I have used this myself to run a district-wide honor band audition for Junior High students. I have also helped to administer 6 nation-wide auditions using SmartMusic and Impact, including those listed below for Music For All. Moreover, I have been helping two different drum and bugle corps use SmartMusic and Impact for testing, placements, and assignments (with feedback) prior to on-site camps.
I personally think this is the way all auditions that require taped or recorded entries should be done. I feel that submitting auditions using SmartMusic and Impact really levels the playing field as you know every auditioning student is using the same technology to submit recordings. Audition adjudicators can provide feedback to students through Impact. I find this component is huge, as I know of no other audition that actually tells students how they could improve for the next time. Through these auditions, we have tried solos, choices (select from a list and post your choice), custom etudes, SmartMusic exercises and most recently, full band repertoire all as components. Most recently we did add a sight reading component, but was done for chair / band placement after students were selected and had arrived at the host site. I have also learned to make sure all the audition material is on-screen so there is no problem of getting the music needed. This cand make choosing solo literature more challenging unless you are looking in the baroque selections.
I am not sure how you could fairly regulate the sight reading component unless you posted the excerpt the day before auditions were due, and removed it from those not submitted by the deadline. You could also track the time spent, but this would not stop a student from working on the excerpt outside the assignment loop and then logging on to post his recording. On all the auditions I have administered, I recommend tracking time for use as a tie-breaker. In other words two students perform amazingly well and the adjudicator has difficulty separating the two. The time spent on the material could be used to distinguish one from another.
One last thought, you could use the play by ear examples, or the rhythm studies as a type of sight reading component. You could turn the "display music" feature off when making the assignment. Students would not be able to see the music and you could give them specific details in the instructions regarding starting pitch and so on. You could use the "track time" function in this case, as hiding the music would not give them information on the actual SmartMusic tree number - I think. I am talking to myself now and will have to try this to confirm my claims.
Good luck and I hope this helps