I was in a very similar situation to you and have been going through the process since January this year! The good news is that I have Polish Citizenship, successfully registered my birth in Poland and today I applied for the passport. It is a very long process and you need lots of patience!
Both my Grandparents on my Dad's side are Polish and were seconded to Germany during the war. My Grandparents met in Germany and married in Germany after the war. They had my dad and a couple of other children and then immigrated to Australia. One key aspect about gaining Polish Citizenship is the date which your Grandfather was naturalised as an Australian Citizen. I am not sure of the exact date, but I think if it was before 1951 then there's a chance that your Grandfather would have renounced his Polish Citizenship in order to gain Australian Citizenship and it could cause problems for your citizenship....
To answer your questions, my Dad didn't have to go through the confirmation of citizenship stage in order for me to do it as you can go as far back as your Grandparents. My Dad was born in Germany and naturalised in Australia but he does not have an official document stating he is a Polish Citizen and he does not have a Polish passport. I also did not have passports for either of my Grandparents, hence why I went to great lengths to get other documents to support our Polish origin. Here is what I did....
To prepare for the citizenship application I researched a few blogs, which helped immensely. I gathered as many documents as possible to support and prove that my Grandparents were/are of Polish origin - mostly documents my Nan still has, as well as anything the National Archives in Canberra has on file. The National Archives had a few documents linked to Dad's family and supported they were of Polish origin (eg. Passenger arrival details in Australia, medical documents from their camp in Germany, refugee forms relating to their move to Australia). The website isn't all that user friendly so look carefully for links to click on that might give you information about your Grandfather's immigration to Australia. Any documents you do request copies of MUST be certified, otherwise the Polish authorities will not accept the documents! Here's a link to the National Archives name search:http://naa12.naa.gov.au/NameSearch/Inte ... hForm.aspx
You also need your birth certificate, your dad and Grandfather's birth certificates, marriage certificates for both your Dad and Grandfather (you too, if you are married), death certificates for your father/Grandfather if they have passed away and the naturalisation certificate.
For a step later on in the process (after you get citizenship), your birth certificate will need to have an apostille stamp. It might be worth getting the apostille stamp on your birth certificate before translating it and then get it translated WITH the apostille stamp so it too is translated. You will need TWO copies of the translation of your birth certificate (one for your citizenship application and the other for a later stage - registering your birth in Poland) - it will be cheaper!
ALL documents must then be translated into Polish and you must use a sworn translator. I used one in London who was very reliable, but I am not sure of any in Australia to suggest. It is a costly exercise, but it is worth it if you are confident you can get citizenship. Basically the Polish authorities will not accept any documents that haven't been translated by a SWORN translator (I think Polish sworn translators are registered with the Polish authorities and they have official stamps, etc). You could probably contact the Polish Consulate in Sydney and they might be able to suggest someone or I can give you the details of the translator I used as she has done some translations for my brother back in Australia as well.
You need to also write a timeline of how you came to be where you are from the Polish roots - I guess starting with the birth of your Grandfather. I just went through all the documents that I had and put together a timeline (first column had the date and second column detailed what happened on that date). I then had to have this translated into Polish.
Once you have everything you go to the Polish Consulate with your Australian passport, two passport-sized photos, consular fee in cash of $144 and all your original documents and accompanying translations. There are forms that you will need to complete - one is available on the Consulate website called "application letter". It is fairly straightforward and not very long at all!http://www.sydney.polemb.net/index.php?document=35
If I haven't frightened you and you are still keen to pursue it, I would be happy to give you the next steps after the Citizenship stage. The hardest thing is the time - time waiting for documents to arrive from National Archives (can take 1-2 months, longer if you forget to get them certified!), time waiting for translations to be completed, time waiting for apostille stamp (shouldn't be any longer than a week), time waiting to see if your citizenship is approved (the turn around time for me was about one month, which was in July), etc. Start chipping away at it and it will all come together before you know it...patience is key!
Ps. Sorry it is such a long post but I hope it is helpful!