is acting like a current source of ~10-15mA to bias the opto-isolator LED into conduction .

\$I_D = (V_{F} - V_{be})/R1\$







simulate this circuit &ndash; Schematic created using CircuitLab

Any signal coming down CH1 will either add of subtract current from that bias, and, consequently, change the drive on the phototransistor.

Attaching the signal directly to your smart-phone output would be a bad thing though. You should at least have a DC blocking capacitor in that line.