Dude, you don't use the wand in the water room. The wand is supposed to used in the next room to the east of the Moblin that tells you the hint. The original hint said "in the next room", but since you first enter the room from the right, people thought it was talking about the next room to the west. I changed "next" to "east"; sorry I couldn't keep both words in the hint.
Just to be clear, use the Lens to find where to use the wand in the first dark room you enter for the basement (just north of the first room w/ stairs).
In the "water room" that has floating traps, look for a stairway under the water. Dive to go down that stairway. FYI, you get the Compass (and can find the talking Goriya) if you keep going that way.
Key from mirror reflection? Yep! That's the way to a big chest, the contents of which you'll need to beat the dungeon. Good luck!