If hearing is poor at an early age, the brain is ill equipped to make sense of messages it hears. For this reason, some kids may have what's called a central auditory processing deficit (CAPD). I would follow the advice of your doctor. A CAPD evaluation is usually done by a team made up of an audiologist and a speech and language pathologist, who use specialized assessments to make this diagnosis.
If your daughter has CAPD, then she needs specialized therapy that can help her process what her ears hear in a more efficient way. Simply repeating a grade won't do that. She needs a combination of therapy and a teacher who believes and understands the CAPD diagnosis and what she can do in the classroom to help your daughter process auditory information more efficiently. However, if the CAPD is diagnosed and a treatment program is begun, your daughter may benefit from having the chance to get exposed again to a first grade curriculum that she can now master. This will go a long way toward rebuilding an eroded self-concept. Moving into second grade with a poor foundation may lead to even greater frustrations and a crumbling sense of self. Get the evaluation and then decide. Use the expertise of the CAPD diagnostic team to help you make this important decision -- and get the CAPD evaluation done as soon as you can, so you can start treatment over the summer.