I think the main thing with this is to reassure her that if she is doing it because she wants to, that is the best thing. If she knows her pieces and scales reasonably well, even if not note-perfect, she is likely to pass (even if she doesn't get a merit or distinction). There is nothing wrong with that!
Do stress to her that the main reason for playing an instrument is to enjoy it, and if she enjoys playing in the orchestra that is really great - I think the social side of music is very important.
It might be an idea in the future to see if you can get her lesson changed so she is not sharing it with the other child, who seems quite competitive. It would work OK if both children were like this, but it seems as if it is having a negative effect on your dd.
Doing grades is fine if you want to, it gives you a good idea about what you have achieved, but ultimately music (I think) shouldn't be about competition. It should be about enjoying playing stuff, and performing in front of others if that's what you enjoy, with other people.
So, encourage her, but make sure she knows that grades aren't the end of the world, and it doesn't matter if her friend is better than her - in any case herfriend may be better technically, but your dd may be better musically, i.e. have the right feeling and expression for the music, etc.
By the way, I am not a teacher (music or otherwise), but play an instrument, havedone grades myself, and this is my take on it.