The 32X used the cartridge audio input for its PWM audio channels. For one example of how this worked, Knuckles' Chaotix used the extra channels for the percussion in its music: https://www.youtube.com/watch?v=L6BSQVK9gSc
I always though that the audio mix happened in the 32X itself, much like the video mix, but I just checked the schematics and you are right (page 7 of https://segaretro.org/File:Genesis32XUSManual.pdf)
I have a Japanese 32X and a copy of Knuckles Chaotix, but I have yet to play it so I didn't notice the sound xD
I have a Japanese 32X and a copy of Knuckles Chaotix, but I have yet to play it so I didn't notice the sound xD