From my experience, hitting 'Yes' replaces the file as normal and the dolphin iso will play just fine (didn't test this on a real burned disk though). However, the size allocated to that particular file on the disk becomes the size of the new file. It accepts files that are at most the same size; you are not allowed to replace files with bigger ones simply because there is no space in the iso.
This is a problem because most files of a specific texture are set to the same standard size, so when you reduce the space that that file is allowed to use, none of those standard-sized textures can be used anymore. If you want to be able to use those files again, you have to get a new iso and manually replace each file again (trust me, I've misclicked a few times too many and had to go through the whole process). On the other hand, if you did that for a file that you don't plan to change in the future, then you can probably forget about it and it won't change much. However, it's probably still best to take care of it now before you forget about it.