make folder, where, how?

For one thing, if you’re referring to this plugin, http://wordpress.org/extend/plugins/audio-player/, then per notes of plugin dev, it’s good to WP 2.9.2. There’s no guarantee it would word in WP 3.1.

Having said that, you could create a folder called audio in the wp-content/ folder or wp-content/uploads/ folder, just indicate where the folder is in Settins > Audio per usage info in plugin dev’s site.