Well, technically, that's how most sounds of the profession are made. They may have more money and equipment on their hands, but the design is universal! You shouldn't feel bad at all.
No, you have to make your own sounds either through a digital audio workstation like LMMS or Garage Band, or through recording sounds down your microphone and recording in Audacity or other free sound editing software. Editing other assets is still using other assets and that's against the rules.
I mean, if you are just short of time you can just break the rules but have a note at the start of your game saying where you used other sounds and where you got them. I wouldn't want your game to suffer just for a technality..
No no, I'm just saying it's better to get something done than bang your head forever... although just making walking or hitting sound effects shouldn't take 8 hours lol
Haha no I've actually really enjoyed being limited, I feel it engenders more creativity! I too have been hitting things and it's been fun to play as a sound designer :D