In an audition, musicians are usually asked to play a mix of prepared and sight-read pieces (though sometimes the sight reading is from standard repertoire, so they may have encountered before). Both are helpful in discerning how qualified the musician is. And sight-reading is incredibly important for most jobs musicians get hired for - in most freelance situations, they'd get a 3 hour rehearsal, or essentially a guided run through of the performance, then they play the gig. So that may not be an accurate analogy, given that writing on the fly isn't part of the programming repertoire - most programmers are allowed to think before they write anything down. Also musician's don't write - performing is very different than writing- so perhaps a composer would be a better analogy.

Maybe it would be a more accurate measure of ability to ask software engineering applicants to read code and explain what it does, or to judge them as you'd judge a composer, by their portfolio.