Parents are role models for their children. A dishonest parent teaches the child that dishonesty is ok, even a good thing.
Lying about a grade level in order to gain an advantage over other competitors is, as already noted, bad sportsmanship and actually is anti-competitive. Good way to train up a future Lance Armstrong.
Lying about a grade level in order to place a child with possibly/probably less prepared students teaches the child, "I am a hot-shot! I am going to leave the others in the dust because I am so great (in comparison)!" If the result is that the child wins easily, he has lost the chance to know what his actual ability is. He does not even know about himself.