Knock sensor code goes off when the sensor has been tested ok.

I am having an issue with my daughters Tercel. It has 110,000 miles on it, My dealership (Honda) has said that the knock sensor is going off likely due to another sound in the engine which in turn activates the check engine light. A little history: My daughter purchased the car private owner in Sept. 2011 my Husband said it need a new oil pan gasket. We asked a friends mechanic to do this. A couple weeks later the engine light came on we then took it took my dealership, At this time the knock sensor was showing up as faulty. We had that replaced we also replaced the belts and water pump because they told us this vehicle had a ton of life left in it. A month later my daughter drove 30min. Away (she only traveled about five miles a day before this) at that time the oil light came on then the car started to drive real rough. She pulled over and found there was no oil that registered on the dip stick. She put two and half quarts of oil in and started on her way at that time the check engine light came on, the car continued to drive rough and now smokes. We took it back to the dealership they changed the oil to a high mileage oil to prevent the burning of oil (This is why the car had no oil in a month after taking to them) and to clog up the piston rings as they seem to think is leaking oil into the engine. Recommend that we add an additive when we need additional oil. They said the check engine light came on due to the oil being so low. After we picked up the car less than two days later the check engine light came on again. We took it back to the dealership now as written above they believe the knock sensor is picking up another sound (they checked the sensor and it is working correctly) and we will need to live with the check engine light on and the smoking with smell. My daughter is only 17 and I really want to get the check engine light off the car because I want to know when something is wrong with the car. Is there something my mechanic could be missing? He usually works on Honda's so maybe it is a Toyota thing?