I have a checklist. It mostly applies to buying classic (manual-focus) gear to use, but is probably of general use.

It's a good idea to try all of these on your own gear first, since you know how you've treated it, and hence what effect you've had, and what "normal" gear feels and looks like when you're really looking closely.

The Most Important Step

Know what you're after.

Do a bit of research on the lens you want. Classifieds/eBay/KEH/etc will give you an idea of the price, and camera forums will give you an idea of common problems to check for with specific models. Both of those are probably more useful than most of the stuff below. If you're going to buy a lens on a whim, make sure it's for an amount of money you don't mind losing!

For example, something like Stephen Gandy's guide to Leica M lenses will tell you a lot more about what to look for than any general guide.

With that in mind, here's my general steps for checking out a lens:

0. Keep your perspective

Remember you're not an expert, not a collector, and that your evaluation is subjective. If you want to use a lens rather than keep it on your shelf to resell it later, most problems are actually pretty minor. You would be shocked at the quality images you can get from the ugliest-looking gear.

1. Look at the glass

• Dust, fungus: Preferably shine a light through, or look at it, wide open, against a white wall. All lenses have dust, do not worry about it unless it's extreme. A bug stuck inside counts as "extreme". What you should be more concerned about are web-like things that are likely fungus, or internal fogging of the lens (e.g., it sat in a smoker's house for 10 years).
• Scratches: Look for scratches and cleaning marks - examine the front and back element at an oblique angle. If scratched lens may still be perfectly usable, but scratches can increase the amount of flare, sometimes drastically. Cleaning marks shouldn't worry you unless you're in the collector's game.
• Separation: will (usually) appear as white marks around the edges of the elements (Google Images). This is a severe defect, repairable, but at fairly high cost, and with a significant risk of failure. Some lenses can be usable for years with mild separation, if you don't mind stopping down a bit.
• Coating: doesn't really apply to modern lenses, which have durable multi-coats, but for older lenses with softer single-coating, examine the lens coating to see if it's still even. Worn-away coating usually appears as oval-shaped wear marks about a finger's width from the edge of the lens (i.e. where it's been cleaned the most).

2. Look at the aperture

• Movement: basically, does it move? smoothly? Do the stops seem correct? Use the camera's actuator rather than the aperture ring (if possible or applicable). If so, great. If not, pass immediately.
• Oil: close the diaphragm completely, and look for spots or a coating. This is somewhat inevitable in most lenses as the lubricants separate and the lighter fractions migrate around. A few spots are not much to worry about, an even coating is a problem, but can often be cleaned. This is less of a problem in rangefinders and cameras with stop-down metering, as the aperture doesn't have to move quickly, but it can cause the aperture to move slowly enough to ruin exposures on modern (post-1980) auto-diaphragm SLRs.
• Rust/corrosion: Just a sign it hasn't been well cared for; left in a too-humid environment, not used enough.

3. Fiddle with the mechanics

• Appearance: paint chips, wear, probably fine. Dents, big problem. Remember to retain perspective with respect to the age of the lens.
• Mount: does it mount? Any visible dings or dents in the mount?
• Focus(feel): should be smooth and well-damped for manual lenses. AF lenses generally looser, but it varies more (and I have less experience). Stiffness through the whole range is usually dried lubricant, and can usually be fixed with a cleaning if it's unbearable. And 'gritty' feeling should be a big warning sign. This probably applies to zoom, too (again, not part of my experience).
• Focus(distance): For SLRs, does it look focused close in? At infinity? Are the distance markings approximately right?
• Front threads: Dents, dings = problem.
• Filter: if it has one, especially if it's claimed to be on there "since new," can you take it off? Filter threads can bind to the front threads on the lens, which is a pain if you ever want to remove it.
• Shutter: (if it has one) Does it fire? Does it seem about right? People are pretty good at estimating this up to about 1/125.
• Aperture: For auto-diaphragm SLRs, does it stop down correctly when fired? Open the back, and fire the shutter on a fairly slow speed. Try this wide open, stopped down all the way, and in-between.