Yes, you should try to remove as much glue residue as you can, which really shouldn't be hard if the walls are plaster. I like to use a green scrubbie pad to loosen the glue and then a couple rinses with water. You should use Gardz as a primer which will lock down any residual paste that you may have missed.

Can GARDZ or KILZ be used over the old paper and then can we paint? If you want to go over what is there use GardZ not Kilz,just be sure to get off as much paste as possible first.

Sanding latex paint is a futile attempt at smoothing. Better to skim coat a little drywall compound over the area and then sand with a sanding block. After sanding , run a well dampened block sponge along the area where the patching meets the old wall area. This will get rid of an minor ridge of compound. You will want to prime this new patch, but use an old, worn roller in order to impart a slight texture, as your new patch will probably be noticeably smoother than the old roller texture on the wall. Further, I would give the new patch a quick, light coat of the finish coat paint, followed by a general painting of the room. Should a "flashing" of the patch still be visible, you may be forced to apply a second general finish coat.

Replace all of the asbestos siding with conventional fiber cement siding. By someone who can do remediation properly.