No, not quite right. Using your example, how it works is that every *unique* file in *all* folders previous to 16/1/40 will be copied into the game. Where files are duplicated (or more to the point, have the same names) across the date folders, only those files in the *last* date folder will be copied across.
This avoids duplication as you do not need to put every file into every date folder for it to be copied into the game - the files only need to be put into the *earliest* date folder and will always be copied into the game until replaced with files with the *same* name in a later date folder, which will from then take their place.
Example, with copied files in bold:
19390901 FILEA, FILEB
19391001 FILEC, FILED
19391101 FILEA, FILED
19391201 FILEB
19400101 FILEE, FILEA
CURRENT DATE 19400116
19400201 FILEA, FILEF
19400301 FILEB, FILEC
Each duplicate file could be an updated ship skin, or sound file (ie like Radio.wav).
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