The answer to your question, and the answer to your problem are two different things I think.
Damage Reduction seems to not be taken into account when dealing with Damage Over Time effects. I would be more certain of that if I had more than one DoT spell to hurt my team with, but Concelhaut's Corrosive Siphon dealing supposedly Corrosive damage works the same whether my character wears +6 Corrosion DR armor or not.
In Combusting Wounds case... Directly testing it is impossible, it doesn't hurt allies. And however I look at it, the description seems wrong. If it were a DoT effect, we're lacking information about one time - either the time over which that 5 damage is distributed, or time the spell lasts.
What follows is a baseless conjecture
It is possible that this 5 damage gets lost - if it really is DoT it might (extrapolating from my experiences) apply wrong amount of damage, and disappear the reminder if timer is not in the correct by-3-divisivness. Or it might have a long timer (in the realm of 9 seconds, which would be about 2 per 3-second period), and not stack which would fit your experience of unimpressiveness.
Any way I look at it I think we will hear about DoT effects in patch notes sooner or later.
If you steal the item successfully whilst in stealth mode, there's no punishment. If you are caught, you may just get a talking to, or you may get a reputation loss through either the action or any combat that's initiated because you were caught. This can lead to the possibility of not being able to select certain special reputation dialogue options that can appear, if you're regarded poorly with the relevant faction.
Best Answer
You are trying to get two characters are more-or-less opposite sides of the enemy, right? So you have to have at least 2 characters to flank, and they have to have an enemy roughly directly between your 2 characters. Some terrible Preformatted examples:
Yay! Flanking
Boo, no flanking
Sometimes flanking, but I can't seem to find a consensus.