Hi i have just completed the step 11 of the skinning process on my mirror covers. At this stage would it ok to use water with the 120 grit sand paper when flattening he surface for the final coat. 

Yes that should be fine.  I would expect to still see some scratches from the 240 grit even after sanding it wet as it is still quite a coarse paper.

Warren Penalver
Easy Composites / Carbon Mods - Technical Support Assistant