Patching:
When patching smaller holes, a 6" taping knife should suffice.
Apply the compound in a few light coats rather than a single heavy coat, and sand between each coat.
You can either sand the patch using a sanding block like the 3M® Fine/Medium Large Drywall Sanding Sponge,
or wet sand using a slightly damp rag. If you choose to wet sand, let the area dry before applying the next coat.
For larger holes, you'll have to fill the hole with something solid before you apply compound (don't try to fill the hole with mud). Once the hole is filled, start with a 6" taping knife for the first coat. Next, apply a few thin coats using a 10" taping knife
feathering the compound out to blend into the wall.
When working with drywall compound it's a good idea to use a Hawk, or a mud pan instead of working directly from the bucket. This will insure that you don't end up with little bits of junk in the compound, and that the compound in the bucket won't dry out too much while you're working. They are also good for catching falling mud.
Preparing the wall:
Wipe the wall down with a dry rag, to remove any dust and dirt. Prime the whole wall with a proper primer, like Glidden Gripper.
Any time you patch, it's a good idea to prime the entire wall. If you simply prime the patches, you may be able to see the patches when you're done.
Painting:
Apply 2 coats of the desired paint, and you're done.
If the patches were done properly (smooth and blended appropriately), after primer and two coats of paint you'll never know there was a patch there.
NOTE: Products mentioned in this answer are for example only, I do not specifically endorse or recommend the use of any products mentioned.
Here's my take on drywall vs skim vs full update.
Skimcoat
Skim coating over the plaster that is already cracking would not be a good idea. Even if you use a harder more durable mud or plaster, it will still most likely crack because of the age of your house, and the fact that your walls are already cracking (and will probably continue to do so). The other down side is the sanding mess.
I recently bought a condo that had nasty texture as well on the walls which I wanted to get rid of. I decided for the first room that I would use a heavy 60 grit paper to remove as much of the larger chunky texture as I could. I then skim coated with drywall mud to smooth out the walls. It took several coats to get perfectly smooth, and a whole lot of cleaning afterward. But, in my case, I know my drywall is sound and not cracking underneath, so I could reliable coat without having to worry about patching too much in the future.
Drywall
Using a thin drywall layer over the top may be a quicker and cheaper solution. This will eliminate the cracking issues and will give you as smooth a wall as you like, with little mess in comparison to skim coating the entire wall.
I would still use a 60 grit paper or paint scraper (if it will cut through your texture) and knock down as much of the heavy texture to allow the drywall to sit closer to the surface. This will help eliminate waviness in the wall where the texture might be outrageous (like it was in my house), and allow you to use a thinner drywall.
A possible major downside to this is electrical boxes? Maybe someone with more electrical knowledge can speak whether adding 1/2 inch thickness to a wall would cause issues with the electrical boxes being set further in? If so, again, I would sand and use 1/4 inch.
Full Update
If I was going to be living in this house for the rest of my life, I would consider a full update, especially if I was already going to be making changes to wiring.
This solution is costly, time consuming, and messsssy! But, the upside is that you can fix/update your electrical to be safer, and more suitable to modern appliances. You can also add low voltage through the house which (if you're a tech nerd like me) may be a nice plus. This will also give you perfectly smooth walls that won't crack and a feeling that your not hiding a mess in your walls.
Hope this is helpful!
Best Answer
It should be fine all on its own, but if you want to be really really totally sure, just sand a bit to expose some of the CMU surface in the high areas.