It's Apple's way of authorizing your device and activating it to work. Technically, it doesn't check to see if it's the latest... but it check to see if it's a valid installation. Typically, after Apple updates the iOS version, they stop "signing" the older versions within a day or two. Once they stop, you cannot go back without having already been there and having saved your "blobs" or the actual activation signature for the iOS version. There are programs to that allow you to save the "blobs" and go back afterwards...
Originally Posted by mwohrlin
There are rumors that Apple is looking for (or already has) a way to stop this process too. The game of "cat and mouse" between the jailbreak community and Apple...