1. No, I never heard of anyone having their working visa application rejected. However, in some cases the process took up to several months. Usually, if there is a problem with your application, an immigration officer will contact you and ask you to withdraw your application. But even then, it is possible to get the visa approved finally, if you are persistent enough and have a sponsor who is really commited to support you.
2. That depends on how you made the application. If you apply for a change of status from tourist to working visa, you don't have to leave Hong Kong. If you apply in the same way as applications are made from overseas, you have to leave and re-enter HK after you get the visa label. You can find more info here:
http://www.emigra.com.hk/HongKong/page74.php