I'm not an expert, but I can tell you what I've observed. Our schools test with DRA and Lexile. Lexile scores (at our schools) are done on a computer only in the upper grades and seems to be about reading comprehension. There's no reading out loud, so any issue with misprounciation or skipping words shouldn't be a problem. DRA testing is used in all grades. Changing/skipping/mispronouncing are tallied, the reading out loud is timed, the child has to orally answer comprehension questions, and - at higher levels - the child has to write answers to comprehension questions. (My dysgraphic ds is allowed to do this part orally per his IEP.) All of that info is compared to charts. A child is at a given level if he/she reads the passage without going over the allotted number of mistakes or time, while proving he/she understands what was read. IMHO, it's somewhat subjective, with some teachers rigidly following the rules and others letting things slide. Also, when teachers make up reading groups, they may include more than one level in a group because they don't have enough kids reading at a particular level to constitute a group.
When they talk about "just right" books, a lot of times that's more than reading level. My ds, for example, would not enjoy a book about princesses and unicorns whether it's on his reading level or not. Usually, to help a child pick a just right book, they teach the kids to look at the book (covers, blurb) and see if they're interested in reading it. Then, they have them read a page. If there are 5 or more troublesome words, it's too hard. If the child is making the judgement about troublesome words, mispronouncing wouldn't make any difference. If the teacher is listening, misprounounciations would possibly count against them. Usually, if the teacher is listening, the child is picking books that are too hard.
Hope that helps.
