So am I right in assuming this is her first official year of school? If so then I completely understand the teachers point of view ( I said I understand not that I agree completely!
) if its her second school year ( grade 1) then get down there and give them a push!
Ok so here is the teachers thinking. A child who turns up to kindergarten already reading at an end of grade one level is 2 years ahead of her peers already. She obviously has parents who care and will continue to extend her educational t home reguardless of what we offer here. The alternative thinking is " oh dear the poor kid, pushy parents much!" Which probably isn't the case in private school or montossori.
she needs to spend some time reading for enjoyment and consolidating her skills. Allowing her to choose books is one way to ensure she doesn't get bored of doing the readers before they finish testing her and signing her off on the whole set.
I have seen kids in her shoes refuse to read anything before the year is out because they got stuck reading levelled readers that were entirely inappropriate material for a child so young.
I would see this as a potential blessing. They care enough to give her some choice for one. They know she is a capable reader. She has already been tested and its only week 2 ( only 1 of my 3 kids have been tested so far!)
In your shows I would probably ask to be completely excused from classroom reading and provide your own books for her to read. That way you can select books you think are challenging yet age appropriate and she isn't wasting time reading crap. In negotiating with the teacher I would ask that you or her prescreen some of the books on the higher level for content and provide Sophia with 2-3 books a term at her reading level. That way you can be sure they will continue to test her each term ( which they won't if she isn't doing levelled readers each week) and she will still have access to the books at the right level to extend her reading. As well as not have to worry about her "psychological phase of development" which is just the teachers way of saying " sorry we don't have any good books for level 26 reading 5 year olds.
If its her second year of official school ( grade 1) then pull her out and home school, you are in the wrong school or with the wrong teacher.
For the record prep/kindy teachers are very good at fobbing off over zealous parents so you need to go in with some sort of plan and suggest it with some backup ideas or proof. Get her reading the yesterday's classics books instead of the crappy readers if you can