Hi Elgin
There are no "rules" relating to your questions but I'll give you my tuppence worth as an assessor:
It is easier to look at the evidence requirements for a unit in a slightly different way in that each item must have at least one tick against it. Evidence for these must be "diverse" such as observation, reflective account, work evidence, witness statement, professional discussion etc. You don't have to have every form of evidence, just a range. You will find that some P/c's are covered by all evidence and some only once - that's how it goes.
Whilst an observation is one of the strongest forms of evidence, other evidence will be needed to demonstrate your competence over a period of time and in varying circumstances.
Work evidence is used to support your reflective accounts and observations. Use the guideline "quality not quantity" for what to include.
At level three, I have assessed and signed off a unit using a professional discussion with a candidate who has provided work evidence to support her declaration of competence.
At the end of the day, your assessor has to be satisfied as to your competence before signing off a unit. If you are unfortunate enough to have an assessor who isn't confident in their decision making you will probably be asked for more evidence than is required.
I ramble on, hope this helps.

Dave