As Embryo and Ken already communicated, the application needs the absolute path to the image. As for image attributes, it dependents on the device.
On my Kobo Touch, I have:
Code:
<html>
<body>
<img src="/mnt/onboard/.kobo/kbmenu/images/test01.png" width="566">
</body>
</html>
On the Aura HD, you could try width="1040", or height="1384". If doing so, there is no need to change the dimension of the image. Any of the two settings should work, if the image has the same ratio as the screen, otherwise it matters which one you take. That is, when you want something similar to full screen.
The next version of KSM will probably have the ability to auto-size images.