Ancient Apple Easter Egg
You are mostly correct. In summary:


It wasn't specifically the Quadra 840AV, it was any PCI Power Mac with Mac OS System 7.5.5 to 7.6.1 installed.
It wasn't accessed at boot time either. All you had to do was launch any text application that supported drag and drop and then type the following text into it: secret about box (exactly as I've typed it here, no capitals, or punctuation marks! Then if you dragged the text to the desktop, you'd see the picture you're referring to (see below):





Yes, you could control the flag by moving the mouse around (i.e. you could use the mouse to control the wind direction, thereby changing the flag).
Yes, you could rip the flag off the flag pole by using your mouse to make the wind stronger. This was done by moving the mouse up and down quickly in just the right spot.


As an aside, the text below the iguana on the flag: "iguana iguana powersurgius" is a reference to the code name used for the PCI Power Macs (i.e. PowerSurge).