Thank you for giving this a try and sharing your feedback! Please note all things Datasets and Entities are still a preview, so there are many things to fix, improve, and add.
We have not yet implemented the ability to edit/update/remove an entity (dataset entry) but it is one of the things we are working on next. It's a top priority to not have users be stuck with incorrect entity data in their datasets.
What I believe is happening in the specific "Problem creating Entity" scenario you posted above is that Central is trying to re-create a new entity from the edited submission, but failing because the UUID of the entity already exists (from the first time you approved the submission and created an entity). This will always fail, so basically Central should not even try to make an entity if an entity already exists for a submission. We will change this!
Also, it seems like a bug that the error message is not shown. I can recreate this error, and when I look at the network traffic in my browse console coming through to that submission page, and read the 'audits' JSON, I can see a the a problem with code 409.3 and message "A resource already exists with uuid value(s) of [some uuid]." We can fix this to make sure the message does come through on the website.
My main recommendation is that, for now, realize that you can edit a submission before approving it, and those changes will be reflected in the entity, but editing a submission after an entity has been created will have no effect on that entity. We will soon introduce the ability to edit entities!