SQL Server Authentication vs Windows Authentication
For Windows Authentication "SQL Server validates the account name and password using the Windows principal token in the operating system."

For SQL Server Authentication "logins are created in SQL Server that are not based on Windows user accounts. Both the user name and the password are created by using SQL Server and stored in SQL Server."

So SQL Server authenticated connections do not use DNS.

See this topic "Choose an Authentication Mode" in MSDN: http://msdn.microsoft.com/en-us/library/ms144284.aspx

EDIT: Even with SQL Server Authentication the initial connection to the SQL Server requires resolution of the SQL Server's name. It is, however, also possible to connect to the SQL Server using only the IP Address as you noted above.  

See SQL Server name formats at:
http://msdn.microsoft.com/en-us/library/ms188642.aspx