Elizabeth-- thanks for your suggestion, that seems possible. I think that some things should become clearer if I explain more of the context here, though:
This sentence is from a section in which the creative team behind the Silent Hill series discusses some of the authors, filmmakers, artists, etc whose works they were inspired by/used as references in creating the games. What "この作品" refers to is Tono Monogatari, a collection of folklore compiled by the folklorist Kunio Yanagita. The way I read this sentence, the series' scenario writer is saying that in coming up with the folklore/traditions of Silent Hill, he used this book as a reference for the way that "prosaic" folklore should be and its "placement" (my best guess at what he means by this is something like "how to arrange elements of folklore/folk traditions," but I'm not sure how much sense that makes...)
As far as what "伝承" is in the context of the game series, I think it could refer to a number of things but there is a certain legend that's mentioned in another section of this book which is headed with the English word "folklore--" It states that the future site of Silent Hill was once "sacred ground where Native Americans conducted mysterious rituals. Before settlers came from Europe, Silent Hill was a holy place. Even then, the land seemed to possess a mysterious power. [The Native Americans] revered the town as "The Place of the Silenced Spirits." However, they were driven away by settlers and had to abandon the town."
Anyway, regarding the other sentence, I was hoping that someone could at least tell me this: Is "絵画はホテル全景を加工したもの" simply a way of saying "the picture is of a panoramic view of a hotel?"