The Update Status module checks with drupal.org once a day to see if there are new officially released versions of Drupal and any modules that you are running. It requires cron to do its thing, so make sure that you have cron correctly enabled or it won't be able to know.
Q. Why doesn't Update Status show all of my installed modules?
A. Out of the box, Update Status does not know the status of any module that was not installed via a tarball produced by drupal.org; thus it doesn't know about modules you installed via a CVS checkout, nor custom modules that are not hosted here. If you deploy your modules via a CVS checkout, you must use the CVS deploy module, which provides the necessary information to Update status. Furthermore, Update Status does not report information about modules that are installed but not enabled. See issue #162788 for efforts towards displaying disabled modules in the available updates report.
Q. What is the difference between Update Status and Release Monitor module?
A. The release monitor system checks your module status through CVS. For most sites, this is an inferior method; however, it can check the status of more modules. By checking CVS, release monitor doesn't really know that much about module packaging; it doesn't know about released version numbers, and it can't tell official (theoretically stable) branches from development branches. Production sites do not want to update to development branches, they should try to use official releases from stable branches whenever and wherever possible. The advantage of checking CVS status, of course, is that it can monitor the status of your development modules; therefore release monitor is a better tool for users working on development versions of their sites.
Update Status uses official release information from drupal.org; developers can include valuable information with releases (release notes, tagging releases as 'beta' releases, etc) to give you more information on why and when you should update. Further, when you have problems with a module you can more readily tell in project issue reports when that problem appeared and where it might be fixed.
Users of the Update Status module are encouraged to ask module developers who have not created official releases of their modules to do so.
Q. Who is responsible for this module?
A. Many people contributed to this module. Nedjo Rogers wrote the first version of both the drupal.org code to make project data available, as well as the initial version of this module to see the data, and deserves the bulk of the credit for this work. Earl Miles did a great deal of fine tuning. Derek Wright invested considerable time reviewing both the design and the code of this module, the redesign and implementation of the 5.x-2.* series, and moving this module into Drupal 6.x core. Many others contributed in both testing and design comments.
Q. Does this module perform automatic updates?
A. Not at this time. We're working on a design that can help perform automatic updates on your Drupal site without impacting your site's security. The ability to automatically install PHP code on a site is a very touchy subject and must be handled very carefully. It will take some time to hammer all this out. However, the Drush module includes support for a package manager ("drush pm") that uses the available update data from Update status to provide a command-line interface to upgrade a site to the latest recommended releases of all enabled modules. This method requires shell access, but is a safe and recommended way to upgrade a site.
Q. Why isn't this in Drupal core?
A. It wasn't ready in time for Drupal 5. However, we're happy to report that this module is now part of Drupal 6 as the "update.module". See issue #94154 for the full story. Please note that some of the advanced settings in the 5.x version of Update status are not present in the update.module in 6.x core, and have been moved into the Update status advanced settings module for Drupal 6.x and beyond.
Q. Will there be a 4.7.x version?
A. No. This module depends on the .info files that first appeared in Drupal 5.x. There's no way to make this module work without knowing this information, and anything other than the .info files will be an ugly, error-prone hack. Furthermore, the user interface depends on the new administration pages and functionality that was only added to Drupal 5.x core.
Q. Will there be a 6.x version?
A. No. See the "Why isn't this in Drupal Core?" section for more info.
Q. I installed this and a module that I know has official releases still isn't showing up!
A. There was a period between Drupal 5 officially being released and project.module starting to package the proper information with releases. While we did start packaging the information at least in January and I think even in December sometime, modules that were downloaded before then will not have the proper information. The easy way to tell is to look in your module's .info file. If you see don't see a couple of lines that were added by the drupal.org packaging system, your module does not have the proper information. Simply update it to the newest code and Update Status will be able to deal with it.
Q. Can this module tell me about new releases of the theme(s) I'm using?
A. Not in Drupal 5. Themes in Drupal 5 do not have .info files, so there's no way Update Status could work. However, since themes in Drupal 6 have .info files, the update.module in Drupal 6.x core does include support for themes.