Upgrade SD Image

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I assume that the issue you're mentioning has to do with the joystick/button driver. Typically this is the piece that doesn't work after an upgrade. That is because it is a kernel module, and (if you get a new kernel) a program called dkms is supposed to recompile the module and install it. I have not yet figured out why it doesn't.

From https://drive.google.com/open?id=0B3u1iT...XdieTdZc28
If you upgrade RetroPie (using ‘sudo ~/RetroPie-Setup/retropie_setup.sh’) and get a new kernel in the process, you may need to add the joystick drivers to this new kernel. After rebooting to the new kernel, the following commands should build and install the drivers. Then reboot, and the buttons/dpad should work again.
dkms build -m mk_arcade_joystick_rpi -v 0.1.5.5
dkms install -m mk_arcade_joystick_rpi -v 0.1.5.5

But notice the "0.1.5.5" on the end. Depending on which install you started with, this may be a different version number. Use this command to determine the version you have.
ls /usr/src/

Also see https://forum.freeplaytech.com/showthread.php?tid=4641