I'm glad that you did something, while I'm not prepared to jump to the worst conclusion. I think, based on previous conversations you had with her (her telling you that you're kids should not be in the same room) that her older child, the son has been curious and recruited his younger sister. I'm not prepared to lable that natural curiosity abuse, but the boy definately needs to be told in no uncertain terms that behavior (self exploration) is private and needs to be done alone.

I babysat my cousin when she was a baby/toddler, she discovered her private parts long before I did and I'm 12 years older than she is. She'd drink her bottle and rub herself at two. I didn't even know what she was doing at the time.

BUT and it is a big but it is unnatural in my opinion for someone that age to look for another person to participate. Which leads me to the brother theory.

I don't envy her mom, that's a lot to process.