Right, so for the neck, all right-side rows go K2, P2, which means with that number of stitches you start and end with K2
All wrong-side rows are P2, K2, ending with P2. Do that for 3.5cm.
When you join the two ends together, you will seaming along the first and last stitch of each row, so it won't look like 4 knit stitches, it'll look like 2, so it won't interrupt the K2,P2 rib pattern.
The cast on edge forms the actual neck edge, and because it's slightly tighter than a normal knit row, that pulls it in when you're wearing it, so it sits flat against your skin, hence no need for decreases, which would cock up the rib pattern.
The knit row after the 3.5cm is the row you're actually going to sew onto the body, through each stitch with back-stitch, so it doesn't unravel. It's neater than sewing on a cast-off edge, which would be too bulky.
The extra rows in waste yarn is to give you something to help stabilise that knit row whilst you're sewing. Once the knit row is securely stitched down, you can unravel the extra rows in waste warn, leaving a nice neat finish.
Does that make sense?
You could, as you say, pick up and knit all the stitches round the neck, do your 3.5cm of rib and cast off, but that cast off edge wouldn't make such a nice edge as a cast-on edge, and it wouldn't sit flat and would probably gape a bit.
Shout if not clear...