Whenever a player or NPC actor is holding a weapon the actor is assigned a specific noise value, which changes when the actor swaps weapons. Whenever the weapon is used, the actor's total alert goes up by the noise value. After a few seconds of not using weapons it drops rapidly down to 0.
Once the actor's total alert passes a threshold, an alert is generated with a certain strength and the actor's total alert is halved (the halving may be removed later if it doesn't make sense, right now it's to make it a bit easier to recover from putting an alert on yourself).
Similarly, if the player is holding a lit flare/chemlight or has their flashlight on, their alert value will be instantly beyond the threshold and an alert will be created (flares cause very strong alerts). The alert's strength will increase as long as they keep using the light.

Alerts are either mobile or immobile, i.e. they either have an object target that they stay with at all times, or they're stuck on an unmoving location. For example, weapon shots come from a location and are immobile while a flashlight beam comes from an actor and is mobile. All alerts are also either light, sound or both for day/night purposes (a bright light isn't gonna be too bright during the day). Alerts that are near each other combine together if they have the same target. So several gunshot alerts in the same area will become one big gunshot alert, or a mobile light alert that was on an actor will combine with a nearby sound alert if the actor dies (but not before).

Alerts of course attract zombies and affect NPCs (they'll either flee from, go towards or ignore alerts depending on what they should behave like). Zombies will also spawn based on alerts, and will probably spawn more rapidly for larger alerts, so an actor that shoots wildly will be quickly swarmed.