My WP blog runs on Godaddy , none of the auto-update methods work.

To update to a new version , is it enough to just copy and activate the new theme 3.4.2 for example.

This seems to be preserving settings but is it the right method. ?

Yes, to add any theme to WordPress, you just copy the Theme folder into wp-contents/themes and then go to the dashboard->appearences->themes and select the thems ou want to activate.

when you move the new version of atahualpa in, name the folder with the version (i.e atahualpa333, atahualpa342 etc) so you can identify them easily if you want to swap.

Also remember, you need to copy any images you placed in ..images/header/ into the ..images/header/ of the new theme folder