Photoshop or any other image editor that handles .psd files
See the screenshot for the exhaust area.
Maybe the master skinnerz template doesn't show it in the mask or something. I can't check it right now.
I think your questions belong in the skins section though
No, the rendering is done with a 3D modelling program like 3D Studio Max. The skin is applied to a 3D model of the car and then rendered.