This is a question that comes up frequently on the disAbilities board(smile). As far as I know, the only children who get immediate front of the line access are the kids with Make A Wish program (terminally ill).
The Guest Assistance Pass has different stamps and are for non-apparent disabilites. So, if a person is sun sensitive, it will allow them to wait in a shaded area (if the line isn't shaded) for the same length of time they would have waited in line out of the sun. Another stamp would be for kids who have the special needs strollers (look like regular strollers but are for kids who are too small for a wheelchair) and this lets the family take the stroller into the line as if it was a wheelchair.
These aren't front of the line passes, but they do allow people to wait in areas that are appropriate for their disability. If a person is in a wheelchair or ECV, there is an assumption that people make when they see the wheelchair in the fastpass lane that they have "gone to the head of the line" when in fact they just had a fastpass the same as everyone else(smile). Often a person in a wheelchair or ECV will wait longer to get on a ride because there are a limited number of people with mobility disabilities that are allowed on the ride at one time in case of an evacuation.
I have no idea what happened with the child the original poster mentioned. I do know that WDW tries hard to accomodate everyone with disabilities and since almost all of the lines are now completely accessible for wheelchairs and ECV's, there is no benefit (except a place to sit while in line)(smile) to renting a wheelchair.
For the rides in Fantasyland where someone enters at the exit (the queues aren't mainstreamed), it may look like they are going ahead of everyone, but what has probably happened is that the family was given a paper with a time that would match the fastpass time and told to come back at that time and ride. When it isn't busy (only time we go)(smile), then the ride is a walk-on and no one waits.
Hope this helps!