Anyone know how to troubleshoot knock sensor ?
Also, could I temporarily unplug it to see how will
it affect the engine ?
I hear banging coming from the engine block near
this sensor.

That banging is probably piston slap, see also FAQ's.

Shifted
--
'87 745t 214,000; '93 Toyota MkII; '73 Suzuki Jimny (Brute) LJ20 360cc

tapping on the block near the sensor with the engine running should cause a temporary fluctuation in timing.

That is almost impossible to do. You'd have to tap the block with the correct impact just when the EZK would expect to "hear" a knock when the spark plug fires. The timing would then be retarded on that, and only that, cylinder and only for a very small period of time.
--
john

Although the tapping trick may have worked with some early design knock sensor systems, you won't likely notice any timing change when tapping on the block. The knock sensor systems are designed only to respond to misfiring noises at higher engine speeds only and to ignore other noises -such things as tapping, rattling parts and road vibrations. See the 700-900 FAQ section under Engine Sensors for more info on knock sensors and tips on diagnosing knock sensor problems.
--
Dave -not to be confused with a real expert

Check the FAQ.
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90 744ti, Airbox, K/N, Cold air, G-Valve, Dual boost control, VDO, Modified exhaust. 88 745 gle.