Alright, this is not necessarily the way the FS does it but there are several criteria in an oral exam for the military. I can't remember them all, but here goes.

To get a "1", you just have to be able to answer certain questions, like what is your name, and so on.

To get a "2" you should be able to do more complicated things with the language, such as give instructions, introduce yourself, tell a story, and most importantly talk about an important news item.

To get a "3" which is very good indeed, you should be able to talk about abstract concepts, like the meaning of life, or the legitimacy of torture.

I think I have mixed a few things up, but that is the general idea. In general, the instructor has an idea of where you are in the language, and will start with introductions, and lead you through a conversation, asking questions related to the level that s/he thinks you might be at. You get two tries at a higher level, and if you get that they will move up to those level questions. A longer interview is not necessarily better.

I hope that is helpful. Again, I cannot guarantee that the FSO uses the same method.