When you are daydreaming it can reach a point where you no longer process information from visual and auditory signals in your environment and you see and hear what you are daydreaming instead. How does that work exactly? Are the external world signals being blocked, overridden or are they too weak to matter when compared to the internal signals?
Easiest explanation would be that the environment is still being ‘percieved’ but that it is not the subject of attentional focus. Kind of like, looking at the monitor right now, but not being aware of the headphones near it, even though it is still in the field of vision. If one momentarily diverts focus towards that area, one registers the headphones, not otherwise.