Lapping is simply the process of getting rid of the imperfections in whatever you're lapping. This makes for a better mating surface with no air, so heat transfer is better.
Basically you wetsand on a flat surface using rough paper to make an even surface, and higher grits to give it a mirror polish.
On heatsinks I usually do
400 grit
600 grit
800 grit
1000 grit
1500 grit
2000 grit
If the heatsink is uneven or has high spots I'll start with 320. Just remember to sand on a flat surface, and use plenty of water.
Some people do, but its dangerous if you do it incorrectly and will not help your temps any. You can only lap a CPU if it has an IHS anyway (so no Bartons or old Pentiums). You don't want to be lapping the CPU core now do we