If you want to create a book based on images from the selected folder(s) on your server, set "Pages are created from" parameter to "Images" when creating a book and enter path(s) to folder(s) with images in "Pages source -> Directories" parameter in book settings. For example if images located in <joomla_directory>/images/mybook folder then populate the parameter with the following value:
images/mybook
PS: Documentation for the extension is available
here. Quick start is described
here.
Regards,
ARI Soft