You are essentially correct on all counts.
There are two penalties for casting "high-level" skills. One is an AP penalty, and this depends on ability (Pyro, Geo, etc) level. The other is a chance-to-fail penalty which depends on the primary attribute for the skill (so Int for spells, Dex for Marksman, and Str for Man At Arms).
For skills that apply damage that isn't tied to weapon damage (so basically all elemental + witchcraft spells, and all marksman skills), that damage increases with character level. So low-level skills are oftentimes still very useful late-game. Some lower level spells do have clear higher-level replacements that offer the same functionality but are more effective (flare -> burning blaze, blitz bolt -> lightning bolt, etc).
