in my distro, the icons are installed in my home dir with name, .icons. if you wanna know how it works, i suggest you look at that dir. if it's not there try to DL an icon theme and install as regular user. for now i can't remember where to look for the default dir where the icons are contained in /usr. i thinks it's /usr/share/pixmaps or /usr/share/icons/. just search for it. i'm too lazy to look for it now, and a bit mad for losing my theme/styles.
if an icon for an app is not found in your current theme, the WM is smart enought to look for an icon associated for such an app. it looks for it at the default dirs.
BTW, you could use GIMP or some other very good image tool if you really wanna make your own icon theme. you only need PNGs for these icons. it's an open format, not like the .ico files on some other system, which you can't readily modify without a required tool other than an image tool.