I have a question about the party AI on/off function. If it is enabled does it mean other members of party automatically heal/attack/look for traps etc or do these commands need to all be done while the game is paused?

If the AI lantern thingy is on, then all of your characters will do whatever their individual scripts tell them to do. You can (and should) still issue them individual commands, but their script may override your commands, depending on its purpose. Check the individual script descriptions for details. If it's off, then they'll do whatever you command but they won't do *anything* by themselves.

It's normally useful to have it on simply because characters won't defend themselves when attacked when the AI is off. Having it on saves you a few extra "attack" clicks especially with a full group. It's useful to turn it off occasionally, though, because (for instance) if you're turning undead, you WANT your cleric to not defend himself, because counter-attacking will cancel the turning action. Just remember to turn it back on afterwards.

I'd say to leave the script on for most of the cases. You can turn them off if, say, you want to save precious ammo. Honestly, you won't worry about money after a dozen hours' playing, which in turn means that you don't need to worry about wasting ammo, so usually I keep AI on.

I personally leave the AI off b/c it tends to do things I don't want it to do too often. But I'm slow and meticulous in these games.

You can choose which script to set to each character in their character screen. (under either the information or the customize buttons -- I can't remember which)

With AI scripts on, you'll want to pick which script you want. But be warned. Sometimes your guys will do what the script says and it won't be what you want (like run off and get killed).

I never really trust the AI either, as the characters tend to perform the most annoying actions at the worst possible moments, and I am a fan of micro-management anyway.

I just use the AI to set their standard attack behavior (move into range and attack, attack but kite melee, or do nothing), and then issue specific orders when I want them to use spells/abilities or change their target.