In club and tournament SCRABBLE, word adjudication is a structured process. It is also the subject of some controversy.
Word adjudication is generally performed by a third party, who looks up each word made in a challenged play, and rules the play acceptable if all words are found in the word source, and unacceptable if any of the words is not found in the word source. In some instances, computers with software self lookup programs loaded on them are used, so that players can adjudicate challenges independently. The player who is challenging the play types in the word(s) being challenged, and then the other player presses the button (usually enter or tab) to call for adjudication.
In North American club and tournament play, someone always loses a turn when there is a challenge. If the challenged play is acceptable, the challenger loses a turn. If the challenged play is unacceptable, the player who attempted to play a phoney word loses a turn.
North American club and tournament play uses a particular source for adjudicating challenges - The Official Word List for Club and Tournament Play - Second Edition (or OWL2). School play uses the Official SCRABBLE Players Dictionary - Fourth Edition (OSPD4), which is substantially similar to the OWL2, but does not contain a number of words deemed offensive by the publisher.
In much of the English speaking world outside of North America, an expanded word list is used, which is often referred to as either SOWPODS or the Collins Word List. There are players who favor the adoption of this expanded word list in North American play, and others who oppose this change. It is beyond the scope of this website to present extensive arguments on this issue.