Grades are not necessarily important, and there's no problem progressing without ever taking an exam, or following that sort of syllabus, particularly if a child is having fun and taking part in a sociable activity.
On the other hand, it is nice to make progress on an instrument, if that's what a child wants. There is no need at all for exams to show that this is actually happening, as hopefully it'll just be obvious by listening, learning new things, and so on - but if a child does take an exam, and doesn't do well/goes backwards, then it might be interesting to consider possible reasons why - e.g., the panic I mentioned above, or not knowing they had to do aural, or not knowing how to sightread if they've always learned by ear, or preparing the wrong pieces, etc - all which do happen; or, indeed, not actually making progress on the instrument! If it's panic/not liking exams/etc - then one solution is just not to do them again, and carry on progressing and enjoying without them. Or if the child does want to keep taking them, then looking at ways of helping performance nerves, increasing performance opportunities, dealing with anxiety, etc. If it's not being prepared properly, then the solution might be in part to make sure the parent also knows the syllabus, checks that all elements are learned, supports the prep by getting books of aural tests. If it's lack of preparation as well as not progressing well on the instrument, then it might be time to look at changing teacher, or adding individual lessons if it's only been group lessons so far ,etc. A failed exam can give you lots of information, and it doesn't have to mean giving up on exams if you don't want to - but equally, there is nothing wrong with that if you do.
There are also jazz exams that might suit her, if that's more her style of music and if she does want to do the exams.