I don't like the term 'testing of limits'. It seems to be imply that somehow children are hell-bent on testing the boundaries of the acceptable and doing the naughtiest things they can do without getting caught, just for the sake of being naughty. Put simply, it assumes behavior that is too 'adult-like' and psychopathic. It seems more realistic to me that children aren't capable of analyzing to this extent; they are impulsive and often do things without even considering the consequences. Sometimes you have a situation where the child is angry at the parent, and deliberately does things to piss the parent off. That doesn't necessarily comprise all situations though.
I agree that corrective measures should be applied at all times. If it's a minor infraction, only a minor correction is necessary ("Don't do that", said neutrally and not angrily.) If it's a big infraction, a bigger correction is necessary. Reacting with unreasonable anger towards a minor infraction hurts your authority.
I don't like the term 'testing of limits'. It seems to be imply that somehow children are hell-bent on testing the boundaries of the acceptable and doing the naughtiest things they can do without getting caught, just for the sake of being naughty.
In my experience children do things like that. I have two little brothers and they had phases where they did engage in a lot of testing of limits.
Followup to: Strategic ignorance and plausible deniability
My in-law always says: "For children it is easier be forgiven then to get permission."
EDIT: This post is superseeded by my Book Review: Kazdin's The Everyday Parenting Toolkit I recommend reading only that. The remaining insight of this post is: Children expend more brain power on their parents than the parents on them.
I can say from experience: That is risky.
Children (esp. small ones) expend significantly more brain power on their parents than the parents on their children (your mileage may vary). I can assure you that they will notice these cases - at least some - and take that into account one way or the other.
If the children notice this they may assume that you either condone, accept, bear or ignore it. None of these has positive effects.
Possible alternative strategies:
I am influenced by The Adlerian School. Of relevance here is Striving for significance.
The testing of limits and the resulting interaction with the parent give the child a feeling of significance if the parent acknoledges the act of the child even if he doesn't agree with it. On the other hand ignoring the act of the child is negative feedback about significance.
EDIT: The asymmetry between parents and children with respect to the effectiveness of deniability can be generalized to any situation where one actor has significantly less overall information about the situation than another actor and thus might not be able to reliably estimate whether deniability is possible.
ADDED: tadamsmar pointed out that ignoring is scientifically known to be effective and the advice or rather personal expierence I have related in this post may be contraproductive (at least if applied in isolation).