It's both.

As a hiring manager I've had situations like this arise because there was a gap in my plan and I didn't realize it. When those come up, we thank them for their cleverness, apologize to the candidate, reframe the situation, and give them another shot.

But also sometimes I leave intentional ambiguity in the plan. Part of the goal is to see if they have a degree of common sense commensurate to their level. If they're interviewing for a high level position, I'd expect them to be able to spot silly flaws and push back that perhaps the whole problem needs rethinking. And of course, I also expect them to know the brute force solution as well. Do they only know one? Both? Let's fine out.

> and give them another shot

Isn't this rather giving yourself another shot.