If they're asking you for a 12 page report on specific lines of code, I can understand the paranoia. If that's how they're interviewing, then you'd better think twice about working there.
However, we - a smaller tech agency, consider questions like that par for the course. It's probably the first question you'll be asked if they hire you, so I think there's some paranoia here for sure (yes, I read the maths above, and yes, they do have some merit in some cases).
It's not unusual to ask someone to complete a small task or project, or ask for improvements to a product. In terms of my experience having been on both sides of the table, I'm always looking for positive and results oriented team members, and I'm often looking for specific examples. Why? Well, there are a lot of people who can talk, or point to work experience, but when it comes right down to it, a lot of people expand their roles in projects or "boast" a little bit on their resumes. It's so important to be able to demonstrate your awesomeness when you're interviewing, and you could look at this as an opportunity to do just that.
If you don't feel like that's what they're giving you, interview somewhere else. :)