You need to eliminate the ipod and cable to rule out the head unit, im assuming this is a problem with the ipod connector either on the ipod itself or the cable.
Try a friends ipod on the same cable, if it does the same thing, buy an apple a/v compsoite cable from your local electronics store, if it still does the same thing even with a different ipod and cable its a setting on the head unit or a defective head unit.
Also perhaps double check you have the cables plugged into the proper port in the rear a/v input. The calbes should be clearly marked ipod or av1, that is the rear rca cables, that are yellow, red and white coming out of the back of the head unit, if these were plugged into the wrong set, that will be a good indicator of these symptoms. And you wouldn't even know since the usb will work the same regardless. Just won't hear the audio.