Refer to figures.
EASA learning objective 022.04.05.01.02 states: 'Using a block diagram, list and explain the function of the following components of a remote-reading compass system: flux detection unit; gyro unit; transducers, precession amplifiers, annunciator; display unit (compass card, synchronising and set-heading knob, DG/compass/slave/free switch).'

The remote reading compass (RRC) is a directional gyro which is synchronised with Magnetic North, via a slaving control, using the output from a flux detector (flux valve) which senses the Earths magnetic field. The annunciator unit indicates to the pilots that this synchronisation function is taking place and also provides a facility for manual alignment of the gyro. The display window shows a dot (or dash) and cross to indicate which direction the gyro is being slaved, in normal flight this will slowly oscillate between a dot and a cross as the system corrects the gyro for drift. A spring loaded switch is provided for occasions where rapid manual synchronisation is required such as the initial alignment on the ground or after extreme manoeuvring. This is the normal mode of operation for the RRC and is called SLAVED mode.

There are occasions where magnetic heading are unreliable, such as near the magnetic poles. The RRC has the facility to disconnect the slaving circuit to allow the RRC to operate as a simple directional gyro (DG) with no magnetic correction. This is known as FREE mode and the annunciator unit will have a two position switch labelled FREE/SLAVED or DG/COMP to allow the pilots to select the appropriate mode.

The magnetic input is active but decoupled, and the pilot manually slaves the compass towards magnetic north → INCORRECT. You could argue that this answer is also correct because it's true to say that the magnetic input (flux detector) is still active but the RRC gyro is no longer coupled to the slaving circuit. Also the pilots have the facility to manually synchronise the gyro with the direct reading compass or any direction that they wish. However feedback indicates that this answer option is incorrect so it may be that the wording in the exam is slightly different.

It acts as a Directional Gyro (DG), operating freely without magnetic correction → CORRECT. In FREE mode the gyroscope is disconnected from the slaving system so it operates as a DG with no magnetic correction.

It automatically realigns to magnetic north through the flux valve → INCORRECT. In FREE mode the gyro is disconnected from the slaving system so it has no input from the Flux Valve.

It corrects for earth’s magnetic dip and deviation automatically → INCORRECT. Because it's operating as DG, dip and deviation are irrelevant.