1.+2.
I moved the old version into it’s own folder via ftp (which is still live on my server) and uploaded the new version (3.5) via ftp.
Would I get a better result by backing up and deleting the old version, and then uploading the new one via the instructions including in the theme?
3. Is WP access a file name or an account login?

I found one here –
1) Its ok to keep the old version.
2) WP access is the account login for the wp site