I don't know how to interpret M/i'.
I'd say its trying to mean the public key of m/i'.
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One weakness that may not be immediately obvious, is that knowledge of the extended public key + a private key descending from it is equivalent to knowing the extended private key (i.e., every private and public key) in case public derivation is used. This means that extended public keys must be treated more carefully than regular public keys. This is the reason why accounts at the first level of the default wallet layout use private derivation, so a leak of account-specific (or below) private key never risks compromising the master.
It looks like its assuming that you are, by default, protecting the master private key by always making the first generation of children through private derivation.
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2) If the primed lines cannot be derived from public keys, is it true that M alone cannot be used for complete auditing? If so, then every primed node has to share its public key with the auditor for access, and whoever holds M can never be sure that the holder of m didn't create hidden wallets
Yes.
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Can it be that parts of the document are not in line with each other after some changes in the ideas/notes/text?
That's what it looks like to me.