The problem of local fault (unknown input) reconstruction for interconnected systems is addressed in this paper. This contribution consists of a geometric method which solves the fault reconstruction (FR) problem via observer based and a differential algebraic concept. The fault diagnosis (FD) problem is tackled using the concept of the differential transcendence degree of a differential field extension and the algebraic observability. The goal is to examine whether the fault occurring in the low-level subsystem can be reconstructed correctly by the output at the high-level subsystem under given initial states. By introducing the fault as an additional state of the low subsystem, an observer based approached is proposed to estimate this new state. Particularly, the output of the lower subsystem is assumed unknown, and is considered as auxiliary outputs. Then, the auxiliary outputs are estimated by a sliding mode observer which is generated by using global outputs and inverse techniques. After this, the estimated auxiliary outputs are employed as virtual sensors of the system to generate a reduced-order observer, which is caplable of estimating the fault variable asymptotically. Thus, the purpose of multi-level fault reconstruction is achieved. Numerical simulations on an intensified heat exchanger are presented to illustrate the effectiveness of the proposed approach.