Proofreading is usually done in a post-manuscript format, such as PDF. I use custom stamps for proofreading marks and Adobe's Comment tool for insertions and queries.
Proofreading is a final check for lingering issues and layout problems. In a publishing house, the proofreader ensures that all the edits in earlier drafts are done (and haven't introduced new problems) on the final proof pages. It should not be confused with copyediting, which is a thorough line by line review of the manuscript for mechanical issues (spelling, punctuation), language (grammar, usage, voice), internal consistency, factual reliability, and a number of other things that must all be addressed before the manuscript can be considered ready for publication. There should be few textual errors on a final proof.
It might be tempting to skip the proofread, especially if a lot of revision went on during editing. Ironically, heavily revised documents often need the most careful proofreads. I do not proofread long documents I have edited myself, though I am happy to proofread the work of other professional editors. I do proofread short documents I have edited but recommend the author also engage a fresh pair of eyes for one last pass.