Hi Bob:
1. Report it at the Police Station closest to where she thinks she lost it. Make a note of their lost property number for future reference. If and when found, don't forget to let the Police know so that their records can be updated/amended.
2. Also let DVLA know re the driving licence. They will advise her what to do next.
3. She may still drive - the only problem that may arise is if, before either the lost licence is found or a new one issued by DVLA, she could be stopchecked by a Police patrol, for example, and given a "producer" which means taking your driving docs to a Police Station - the Law allows you 7 days from date of issue to produce.
If that happened, and she still didn't have her licence, take the lost property slip to the nick as well to prove that it had been lost. This will prevent her being reported for "failing to produce".
That's about it - don't be too hard on her, she's obviously just made a mistake any number of us make. Good luck.