I don't want to change AIR now that everything works. Everytime AIR is updated something breaks. Last time it was video, this time could be file access who knows. Hard to predict. I had to update to 3.5 at some point as soon as ios 6 came out because the whole program was pretty messed up.
Using the latest AIR build will be beneficial for your app because it usually comes with updates and less bugs. I'm currently using Adobe AIR 3.7 for iOS and Android games and it has not been an issue with development or during runtime.
About the question on AIR 3.5 being compatible with iOS 7, I think it should not be a problem because AIR is backward compatible. However Adobe recently announced some key features on their Flash Player and Adobe AIR roadmap (with no definate release dates), and one of them does include support for iOS 7.