Thoughts on Martial Arts Testing
The following represents my own personal thoughts and do not necessarily represent the beliefs of any school or instructor to which I have been associated.
It is important for the instructor to set the right expectations about testing so the candidate knows what they should do to prepare.  The biggest factor in determining whether a candidate is ready to be promoted is their performance on a day to day basis. An instructor usually has a pretty good idea whether the student is capable of passing just by watching how they work during a normal class. If the instructor is unsure, he can always request a spontaneous demonstration to "check" an aspect of their practice to verify before the actual test. The impression should be given that the bar for testing is slightly higher than it actually is so that they will perform to the best of their ability.

If the instructor has significant concerns about specific problems that are holding the student back, they should be expressed to the student in private as soon as the student has voiced an interest in testing for the next level. Conversely, candidates should discuss requirements with the instructor if they are not sure what is expected, but this is not something an instructor has much control over.
My basic feeling is that a candidate should not be permitted to test until they have expressed a desire to advance and the instructor is confident that they would not fail if tested. When they are deemed ready, and consequently tested, they should only fail if they really screw up. By screwing up, I mean that it is obvious to all that they performed inadequately. Possible ways to "screw up" include not trying, completely freezing up, forgetting a large amount of the material, being intentionally disrepectful, and other obvious but unforeseen things. What I think can lead to a problem is when the student thinks they did really well, but the instructors do not agree. If this happens, the blame falls more on the instructors for not making expectations clear. As a result, in cases like that, I think its best if the student is passed, but given a lot of feedback so that it does not happen they same way next time.

The test should be a time where the student has an opportunity to shine - and they should be given every opportunity to do so. We want to avoid embarrassing them during the test. As much as possible we want the test to be a positive, but rigorous experience. Our goal is to build self-confidence and provide the student with a sense of accomplishment. The test should be very rigorous and push the candidate to the limit of their abilities. Of course this will vary per student. If we believe the candidate capable, I don't think there is anything wrong with surprise requests to demonstate abilities that are not strictly required for the targeted level of advancement. We want the student to be able to show off their unique strengths.

Testing is a time for the members of the board to calibrate requirements. As an instructor, it is a time to find out how closely the expectations of other board members match regarding the different aspects of the test.  The  correct ways in which techniques are done should be discussed. When there is some consensus among board members, feedback should be given to the candidate. There should always be a mix of positive and negative criticism.
Different people will advance at different rates. Students joining the school after having practiced the same style elsewhwere, should test again for their most recent rank. When I was in college practicing karate, we got a lot of new students who had advanced ranks when they joined. My instructor there always tested them and gave them a rank that he thought was appropriate for his school - even if they got demoted back to white belt (this happened to me when I first started there - even though I already had a black belt in the same style). He also, on rare occasions, advanced people more than one rank if they merited it. The testing at that school was extremely rigorous. He pushed people to the point that they were so exhuasted that they were ready to give up. If they did actually give up, they would be failed and they knew it. Not sure that we want to go to that extreme at Aiki Zenshin, but its an interesting example.

If someone has been practicing for a long time, and they are not advancing, and they want to advance, then some discussion about what is wrong probably needs to be had. Perhaps certain goals could be set that would allow them to become sufficiently ready. I suppose there are some rare cases where an individual might just not be capable of advancing. I think these cases would be rare, and might be issues due to personality or attitude rather than physical limitations. For example, consider Joeseph and Martin, both of whom have physical limitations, but because of a superior attitude, do not have problems advancing.

Students practice martial arts for a wide variety of reasons. Not everyone is interested in achieving higher rank or even learning self-defense. Some are there to sociallize or get exercise, or any one of a spectrum of other reasons. At the very least students prioritize their reasons for practicing differently. Testing standards should never be lowered, but there could be some level of personalization in the delivery.

Figuring out the correct way to do testing is extremely difficult and varies for each student. The best that the instructor can do is create a testing program that develops students to the best of their ability based on a genuine interest in the growth and needs of each student. There are widely varying, and equally valid styles that could be employed to achieve this. The overrall goal of any dojo is to improve the ability of its members. Testing for rank is one tool of many for achieving this goal.