The directions above are under the sleeve directions, so this is most likely the sleeve cap. If you look at the diagram of the sleeve, you will see that the sleeve is indented about an inch or so at the top and then forms a "bubble." I believe this is what all these directions are trying to get you to do.
As for your second question, I see on Ravelry that several people have had problems with this pattern; however, I don't see any errata listed. Plus, my final count says you would have 34 V-sts, too. SO . . . at this point, since it's probably not going to mess up any patterns or anything, my question is, do you need a little extra room in your sleeve (you can use contrasting yarn to seam it together loosely and try it on)? If so, stick with the 34 V-sts. If it fits fine with the 32 V-sts, then don't increase that last time. Really, though, two extra V-sts may make very little difference in fit, but if you need more room, then here is a good place to add it! And just to cover all bases, check the length of the sleeve based on the diagrams. Those diagrams are wonderful--if you use them.
Oh, and be sure you make a note of what you did here so you can repeat it on the second sleeve.