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So, the power says you can turn into "a small beast (mammal or reptile)". I take it this excludes birds, but bats are mammals that can fly, so I don't think turning into a bird is unbalanced. I allowed a PC to turn into a bird to scout around, but I am trying to decide what was intended. Should they be able to fly at all? Should I allow bats but not birds?

Secondly, do they intend for only existing beasts to be available? For instance: can they turn into a beast of their own creation, such as a unique creature or hybrid animal? This isn't an issue in terms of mechanics, because the character's abilities are defined, but in terms of the fiction, are they limited to "real" beasts?

Thirdly, combining these two questions: my PC asked about the possibility of a "battle beast bird" at the Adept or Mater level. The answer to this could be 1) No, because you can't turn into a bird; 2) Yes, you can turn into something like a Dragon Fly, 3) Yes, because you can just turn into any bird with the listed abilities, and "bird" is just your appearance; or 4) Yes, you could turn into a unique bird-like beast of your own conception with the listed abilities.

I am trying to follow the rules as written, the rules as intended, and also make a ruling consistent with the fiction of the setting, and I'm not sure which way to go.

Although it looks like birds are specifically excluded from the definition of beasts in the mystical power (because it specifies mammal or reptile), on page 224 of the core book, winged creatures are clearly in the category of beasts.

Perhaps the spell seeks to narrow the category for the purposes of the mystical power, perhaps it’s an omission, or mammal and reptile are just examples).

There is an argument for including them and for excluding them, so go with whatever suits you best.

As for making up your own creatures, well you need a piece of skin or fur from the creature in question, so I would suggest that you can only Shapeshift into known creatures.