I currently have all my change frequencies set to "daily" and my priorities set to 1. Is this bad or does it really matter?
Quotes are taken from: http://www.google.com/schemas/sitemap/0.84/sitemap.xsd Changing your frequency to daily won't make google crawl your site more often. And setting up your priorities to 1 isn't better than having them all at 0.5 or even 0.0 since what counts in priorities is their values compared to each other. What you are saying by setting them all to 1, is that they all have the same priority:
Those settings are optional. I believe google doesn't really use them for anything. I didn't have them before, I use them now. I really see no changes. That is only my opinion, and since explanation on the use is pretty vague ("Consider this element as a friendly suggestion and not a command."), we have to choose our action according to observations.
If you you do this in your webmaster account you will get a site map warning says that all priorities are set to same thing. If i where you I would put the homepage as 1.0 and major urls you are optimizing for as 0.8 and the rest of the site to 0.5
You should either leave out the priority values or use a program that will calculate them properly. You may want to check this sitemap priorities article-
I think Google is using the last modified date as the flag or key to index the page. The Sitemap should reflect this date.