How does debian/ubuntu knows a package has a updated version

Whilst apt update can download one or more Release files, the primary files it is downloading are Packages file(s). Those files contain the full list of available packages, their versions, and other metadata (like dependencies). Once apt has a list of available packages and their versions, it is a straightforward matter of comparison to determine which packages have versions newer than those currently installed.

Package lists are the Packages and Sources files. These contain the debian/control file content for every package in the repository. From these metadata APT can determine a dependency solution.

Releases is a description of the entire archive and signature data.

Debian reference manual, Chapter 2. Debian package management