You're on the right track. Set your micrometer to the bore size (4.11"), lay the dial bore gauge on a work bench with the gauge face up, and use the mic to set the dial bore gauge. You usually will have to manually depress the bore gauge to get the mic to go over it. The screw point doesn't need to be bottomed out; you can adjust it to wherever you want to suit your needs - thus the locking nut. There should be 1 point on one side of the head, and three points on the other side; the middle of the 3 points does the measuring, and the outer 2 are there to keep the gauge centered in the bore.
It might be worth checking with some local machine shops if they could walk you through the process; it's really not that complicated, just hard as hell to convey in writing.
One thing I failed to ask; does this dial bore gauge have the lever on the back of it, just below the gauge, that retracts the little measuring fingers when pulled? If so, that's the industry standard for measuring cylinder bores. There's smaller versions that don't have the "retract" function on them; these have a smaller head and will therefore work better for smaller holes, such as rod journals.
Now with all of this said, when a machinist measures the bores on a block he's checking out, it's usually to see how little of a bore job will be required for a new set of over sized pistons. Unless the block has really low miles - like a race motor that gets torn down all the time, a machine shop will automatically plan on new pistons. With IDI's having the cavitation issues, combined with IH using a crapload of nickle in their cast iron (this means the blocks are hard and the bores wear really well), it would probably require a LOT of run time or serious abuse to require a rebore. I've only bored 1 IDI (8 sleeves) and multiple Powerstrokes and older IH gassers; this experience is why I have owned 3 of them. They are all seriously over built. Just looking at the cast iron parts, they appear to be pretty strong, but once you start machining on them, you realize what a high quality of metal IH uses. The connecting rods in a 392 IH gasser are probably just as strong as a 4340 steel Carillo rod for a big block chevy, even though they don't look as fancy.