What is ISO file?

The name ISO is taken from the ISO 9660 file system used with CD-ROM media, but an ISO image can also contain UDF file system because UDF is backward-compatible with ISO 9660.

An ISO file contains the image of a disk, meaning that it contains every file and folder that the disk had. There's nothing about the ISO format that actually knows about files, folders or formats. It's just the raw data from the disk. Now, naturally that raw data, if interpreted correctly, may know about files, folders and format. But, like a disk, the operating system has to look, see what format was used (things like FAT32, NTFS and the like), and interpret the contents of the ISO file as if it were reading the raw data from an actual disk.