+1 on using VCDS to retract the rear brake calipers. Yes, it's an expensive tool to get, but if you're going to keep the car for a few years it's well worth it.
As for your other questions: I would recommend going with an after-market brake pad that produces less dust but has superior performance. I've used Hawk HPS for several years and love them - much less dust than stock (though not a true "dustless" pad) and known for excellent performance on the street. I use these as street pads for both my S5 and Cayman S.
Second, replace brake pads at all 4 corners at the same time. The fronts do wear quicker than the rears, but the brake pad sensor is located only on the fronts, so if you don't replace the rears at the same time it's possible to wear through them without realizing it. Better safe than sorry.
The brake pad sensor is located on the front left brakes only. It snaps in place into the pad (assuming you buy pads made correctly for this car). You can reuse the old one as long as the sensor had not been damaged (i.e., hasn't worn through and activated the brake sensor idiot light). One thing to be careful of - there's a small copper clip that snaps over the leading edge of the sensor, and it's easy to misplace. Take note of how it is aligned with the sensor so in case it falls off (which it will) you will know how to put it back.
After the job is done there is no need to reset anything at the dealer. However, you should cycle the electric parking brake once or twice - that teaches the system what the thickness of the new rear pads is. You should also take care to properly bed the new brakes with the rotors. Post back if you'd like hints on how to do that.
Finally, though you didn't ask about it, you should check the thickness of the brake rotors to ensure they are still in spec (less than 2mm wear compared to new). In general brake discs wear out slower than brake pads, so you are unlikely to need to replace them, yet. However, there is no sensor that will warn you if the rotors get worn too thin - so Audi's recommendation is to go ahead and replace the rotors at the same time as the pads. If you are the kind or person who pays attention to such things then you can probably wait until your next pad change before changing the rotors. But it is something to be aware of and watch out for.
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