Ok, its been a while since I've studied this, but I'll have a shot anyway.
When you do the align you enter in the lat and long, so the system knows where on earth it is. When it alings itself the aircraft has to be stationary, so that any movement felt by the system is caused by the earths rotation. If the system is pointing to north (that would be true north) then one of the axes of the system will not detect any displacement, as all the rotaion will be at 90 degrees to it.
Right, so it knows where true north is, which brings me to the fact I have no idea how it then works out where magnetic north is. I can only imagine it either knows the magnetic variation over the earth, or knows where the magnetic north pole is and works out the variation for itself.
And that concludes a thorough and deatailed answer to your question
