How does a compass know where to point?

A compass, as you know, has a small needle-like magnet for a pointer. Because the earth is a big magnet, the pointer-magnet of a compass lines up with the earth’s magnetic field. So, the needle points almost north and south.

However, the earth’s magnetic north pole is not exactly the true North Pole. There are also small changes from place to place in the magnetic declination, how far off the compass will be from pointing true north.

If you want to know how to correct the compass in your area, I suggest you ask your local surveyor. He can tell you the proper declination to use.