I agree with you until your last sentence. Especially in upper division courses, the material is more complicated and problems that really test understanding are too ambitious for an exam. This means that if you want to see the student solve interesting problems, they have to complete problem sets or a project. (The corruption of the assignment system means that you're still stuck with exams until the students reach a certain point, though.)

Of course, my experience is only with math courses, and your mileage may vary.