You don't have to put 'mud' over drywall before painting. If you want a texture on the walls you do, but not if you want flat walls. You need to float out the area where the paper is torn off or you will be able to see the edges after you paint. You don't necessarily need to tape over the torn edges. You should make sure there are no fuzzy pieces of paper sticking up, then you can just take drywall "topper" (a light-weight joint compound) and a large drywall knife and float the wall flat. Sand lightly and repeat. You may want to put a good primer down before you paint to make sure the paint looks the same all over the wall. Good luck!
Renee

Thanks for the advice. I think the guys that did our bathroom were great tilers and good at drywall, but they are marginal as painters. After all of the great detail work and consideration about moisture and plumbing, it seems they looked at the painting as more of an afterthought. I started REALLY looking at some of the details in the paint after I took down the mirror, and its easy to see where they cut corners. I can see the transition between the tape and the drywall surface. Perhaps another coat or two of primer would have been in order.