First,
As for how it works, this is using the same tech as the Type 31 Science Scanner which this question did not come up, and the function of life sign detection was introduced for SAoY with
Multi Function Bracelet
And the ability to detect lifesigns is available to the UOC
Peacekeeper Personal Communicator
As for your concerns Fred, from the page it says that the device can be fooled.
Note: The scanner results can be affected by circumstances, for example a life form in a hibernation or stasis state. Nor can the scanner identify a single individual, unless that person has a unique physiology and it is stored in the scanner.
Second, in the case of the boarding of the
Eucharis, the ship had sustained damage, so a GM wanting to have their ship boarded can easily say that the unit was damaged in that area.
Like any method of detection there will of course eventually be a way to counter it, this is also true of our starships cloaking techs. But in this instance since the unit is already limited, it will be easier to defeat. A personal stealth suit would probably emit a field that would make the wearer's life signs appear to be something else or mask them completely.