good catch,i would listen to swedefish on this one and probably alot more he is a sharpminded guy!
also i wouldnt feel all that good about those paintflakes in the shortblock(i have seen worse and got away with worse but i would never feel safe about it if it was someone elses engine),and its not the flakes themselfes but what more could have been ignored and left inside,it makes me think that whoever built/assembled that engine in the first place might not have had enough attention to detail.