ISO images are files that contain data files, as well as filesystem information such as boot code. You could consider them as a single file copy of a disc. For further information visit this Wikipedia article.
To create an ISO image of an existing disc you must follow the Copy Data Disc procedure, selecting Hard disc as the target drive.
You can create an ISO file straight from a compilation. To do that you must follow the Create Data Disc procedure, up to the point of burning, in order to choose the contents. Then simply select from the menu File → Save compilation as ISO file….
The options for ISO image creation are the same as for usual data compliations. You can set the ISO labels and boot options using the disc menu.
It is not possible to create an ISO image which represents an audio disc, because ISO images contain a file system structure which audio discs do not have. ISO images are only meant for containing files, not audio data. (Audio data is of course saved as a file on your computer, but these files are not written to audio disc as such.)