Heill!

> I assume that "með því móti" is referring back to the description of
> Þorlákr. Zoega gives "in that way", but could it be understood as "in
> the same way" or "like that" to make the reference clearer?

Indeed.

> Also, "allar Færeyjar" seems to be referring to the Islands themselves.
> Is it just being used in a general sense, or should it be read as
> "Islanders"?

Heathenry tends to be viewed in the literature as
something that existed in particular places at a
particular time. This is perhaps some sort of euphemism
by the Christian saga writers. It may be easier to think
of the noble forefathers as having been born in an unfortunate
age WHEN people were heathen or WHERE they were heathen.
The times were heathen, the lands were heathen...
The people were heathen, but that was a consequence of
the first two facts and, sort of, couldn't be helped. ;)

Just an idea, I wouldn't make too much of it. It's probably
just the idiomatic expression for whatever reason - or no
reason at all. It's still idiomatic, for that matter.

"Pólland er kaþólskt (land)."

You can say that in English too, can't you?

See my comments on Arlie's translation for more on this.

Kveðja,
Haukur