To see what words they know have you tried making a game of it?
With a book that you have read together a lot, one with clear and easy print and not many sentences per page, try reading part way through the book and then after finishing a page say, "hey let's play a game, can you find the word "[choose a easy word they likely know]". It's often easiest if it's the first or last word in a sentence. Your first choices for words to look for might best be nouns, familiar objects that have 3 letter spellings such as "dog" "cat" etc. Once the concept of the game is learned and they enjoy it, then you can check another day about words you don't know if they know.
Finding a word in the midst of print is not exactly the same as reading but it does show recognition. Also allows them to gain confidence at speaking words aloud from print. That was a reading stumbling block for my DS... almost that he didn't realize his knowledge about words could be useful for him. After playing that game some then we moved on to occasionally doing a book by me reading one page and him reading one page.
As far as sight reading... there are some words that are difficult to read phonetically (the, said) and other words that are phonetically easy (Up, Dog, box). Many kids may read in more than one way. Even a word that is more a memorized word like "said" may have some of the letters in the word read phonetically. Once a word is familiar it is so quickly recognized that the mechanism it was learned by may no longer be relevant.
For assessing level one can go by the grade levels given on easy books, or try typing "word lists" and "grade level assessment" or something similar into google. Simple word lists don't assess comprehension of course but it's a start.
Polly
