1: That's what I do, I add a little sand to the peat moss to help it rewet. It works well for me, it's better then my tegu eating wood.: )
2: Depends if there's any holes in the bag you bought, and if it was sitting outside. There might be some bugs that crawled in there who knows. I would think the peat moss is sterilized if it's sealed. And it's pretty common for people to use peat moss in the hide box.