P.W.
It's fine. They've both seen penises before. :)
Look at some tribal people squatting about innocently in all their naked glory in an old National Geographic spread, and then ponder how we Westerners fuss over the naked body.
To address a response below: her two year old is noticing the differences! That's called education. There ARE differences between males and females, and what better way for kids to learn about them than to see the naked body. I never had to teach my kids anything, because it was all visible from a very early age. My boys knew about periods, etc. By the way, none of my kids is sexualized -- my oldest just got his first girlfriend at 21, and my 17 year old daughter and 16 year old son still don't date.