My 7 year old and another boy were showing one another there privates

[CdwJava]

We know what OP said:
"They said because my son came up with the Idea it was mostly him."

OP didn't seem to object to that conclusion. However, you are correct that OP can certainly challenge it - she was told early on that she could appeal the decision and/or get an attorney involved.

Note that she wrote that "THEY" came up with the idea ... this may be the same "they" that also say that if a 15 year old girl gets pregnant she is emancipated, or the same "they" that says they don't need a driver's license. Just saying that we do not know, nor does it really matter.

Sending the kid to a counselor would be an appropriate response for mom at this point. Both kids should go, in fact (to separate therapists, of course). Suspension also seems appropriate. But, I doubt that CPS will do much more than look into the matter. And unless there is something more egregious that pops up, the fact that the kid may have seen something bad a year ago is not going to be sufficient to take the kid or even castigate mom.