A new model based testing theory built on simulation semantics is presented. At the core of this theory there is an input-output conformance simulation relation (iocos). As a branching semantics iocos can naturally distinguish the context of local choices. We show iocos to be a finer relation than the classic ioco conformance relation. It turns out that iocos is a transitive relation and therefore it can be used both as a conformance relation and a refinement preorder. An alternative characterisation of iocos is provided in terms of testing semantics. Finally we present an algorithm that produces a test suite for any specification. The resulting test suite is sound and exhaustive for the given specification with respect to iocos.