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When you munge items, they are only used to create adornments for their respective tiers (i.e munging a level 5 Adept III could possibly yield the infusion needed for an adornment in T1). Is that correct?
Correct
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So that means at skill level 100, you have to munge T3 items (while not getting skill gain) in order to get the correct components to craft T3 adornments. Is that correct?
Correct
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The reason I am confused is because people keep mentioning the island to skill their transmuters. I guess they were trying to say that you munge the T1 items up until skill level 100 and then use those items to create T1 adornments. So basically, you gain the necessary skill points by munging to 100 and the rest of the skill gain is from crafting the subsequent T1 gray adornments from your T1 munges. Is that correct?
Yes, get your skillups to 100 by munging items, then use those items to make transmuter adornments for the best return on your time or money invested in mungable items.
The other thing they're saying is you can skill up on gray T1 transmuter recipes all the way to 350. It will be slower because from my experience you get about 1 in 5 skillups on gray recipes compared to 1 in 2 for even con or better. The thing is it's easy to get mungable T1 treasured items by using a level capped alt on the island. (If you have a high level character I would use it to harvest T1 for rares and craft mungable T1 Mastercrafted/Adept III's because higher harvesting skill nets you more rares.)
In addition, if you want to make money you're better off turning the higher tier transmuted items into marketable crafting class adornments than transmuter adornments that sell for fuel cost if you're lucky. Unless you're a weaponsmith.