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If you're having the students grade each others' work, then I certainly hope that grade is purely for self-evaluation, and not factored into any kind of final letter grade.
Indeed, I didn't mean to imply that you were calling it widespread. Since it holding in "at least a few graduate schools" is at least consistent with the practice being widespread, and since I also don't know how widespread the practice was prior to my own grad school experience, I figured it was worth chiming in.
Speaking only to your last paragraph, as someone who completed a mathematics PhD in 2014, I have never heard of graduate students auditing every advanced course before taking them for credit. I have no data to back this up but I'd be very surprised if this was a widespread practice.