That's how it should be done. "Can this kid read this work? Well, I can find out by giving him a test or by having him read out loud." One is faster, immediate. The other requires grading.
Is it used this way consistently? No.
It's also used to make sure kids read the text. In high school I've seen it done when the teacher was fairly sure that the students weren't doing the reading, but instead relying on other students' answers and teacher-centered instruction.
I did it when I realized that my students had trouble reading the assigned texts. They'd gotten information about the texts from tutors, from others students. They could write essays--with a lot of help. But reaction journals were beyond them, and they couldn't answer squat given cold reads. Their literacy skills weren't up to the 6th or 7th grade lexile. Yet they were college seniors on an athletics team, in which they'd gotten through high school and a lot of college lit classes using choral reading, teacher reading, readings on CD or tape, watching movies, and generally being scaffolded beyond imagination.