The wider range of acceptable ISO that all the modern Nikon's have has allowed shooting manual and Auto ISO to be the most effective mode in changing conditions. A and S mode always risks a ruined shot if conditions change and results in artistic factors like DOF and shutter speed to move out of a useful range. Setting aperture for desired DOF and shutter to the lowest speed that you are confident in being fast enough, Auto ISO can adjust over a wider range than would have been acceptable in the past.
Regarding flash, it all makes more sense when you consider that the metering in the camera is separate from the flash metering. When metering, flash is not considered so what you have based on shutter and aperture is all you get until the flash fires based on its own calculation. The Auto ISO runs up the ISO just as it would if the flash was not active, shooting in the ambient light levels with the setting for aperture and shutter. Before the flash even calculates its contribution the camera has increased the ISO to where the camera alone is trying to expose correctly. Turn it off if you do not want Auto ISO to be used in that moment before the flash is triggered. The camera will do what it has to for a proper exposure regardless of a flash attached or not. I have my U1 and U2 set up for basic ambient and for flash. Both are manual exposure but the main difference is setting a preferred ISO for flash shots. If in lower ambient conditions, and I want to balance ambient to flash, I do it by simple advancing or retarding ISO with any set aperture and shutter speed I think is best for the scene. But upping the ISO, flash power drops which allows for continuous shooting if desired, without waiting for the flash to rearm, and of course it also extends flash battery life.
Nikon is fine tuning features to take best advantage of the wider acceptable ISO range of more modern cameras like the D7000, 600, 800 and 4.