Is "Filii" pronounced "fili'i", like in the audio?
Yep. It's not one long i sound but there is a little stop between them.
Does Filii imply that they are all males or they may be both males and females? In Spanish and other Romance languages the masculine plural works as a non-specific form.
They can be all male or a mix, as in other Romance languages.
"Your children are sleeping" is accepted by Duolingo.
Is there only one form for present time verbs in latin?
Yes, there is no progressive.
This sounded much more like "filiae" = daughters
I listened to both audio clips and neither is saying filiae.
AE in Classical Latin sounds like the English word eye.