I've worked with kids for many years (20+) and have approached it two different ways.  The first is improv ... but, don't expect too much, especially if you don't know the child.  He'll be shy and hold back what he can really do, or you'll get the same thing in the show.

The second way is to have them come prepared with a short monologue.  (If you insist that everyone who auditions be prepared with something, then you don't really have to worry about singling out the little ones.)  That way they can be prepared to show you their all ... ability to memorize, character, projection, body language, etc.

Of course, come show time you may get the shy little kid even if he did give you a stellar audition.  The best bet is to cast your more experienced little actors in the bigger roles and your newbies in supporting roles to get them exposed to acting in front of a house full of people. 

Some might not think this is fair, but reading kids is really tricky.  If you've never worked with kids before, or have little experience working with them, you're going to find it difficult to know if you've cast them in a role they can handle in front of a crowd until opening night.

Hope this helps.