Well, I don't see anything wrong with it. It's exactly how I am teaching my kindergartner his sight words right now and it's working very well. After the test, test him at home yourself the way you want and see if it's effective.
No. LOL. She said that's how the district does spelling tests for all grade levels.
If it's their first test, they are probably just getting them used to it. Doing the words different ways will help them learn. I'm sure they will have traditional spelling tests soon enough.