1. You put the plug on the upstream side of the test tee with the chain and loop outside the tee so it cannot get washed down the pipe when it deflates, whether intentionally or by accident.
2. After the test, you deflate the ball and the water flows past it down the drain.
3. Sometimes you CANNOT make the plug watertight. I either put a rubber test cap OVER the plug and tighten it to the tee's opening, or divert the leaking water away from the pipes so the inspector can tell that the pipe itself is not causeing the wetness.