Is it reliable to test an Android application on a rooted phone with cyanogenmod

Question 1

whether you are rooted or not, certain api calls to hardware features will act differently from stock android versus any skinned android OS.

Cameras functions will be unreliable, reading files from SD cards and other I/O functions like sqlite databases can function unreliably, fragment activities can behave ways different than documented, positioning services may not work as expected, image manipulation won't address different heap sizes, direct interfacing with certain wireless radios will also give different results

Using a rooted phone with a modified OS will just further remove you from reality (than if you use stock android, as a starting point), as you make code that works and doesn't crash on your device, but as soon as you release it into the wild, even stock android users experience crashes you couldn't have foreseen.

Question 2

Unless you use functionalities that require rooting in your application (which is quite uncommon), a rooted CyanogenMod device is perfectly fit for testing. I even think a lot of users are in this situation, as I was myself.

If it were not fit for testing (e.g. if it were a really different environment), you could expect all the apps you use to have a weird behavior ; which is definitely not the case.

If I recall right, Google was even selling "developer phones" that were already rooted a while back ; I might be mistaken on this one though.

Edit : google "dev phones" were sim-unlocked and bootloader-unlocked phones according to http://en.wikipedia.org/wiki/Android_Dev_Phone, probably not sold already rooted (but easily rootable).

Question 3

Yes it is fine! I myself have been developing on a rooted android phone running cyanogenmod and have had absolutely no problems so far.

My app uses everything from camera functions, reading SD card files, hibernate, fragment activities, location services, various libraries.