Hello. I purchased a house and I am making a some renovation. While sanding the floor and removing the baseboards, I noticed that the paint is coming off along with the brown paper. I pulled it out a little bit and the drywall started to crack and fall apart. It doesn't look good. The drywall is dry but it looks like it might have experiended some moisture. Here are some pics:

http://imgur.com/a/PizALp6

I also took off a cover and noticed that there are bathtub pipes and valves visible from that bedroom. I can smell moisture, possibly mold coming out of there. (I even found a spider that looked like brown widow but he hid somewhere before I've been able to get him). Maybe there was some leak few years back?

https://i.imgur.com/32am9ZH.jpg

Should I cut out the drywall? If yes, should I cut only at the bottom?

 

How old is your house? Is it indeed drywall or is it a drywall lath with plaster veneer?
The damage was likely caused by moisture but it shouldn't be a big deal to fix [if it needs to be] The main thing is for your new base to set flat against the wall. I'd only mud enough for that.

 

Is the damage just in the area of the pipes?

I'd be checking to see if anything is still leaking or if it appears was repaired at some point.

If all is dry and damage is covered by molding I dont think it's going to get any worse!