Passau is a "Landkreis" (district) in the southeast of Bavaria. It encloses the city of Passau geographically from two sides. Neighboring districts are (from the east clockwise) Rottal-Inn, Deggendorf, Freyung-Grafenau. To the south it borders Austria.
Passau is north of Austria.
It's definitely correct because if Austria borders Passau in the south, then Passau must be north of Austria. It's difficult for the system because the sentence that mentions borders has the word south in it, not north.