What does "Auto" setting of white balance do? I know what it is supposed to do but how does it actually work? Does it chose from the various Sunny, cloudy,incandescent white balance settings you have already entered and use one of them?or does it work independently, then applies the adjustment hues you have entered?
Your digital camera uses math algorithms to evaluate the overall color characteristics of the vista it is about to record. If there is a color bias, the camera software attempts to neutralize it out. These algorithms work quite well most of the time but some scenes may be rendered with less than favorable colors. If they were perfect, a sunset would be rendered without that golden touch.
These color balancing algorithms attempt to mimic the human eye/brain involuntary color adaptation. It is worthwhile for you to observe this adaptation first hand as it provides insight into white balance. Procure some deep colored filters. You can use colored candy wrappers or holiday package cellophanes. Cut one, say deep red, and hold it over just one eye. Stare about at objects with this filtered eye. After a minute or so, remove the filter and look about. Quickly cover the left eye and then switch and cover the right eye. You will see that the once filtered eye now has an altered color balance. It’s bias is the complement of the filter. The eye that peered out with a red filter is now biased cyan. Don’t worry, this condition is only temporary. Try this again with a yellow filter, again with green. You are witnessing firsthand how the eye/brain accommodates different color illuminants.
Film cameras lack the ability to automatically white balance. For film photography, we applied filters to accomplish and or the photo lab applied color correction on a custom bases during the printing stage, making prints from color negative. Photofinishing printing machines sport complex color balancing algorithms that apply color bias corrections on the fly as each negative is scanned and printed.
The answer is as varied as the many different models of cameras and their related firmware.
When set to AWB, most older digital cameras use algorithms that attempt to set white balance based on the assumption that the brightest areas in the frame should be neutral white or very light gray. This works fairly well unless some areas are fully saturated in all three channels (before any exposure adjustments are applied).
The result may be similar to one of the preset selections available (Daylight, Tungsten, Cloudy, Fluorescent, etc.) or it may be considerably different from any of them. If the detected scene is close enough to one of the camera's preset choices, that one might be applied or might not, depending upon the exact camera model in question.
Newer cameras often use more sophisticated algorithms that can vary greatly from one camera model to the next. Most are similar to some forms of metering such as Nikon's 'Matrix' or Canon's 'Evaluative' metering in which the data from the frame is compared to a library loaded into the camera's firmware and applied based on instructions for the closest match. If the camera detects a scene with bright blue sky in the upper part of the frame and darker green in the lower frame it will apply WB based upon a landscape profile. If it detects a scene with lots of areas that look (to it) like skin tones it will apply a WB based upon a portrait profile. (This explanation is vastly simplified from the many subtleties that are analyzed and can affect the outcome.)
Some cameras even allow user selectable options between bias towards the brightest areas of the scene or bias towards the more average areas of the scene. Canon calls the two choices available with some of their newest models 'white priority AWB' or 'ambience priority AWB'.