First, look in the Shop Tips section of the CLC website. Lot of good info, specifically:
05: Epoxy Work - The Gluing Part of Stitch & Glue Boatbuilding (video)
Pastry Bags for Epoxy Fillets
While CLC's methods have been successfully used by thousands of boatbuilders and will result in a very nice boat, over the years I've come up with variations that suit me better. I find that I can build lighter and cleaner with less sanding and the tools suit me better than pastry bags and wooden spatulas. When in doubt, do what the manual and CLC say to do, but if you feel adventurous try:
Building a Wood Duck 12 - Interior fillets & glass


In answer to your specific questions:
1. Yes, you can sand fillets but you really don't want to. It's a lot of hard work. If they've already cured, you're stuck with it, though. The time to smooth them is before they've cured. Painting them with a chip brush dipped in unthickened epoxy leaves them smooth as a baby's bottom.
2. Covering them with more fillet material to smooth them out is a done thing. It's known as a cosmetic fillet. The only downside is the added weight and expense.
3. Take a scrap piece of fiberglass and gently pull it across the fillet. If the glass snags the fillet is too rough and needs sanding. Ideally, the glass should be applied before the putty has cured, while it's still soft.
4. The rounded putty knife gives the fillet the correct curve and depth. As the angle between the wood pieces changes, the putty knife's height changes, causing the depth of the fillet to automatically adjust. For glassed fillets using up to 6 oz glass, the putty knife should have the same curvature as a nickel.
5. The flat putty knife is used to scrape the ridges from each side of the fillet. Some folks use blue tape to prevent the ridges from forming; put down tape on each side of the fillet, lay down the putty and pull up the tape to get rid of the excess.
Hope this helps,
Laszlo