Functional testing ensures proper functionality and that customer needs are met. The document discusses different types of functional testing like smoke testing, sanity testing, and regression testing. It explains that smoke testing provides quick feedback on problem areas, sanity testing verifies new functionality works as intended, and regression testing checks for behavior changes and recurring defects. The document also distinguishes between unit, functional, and integration testing, explaining that unit testing is done in isolation from code, functional testing is done on each program component, and integration testing ensures module and interface functionality following integration.