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Normal and MW hits are allocated closest to furthest, even to units that were NOT in base contact ven though all hits were generated by base contact rolls (CC)?
Correct.
It's an abstraction that assumes that over the course of an engagement units will move about a bit, maybe surge forwards and apply more hits, etc.
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Also, Normal and MW hits are determined BEFORE any units are removed from the table? So if 2 terminators were killed by the ORK normal hits, there would still be 3 MW hits as roled before units are removed?
Yes, the Terminators still count as having hit the Orks with their MW attacks, even if they are killed before the MW attacks are allocated to particular Ork units.
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Also, what about targeting of WE vs Infantry?
Doesn't apply in Engagements.
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Finally, I seem to remember the rules stating that the 'controlling player' chooses the units when there are some which are all the same distance. Since it is an assault who is the controlling player? In your answer above you state the defender can choose the units hit... which of course is very different to the units the attacker would choose (grots v WE) with the MW hits for example.
In this case, "controlling player" means the one who's making the armour saves.
So there's a Space Marine controlling player, and an Ork controlling player.