Here is how I understand it:
1.) Default is the sound assigned to that event and isn't just limited to the sounds dialog, check under Options->IRC->Highlight for example. You'll see you can assign sounds to certain words too and that is also seen as a 'beep' in mIRC. If you don't assign sounds to the on event pull down menu, but check all the beep on message part you'll still get a beep, when the internal sound or the PC speaker is selected.
2.) As for the beep, it's that box marked "Event beep" which controls it. As for finding a way to making a custom sound on certain events, you could use the "on Event, play sound" pull down menu to pick custom sounds, but for a broader choice you'll need a script to do that for you.
This is how I have come to understand it, so I may be wrong on certian points so anybody feel free to correct my errors :P
