The naval system is a bit out of whack. Generally you put fleets into areas(sea zones) and they patrol that zone. If you set it to engage, the entire fleet in that "group"(not zone) will seek the enemy ships. If you put it on Raider(evade) it will seek out convoys only individually.

The problem with the system is that ships are easily engaged as large groups, but as the forces get smaller, it becomes all but impossible to kill the last few ships if the AI is the target. Note also, carrier airstrikes and bombardments are done by selecting the individual ship in the fleet menu and then hitting the button on the side.

Overall, the naval system is ok, but it is bugged as hell. I have convoys being wiped out by lone ships in bizzare areas. For example, my convoys from Halifax to Manchester, end up going through the eastern and western med. Even had a french convoy going from Cherborg to Southhampton( real life about 100 mile trip) end up getting destroyed in the western med :P