There are two parts to this error, startup and running. In general, the ECM is VERY unsophisticated with the error checking and you need either a solid short or open to set a code. The knock sensor is basically a microphone that listens for the knocks. The knock signal is amplified and filtered by the ESC module and the module sends a signal to the ECM when it detects a knock.
When you first start cranking, the ECM adds 20 degrees of advance to force the knock detector and ESC module to work. It passes this part of the test if it sees 2 knock counts, which proves that the knock sensor and ESC module are working. I can hear the knocks when the engine first starts, kind of a rattling sound. I recorded two knock counts on my car during startup. Here's a pic:
The ECM also looks at the ESC signal while the engine is running. It sets a Code 43 if the ESC signal is low for longer than 0.0143 seconds (like a short to ground or the output of the ESC module is stuck low -- it should be high except when it sees a knock).
Unfortunately there is no way to tell which part of the test failed without using a scanner.