Funny thing is after some serious experimentation, I found that the auto brightness does indeed actually work. Believe it or not, Apple has based the new way it handles brightness on the reaction of the pupils in your eyes. Yes, it's different from the way iOS5 previously handled it and I'm not absolutely sure why they changed it but they did and it does work. Try this.
(1) While in complete darkness, turn on the AB (auto-brightness) and set the slider to what is comfortably bright to you. Mines at about 25% or lower.
(2) Now turn on a light, preferably bright, in the room and you'll see the slider adjust upwards, mines usually stops somewhere around the 50% point just under the ampersand (&).
(3) Here's where it gets interesting. If you now go back to a completely dark room you will notice that the slider will not move back to the beginning setting you first set. That's because since your eyes focal point is already adjusted to the iPads screen, your eyes would commonly ignore the surrounding light of the room, so there's no need to readjust it. (In actuality the ipad will eventually readjust, but it takes a lot of minutes to pass first before it does, under half an hour)
(4) This is where it REALLY GETS INTERESTING. Using the power button on the top of the ipad, shut off the screen with one click, I assume you're still in the dark with room lights off right? At this point, your pupils are now readjusting to ambient light in the room, which is zero. So if a bright light, such as the ipad, came on suddenly you would be blinded. However not so. Powering the screen back up, the ipad now automatically sets the AB to what you first set it to when you found the adjustment that suited you first in the dark (back to 25%), and whala, no more burned out vision from a bright ipad when turned on in the dark.
I can only imagine that Apple thought that with a device like ipad being so conveniently accessible, unlike something you would normally have to get up to boot like a laptop or desktop, they found that a lot of people would be reaching for it in the middle of the night and did'nt want you to have to wait for a brightness control to sample the surrounding light and bounce up or down to adjust, thus blinding you.
I apologize for the long explanation, just wanted everyone to be perfectly clear. Of course this is just my assumption, so good luck.