Flying units are able to fly over mountains and water. I do recall air elementals in particular can get rather tricky when they come up over a mountain to surprise you.

There are sometimes islands out in the water. You can get to these islands by land bridges from the spell raise land. Islands are not a real part of the game due to boats and the poor mechanics dealing with boats. If you have really good suggestions about boats, I'm sure that they would like to listen to them and see if they are easily implemented. At this time though the general consensus from the developers is that boats are just too big of a problem for how they are implemented.