This question comes up a lot in art school crits both at the undergraduate and graduate level. Or at least, it did for me. It always struck me as an odd question, too, for art students to be asking each other. The question causes me pause... because how should I understand the meaning of the question?
(Note: "Crit" is short for "critique", meaning a face-to-face feedback session discussing the work or work-in-progress of one or more artists. It's not a crit unless the artist is present and actively participating in discussion.)
I think anyone who has worked backstage in a theater (I certainly have) or performed live on-stage (I've done that, too) is likely to imagine the word 'audience' to mean the spectators who gather explicitly to witness a performance. And so in a crit scenario, anyone attending the crit becomes the audience, because they're the ones present to witness you and what you're showing (or doing) that day. But I don't think that's what anyone means when they ask the question in a crit scenario. Generally speaking, if you hear someone say that a work is in any way 'theatrical' during an art school crit, it's generally a negative criticism of the work. So it follows that any association of your work with a theatrical audience would naturally be undesirable.
Similarly, anyone who has studied design — such as industrial design, furniture design, fashion design, interior design, jewelry design, etcetera — is likely to imagine the word 'audience' to mean the potential market for a designer's product or service. Asking "Who is your audience?" in the context of design suggests one is probing into the utilitarian value of a given design to the presumptive consumer. If a product or service provides a function either needed or wanted by consumers, and there are a large number of people within that demographic (or if that demographic is presently under-served), then it may be safe to assume there is a strong market for the design in question. But yet again, I don't think anyone means to imply these considerations when the question is raised in art school crits. Starting in or around the 1980s, any association of your work with some commercial application or mass-market appeal would be highly undesirable, in the same way that calling someone a 'sell-out' had become an insult.
I imagine that writers — authors, poets, journalists, magazine publishers, advertising copywriters, screenwriters, storytellers of all persuasions — might read a marketing implication into the question "Who is your audience?", as well. With a bent, in this case, to the issue of messaging. The function of communication (the written word being a form of communication) is to convey a message. Having worked, myself, within the direct-to-consumer advertising industry for a time, the intended 'audience' for a particular 'message' is usually also the intended 'market' for an advertised service or product. We were never just communicating with consumers for the sake of expressing ourselves; we were trying to persuade people to buy something, or else encouraging them to transmit our message to other people who could just as easily be persuaded to buy something...
Stories recorded in the Bible, incidentally, are teaching stories meant to convey moral lessons. And while contemporary creative writing and storytelling is rarely expected to convey moral lessons the way the Bible does, there is still tremendous pressure to perform a commercial function through the writing; writers should hope to sell as many units as possible (books, movies, tickets, magazines, newspapers, downloads, clicks, etcetera). Again, I think an art school crowd would not look favorably on anything with a profit motive, nor a didactic (or morally righteous) motive.
"Art for art's sake", despite its original association with Modernism, remains a sort of mantra for all contemporary, living artists. Many, if not most, still hold to this value even as they reject other aspects of Modernism. It's supposed to mean that 'true Art' should exist divorced from any didactic, moral, or utilitarian function; works of art that teach, preach, illustrate, or serve any other practical purpose are not 'true Art', because their value is predicated on these social functions. This concept gives artists the freedom to practice a diverse range of artistic activity without having to justify anything they may be doing in terms of value to humanity. Modernism asserts that 'artistic value' is and must always be assessed independent of any moral value, utilitarian value, educational value, financial value, etcetera.
The notion of "art for art's sake" arose within the Modernist movement in response to social pressures that threatened to frustrate Modern artists. Modernist works of the early 20th-century represented such a radical departure from everything that came before, I imagine it was tremendously difficult for artists to find encouragement outside their closest circle of friends, let alone find patrons and art dealers willing to invest in their work. Even family members were likely to have a few discouraging words to share with the early cubists, surrealists, impressionists, dada-ists, minimalists, formalists, and so on. The statement "art for art's sake" is quite simply defensive. The early Modernist movement was so incredibly vulnerable to criticism on the basis of social benefit, it was necessary to reject the entire premise of art's value to society in order to carve out a theoretical space where Modernist ideas could survive and thrive without interference from the thought police.
I have never liked the question "Who is your audience?" because it feels like a trap, a temptation to identify the demographic market for something that may be commercial, utilitarian, moral, educational, political, or theatrical in nature. If I have a ready answer for who my audience may be, that would suggest I am fully cognizant of the value proposition of my work, that perhaps I set out to fulfill that value proposition in the first place. And if I am not fully cognizant of these things, but I have an answer anyway, it would suggest I'm just not as bright as I think I am. The artist who makes work with a particular audience in mind without realizing how doing so affects the meaning of the work is likely foolish, naive, and immature. So answering this question could be like volunteering yourself and your work for ridicule by those who are more mature and advanced in their artistic development. Or at the very least, admitting that the artistic value of your work is secondary to other value measures. Therefore, I struggle to think of any response to the question which would not automatically diminish a work's potential relevance to art movements presently underway.
...Of course, the question is only really a trap if we still believe in "art for art's sake".
And it is never a trap when asked by a true and trusted friend.