For Wounding, that's going to be up to the GM. The clear intent is that it functions as a foil to the Inflict series of spells, but it doesn't contain the words "negative energy." I would side on it working as intended, but I can see the argument otherwise.
The Undeath effect word does not allow for the creation of variant undead. You get skeletons or zombies and that's it. If the player wants to fight that, my response would be that the fluff of WoP is that it is a primitive precursor to Vancian casting (standard magic) and, as such, has limited options.
Words of power represent a primal form of magic used in ages past. As such, use of the words of power system is rare these days, and its practitioners tend to be masters of esoteric lore. Words of power constitute a root system, from which all modern magic descends. Although powerful, this system is more primitive in some ways than modern magic. Flexible, but lacking the refinement of modern spells, this system allows spellcasters to shape magic in ways they never could before, while simultaneously preventing them from producing the same sort of incredibly specific effects that ordinary spellcasters master. It is not surprising that most magical institutions and centers for learning treat words of power as an archaic art, to be studied along with other historical matters, but not actually practiced. Those who delve into the lore of words of power often find themselves lost in an ancient art that they alone might now know. There is power there, but each wordcaster must find it alone.
1.) The "Wounding" line of spells specify that they heal undead, and are an analogue to the "Inflict" spells of standard Vancian fare. The Knight of the Sepulcher is healed by effects that heal undead (before level 20 when he actually BECOMES an undead, anyway). It's pretty clear the two should work.
2.) It was handled correctly. Not every Word of Power is of equivalent strength as it's Vancian counterpart, in fact most are quite weaker (Alignment Shield spells don't grant immunity to mental control like Protection from Alignment, Control Time gives 1d4 standard actions rather than 1d4 rounds, etc.). He shouldn't expect to have the same strength as Vancian casting, especially if he isn't willing to pay the same cost.
That said, point him to Spheres of Power instead. Let him be a Low caster (a la the Armorist) and if he wants to dabble in Necromancy and even make templated creatures, he can. He'll just have to focus in it, that's all.
Thanks folks. A third question that came up; Words of Power, and silent spell, from the Oracle curse. The player was arguing that it was a purely mental spell and that people damaged/affected by the spells had no way to know who in fact had hurt them. I believe every spell has a visible component right? Or how would that actually work?