MMI 3G+ Best Sound Quality Files?

Hi,
First post. About to be the owner of a new MY14 A4 Black Edition.

From the online reading I've done, I think that the best audio quality will be through an SD Card (even though I'll have a music interface). What is the best quality sound tht the SD Card can play?

I also read that it's now possible to have album art showing through the SD Card - does anyone know where in the file structure do I place the album art and if the album art has to be a particular size?

Lastly, if the SD card can play itunes playlists - where do the m3u files go in the card's file structure?

Thanks in advance
GE

Thanks for the response, just ripped some CDs to 320kbps ready for the card.