Are you having to approve the users, or is the issue that users are having to verify their email address? It is expected that users will still need to verify their email address. The reason for this is that Discourse needs to confirm that the email address actually belongs to the user.
No, I don’t need to approve users. What I understand from this feature is that users who register with an e-mail with a specific domain name sign up without receiving a confirmation e-mail.
No, the setting is meant to allow users who have a given email domain to not have to be approved if the must approve users site setting is enabled. Maybe the setting’s description could be improved to make that clear.
Allowing users to login directly to the site without having to click the link in the confirmation email would be a security risk. There would be no way of confirming that the email address actually belonged to the user.