Work sample test fraud is one of those things that sounds like a huge deal on message boards, but when you game through what would be involved in doing it in real life, it makes very little sense.
Talk to them about the code they wrote.
Have a conversation, as if they were already your co-worker, with the exercise as the subject. Go through it, ask them -- non-adversarially -- why they did X, what they thought about requirement 2, how they could get better test coverage for Z. If you see something that seems to be a mistake, talk about it. If you see something awesome, discuss it. I can't imagine someone incompetent being able to bullshit their way through detailed discussion of code they were supposed to have written.
And this provides valuable info about how this person thinks and communicates about the work you want them to do.
I'm not sure why you felt the need to come out guns blazing.