A test gauge for determining whether a tool holder assembly that utilizes a retention knob is properly assembled. The test gauge is mounted on a tool holder before the installation of a retention knob. Measurement devices, such as dial indicators, determine whether a “wobble” exists between the test gauge and the tapered surface of the tool holder and also provide a distance measurement between the test gauge and a reference surface on the tool holder. After installation of the retention knob, the test gauge is again placed on the tool holder in the same relative position and the distance between the test gauge and the reference surface is again observed. Any change in the distance measurement is an indication that the installation of the retention knob produced a distortion in the tool holder tapered surface which, if not corrected, can produce wear in the tool holder, the spindle and/or the cutting tool. The test gauge also includes at least one measurement device for measuring wobble between the test gauge and a tool holder received by the test gauge.