I think it depends on the examiner. My examiner explicitly said he did not want me to go through the whole routine of treating him like a passenger, but he did want me to answer some questions about it during the oral part.
The JAA skills test is in two parts, the navigation exercise which will contain a diversion and the circuit activity. Assuming one of these parts is successful you can have another attempt at the other part.
Needless to say I know this because of my rather poor performance on my skills test!
Drop me a PM if you think I might be able to help with any specific questions...
Edited to say - In terms of limits, my examiner wanted to see +/- 100 ft altitude and 5 degrees on heading - but I understand there is some flexibility there - particularly on a bumpy day. In terms of the diversion, the most important thing is that you get to your diversion airfield and you identify it.