Your comment is incoherent.
I know what "Free Software" means. Your definition has no connection to what you assert here: "Apple could still have audited free software into its appstore as it does for nonfree software currently."
So, unless you're suggesting that apps be distributed as source code, and compiled locally on your phone, there's no way to determine if the binary the App store distributes is an accurate uncompromised representation of the original source. Furthermore, expecting normal users to examine source code for security holes is an unreasonable burden. The security of iPhone apps is based on how much we trust Apple to maintain that security, and to review the apps. Not in our personal freedom to examine the source code, which we can do already, for many apps.
You confuse developer control/freedom with user control/freedom. They are very different things. A user doesn't have programming skills, and their personal interests are in freedom from malware- freedom from developers that have the ability to do whatever they feel like with the user's data. They have no interest in being able to compile their own apps and run them on their own hardware.
On the other hand, developers are interested in having the freedom of not being in a sandbox. not having to go through an app review/approval process. The freedom from security restrictions. The freedom to slurp address books. The freedom to override any hardware button, use any API, without limit.
Do you not see how developer freedom and user freedom are in conflict?