Serebii* posts this, stating that the official B/W site has clarified the ability Illusion:

We also appear to have some clarification on the new ability Illusion. The official site states Zoroark will appear as a different Pokémon when it enters battle. The name of the opponent is different to hide the fact that it is Zoroark, but the type remains Dark.

With the name, and the fact that Zoroark remains a dark type Pokemon upon "transformation" we can conclude that it is not in fact a transformation in the sense that Ditto and Mew transform, but that Zoroark's ability does something to the way people and Pokemon process sensory information and causes them to perceive it differently, hence an illusion.

Of course, the current description is limited by game mechanics, but that's what this discussion is for. How far can this ability extend? We've seen from the movie that Zoroark not only changes visual perception but also auditory perception as its cries certainly are that of the Legendary Beasts. Its attacks in that form may also have just been an illusion along with the destruction of the town.

So my questions are:

Does its illusions extend to the touch senses?If it doesn't, then a mere touch towards Zoroark's form, no matter how you perceive it should indicate something is wrong.

Does it extend to the sense of smell?
Primarily asking because Pokemon have a good sense of smell, and if it doesn't its identity could be easily identified by Pokemon who can Odeur Sleuth.

Can it fool psychic and aura-based abilities?
Honestly, I doubt it can fool aura based abilities since aura users are able to identify things based on its aura, and Psychic abilities, they'd have to have a good ability to block psychic powers for them to not find the truth. Then again, Zoroark are dark Pokemon, which comes with a built-in "psy-block" which would make it seem like they are protected from Psychic Pokemon or humans with Psychic abilities, but they would certainly find something wrong when they can't sense Zoroark's presence when its in the form of a non-dark pokemon.

So, in the end, I doubt that (outside of game restrictions), people with proficient aura powers, and even minor psychic abilities that allow you to just sense other people's presence, would be fooled by Zoroark.

Can its ability extend outside from its cloaking its form?

We've seen from Lucario's entry that it's aura sensing abilities can actually extend to an 800m radius if properly trained. That's a massive range.

Now how far can a Zoroark's ability to create illusions extend? By that, I mean can it's power extend past cloaking its form and making people believe that their very surroundings are something they are not, and like Lucario, how far is the range for this ability?

Certainly it does make Zoroark look powerful and even a reality warper, but at the end of the day, its still an illusion.

EDIT: In light of new information I just gathered from the movie:

SpoilerZoroark creates an illusion that the whole town the movie takes place in is destroyed, so his powers can extend in a very wide range.

Back to the point before this, Aura users would probably sense the illusion right away due to their aura senses, while Psycic Pokemon probably won't be able to tell it apart since their powers reside within the mind, and not the flow of energy in the surroundings, so in terms of an environment-wide illusion, Psychic Pokemon are at a disadvantage.

Also would be cool for a smartass Zoroark to abuse this ability in the anime.

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Spoiler

Please don't go into a debate about Serebii here, thank you.