I have a world file and it was used to locate my raster after setting the SRS, but when I check the coordinate information, it says "unknown spatial reference", also when I tried set SRS again it still lists the raster as having an unknown spatial reference. Do I have to define projection or georeference again?
see
Set ArcGIS to read the world file first
in
World files for raster datasets—ArcGIS Pro | Documentation
If it is a valid world file, it will read it. As a last resort, you can try Define Projection
It is valid and has been read. However I wanted to know if I can go ahead and digitize my features on this basemap even though I complains of last of coordinate system. Is it more appropriate to go ahead and define projection?
If it is complaining about unknown coordinate system, then it isn't being read or it is incorrect. Try Define Projection