My last pap was with a new OB/GYN, a woman, who had a male intern. He had a uniform on that identified his school, as well as a nametag that stated his name and position "Medical Student". She came in first and asked if it would be OK for him to take my history, to which I consented verbally.
He came in and was probably more nervous than I was, trying very hard to remember all the questions to ask. When she came in, she confirmed that he had asked the right questions, did my exam and pap after asking it was OK for him to stay (to which I consented) and then asked it it would also be OK for him to perform an exam. She stayed there the whole time and while it was quite weird for her to be teaching him while he was doing the exam (Do you feel the cervix there?, etc), it was OK.
The differences - a) I was asked to consent to EVERY step. She didn't just ask me once and assume I'd be fine with the rest of it. b) I am not a virgin - have given birth to three children.
I would definitely have your sister get to the bottom of it. Right to be upset - um, yeah. I have an 20 year old daughter who sounds similar to your niece - kind of shy and naive. If her first pelvic exam had gone that way, I would be livid and my helicopter Mom would come out with a vengeance.