I've got my Tern sanded smooth with 120 grit. Do I need to go over it again with 220 (or even finer after that?) before starting on the first coat of varnish?

What is the reason for sanding between coats of varnish? mechanical adhesion? just removing imperfections?

And on a somewhat unrelated note, is it necessary to varnish the interior of the cockpit and inside the hatch areas? I can conjecture a need for the former, but not nearly so much for the latter.

Thanks!