The two password entries are checked to make sure they match. If they do not, the message Passwords do not match appears and you remain in the window. If they match, your user ID and password are encrypted and saved and are used to log in when this or any automatic script is run.
Your user ID and password are not verified with the server at this time. The only way to check if they are correct is to attempt to run an automatic script and check the script log to see if the script ran successfully.