This option is typically used when you have a single video track and a single audio track. For example, the video comes from a DSLR camera using the built-in mic and the audio comes from an external audio recorder with higher-quality sound. The goal is to use the external audio instead of the camera audio. It is convenient to have the audio replaced in the clips in the synced timeline, so that no further effort is required to keep them in sync during the editing process.

The Replace audio option does that for you. When chosen, an additional output sequence is created where the audio in each video clip is replaced by the audio from the synced audio track. Note that the clips are changed in this sequence only. The original media files and the other sequences are not modified in any way.