Mostly it waves a magic wand and things are conjured from the earth.
Seriously, though, I assume that the AI recruits units in a central hub of several cities, then has them sent to a meet-up point, sorts them into armies, and sends them out.
We humans have to keep an eye on production queues, population, and a myriad other things on every city, while at the same time developing our strategy and executing. The Lord AI has his strategy handed to him in one of the text files setting up the game- what units he will prefer, what strategy he will follow, and who his targets are. He will mass his units and assault those targets in order. At times, hit an target of opportunity.
I am less sure if the Occupy / Enslave / Exterminate choice is also predetermined. If you are hitting empty shells of cities captured from the Lord AI that he had captured, it could be the buildings you miss are ones he rubbled for cash. After all, the Lord AI does not use front-line recruiting- he has his base back home for that and will need people to populate his cities and units, thus I assume he Enslaves a lot.
Revolts are easier to explain. When a city gets fed up with its rulers, the people flock to the streets and shout bloody murder and switch sides. The new rebel commanders impress the populace into whatever units the city was able to provide before the revolt. Voila, instant army.
I am less sure about all the chevrons they get. That makes little sense to me. Newly-formed units should be rookies, not gold-star veterans.