Yes, the SD card has to be FAT32. The Kobo devices won't recognise anything else. And yes, the Aura HD supports 32GB micro SD cards. There are some cards the Kobo devices don't seem to like, and some that need to be reformatted to work properly. But these problems tend to be the device not seeing the card at all.
One thing I just realised is that I don't think the OP has said what happens when copying books to the main memory. There shouldn't be any difference, but it would be good to know.
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