| A failed oxygen sensor should produce a fault code and turn on the malfunction indicator light (often called, confusingly, the “service engine soon” light). Marginal operation of the sensor could affect mileage and not cause the light to be turned on, but there may be a pending code set and a decent scan tool should show this status.
A good oxygen sensor produces an oscillating waveform that toggles between 0.1V to 0.9V. The sensor indicates between 0.1V for lean mixture and 0.9V for rich air to fuel mixture. The OBD2 tests how fast or slow the oxygen sensor transitions between lean and rich mixture levels (usually referred to as “crossings” as the voltage crosses the nominal mixture value) and compares the response time of the oxygen sensor with known good values. More comprehensive OBD2 scan tools will also display the oxygen sensor output waveform as seen using an oscilloscope, or a high impedance volt meter across the sensor will show the activity.
The oxygen sensor compares the oxygen levels in the exhaust with the outside oxygen level. If the sensor is coated with mud or undercoating then this will cause it to mis-read.
Note that I am referring to the sensor before the catalytic converter. The post-cat sensor is there to monitor the effectiveness of the catalytic converter and its failure will not affect the engine operation.  | 
