Questions:
1) Can you just flash xianfu's openwrt-ar71xx-generic-tl-wr703n-v1-squashfs-factory.bin to the router? Will it work with the K16 (is it the same basic firmware for Icarus, Avalon and K16)?
No. You would need to build the image yourself with a newer version of cgminer which isint developed yet, since the current cgminer wont run klondike.
2) Would you need an extra power source for the K16?
Yes. K16 is estimated to need 36W of power at 12V. You need a 12V PSU.
3) I heard there's some USB issues with the TL-WR703N and that you need a USB hub. Does it matter what kind?
No idea. You can try without hub first...