You applied to appeal the decision. If you win at appeal, you may get back into the queue to have your case looked at by CIC again within a year from the time you initially applied. Yes, if you choose to appear at the hearing, which you both should if you can, even if by teleconference, you will give evidence, ie, be asked questions. It's not just an interview, though. I understand it's more formal, more like court. I have not had to appeal, so I am only going based on what I've read and heard.
The IAD appeal can be a full hearing or may be done at simpler levels such as by submissions or through something like mediation. Federal Court is for appealing the decision at the IAD, if you are not satisfied with it. Then it's a judicial review by a real judge. Here are a couple such cases. As you can see, they were refused by the visa officer, and then the IAD hearing confirmed that, and they are appealing again:
http://www.canlii.org/en/ca/fct/doc/2007/2007fc1051/2007fc1051.html
http://www.canlii.org/en/ca/fct/doc/2003/2003fct685/2003fct685.html
The IAD hearing is a full hearing, although deference is given to the visa officer's decisions. They are not just dismissed outright and you start over. The "judge" or panel will decide whether they were correct or not, and consider them as part of the IAD decision.