Can this be used for the stars in the sky?
Yes, that's it's main meaning. Though "Seren" is "A star", "Sêr" is more than one.
I think properly the plural should have a to bach, i.e. sêr.
Yes it should, I'll fix it now.
Then what's it doing here?
What is "here"?
Note that Duolingo sometimes shows you a word or sentence from a different lesson to the one that you are currently learning -- if you saw this word in (say) the lesson on Politics, that could be the reason.
Because a star is also a shape.