I am not an audiophile but this is my understanding of how audio is output from the iPad. This is also the case for the iPhone and iPods.
When you play music on these devices they are digital for us to hear them they have to be converted to sound waves which are analogue. When we plug a set of headphones into the headphone socket you can here the music and adjust the volume because the iPad has a DAC ( Digital to Analogue Convertor) and an amplifier. Because of limits in space and price the in built DAC and amp are not the best, they are very good and for most of use they are more than adequate to listen to music through.
The other way to get music out of an iPad is through the 30 pin dock connector. The advantage with this that the music steeam is digital, no DAC or amp involved. We the listeners can then decide how we want to process the music so we can hear it. We still need to use a DAC and amp but we can decide the quality and price we are willing to pay.
So what is the best way to connect an iPad to an audio system.
We can use the headphone socket on the iPad and with the appropriate cable connect it to our audio system. The sound will be very good and acceptable for most people. The quality of the music is limited by the iPad DAC and amp as well as the audio system. This is also the cheapest method
We can use a dock connector which has an audio output (the apple dock connector does this) we can then connect this to our audio system. The quality of the music is now limited by the dock connector and the audio system. This is more expensive and is only limited by how deep your pockets are.
Here are a couple of sites that make specialised dock connectors that will give the best audio output to use with higher end audio system.
One other thing to remember is the quality of the orginal music, what rate it was origionaly sampled at, the higher the better and has it been compressed (loss in quality) to make the music file smaller. High sample rates and no compression mean best quailty but bigger music files. Low sample rates and lots of compression, low quality and lower music files.
Hope you find this info useful