Nice looking machine.
Yes, the DISK light (bottom one) should illuminate on hard disk access. This is likely your CF IDE adapter at fault.
Maybe not. Commodore did some really squirrelly things to block the upgrade path and try to force folks to buy the A600HD. On some non-HD models, they actually pulled the one pin from the IDE HD header on the motherboard that carries the 'activity' signal back to the motherboard. If you look at the header, there is probably one missing pin out in the middle. That's it. I'm pretty certain Commodore could not have sourced headers like this. They must have purposely modified it at assembly. How spiteful can a company be?
I got around this by cutting a pin from my wife's sewing kit to length and soldering it in place. Works great.