I removed all permissions from a folder, but users are still able to see the template in the dropdown list when starting a new release. Please advise how I can prevent them from seeing templates that they do not have permission to.
You can do this by removing the Audit reports permission at the Global Permissions level for the role in which the user is part.
Audit reports permission is more like read-only admin permission. So, if the role has that permission enabled, they will be able to see the templates from the Release dropdown list, but won't be able to perform any operation on those templates unless the permission is given.