When you shut down the radio, yes, it does pause the iPod. It won't turn it completely off, but it will shutdown like normal after a few minutes of sitting idle. This behaviour is actually the iPod's, not the interface. When you disconnect power while playing, it will pause, then time out and shut down.

As for the nav system prompts, I haven't used mine yet, but the nav system appears to be oblivious to what's actually plugged into it and it should work just like it's connected to the CD changer, regardless of whether you're using the FRDW/PC-POD2 or the X3.