Q: If you update an IPhone and it asks you for the Apple ID and password,what do you do?

Did this person buy second hand device? If yes - obviously this device has activation lock.

You need to contact the previous owner and ask him to remove this iPhone from his list of devices. Otherwise, this iPhone will be a useless brick.

Find My iPhone Activation Lock: Removing a device from a previous owner’s account - Apple Support

How do they not know this?

You can try going to http://iforgot.apple.com and see if you can recover their Apple ID and password.

Otherwise, there's not much that can be done. Its important this information is known. As you use it to buy things from the App Store, and log in to most services on the device.

Nothing. Only the owner of the account used to set up FindMyiPhone on the device can remove the activation lock.

If they can't remember their password they can try to re-set it at https://iforgot.apple.com

If they can't do that, they will have to contact Apple Account Security.

If they can't or won't do that, or they are unable to re-set it that way, it's a brick. There is no way to bypass the activation lock.

As I said, you may be able to use the iforgot service to recover the ID and password, assuming the E-Mail address they used is still functional.

Other than that, they can take proof of purchase to an Apple Store, and have them restore the iPhone to factory condition.