Many dogs find children disconcerting - they run around, shout, crowd in on the dog, and are generally unpredictable (from the dog's viewpoint). Cavaliers are great with children who are part of the daily family, but if a child is only an occasional visitor, the dog will need to get used to them. Your youngster needs more opportunities to get used to children in general (and other dogs); some suggestions:
For children, sit in the park near, but not right next to, the children's playground so that she can get used to children from the security of your lap. If she seems frightened, don't reassure her (which reinforces that there's something to worry about) - be cheerful, distract her with titbits, play a game, so that children's noise becomes a normal part of the background, and being near them means nice things happen. Then ask an occasional child to come and gently say hello to her (for obvious reasons this is probably better done by your wife! And explain to the parent what you're doing) - then extend this to letting children in the street stroke her, and reward her for sitting quietly while they fuss her.
For other dogs, do you take your Cavalier to training class? This is the easiest way of getting used to other dogs, though you may need to start by simply watching (much the same way that you did for children).
Ideally, this sort of deliberate socialising with children and dogs should have been done as early as possible, but you should be able to catch her up, it will just take a little more time and patience. Take her out and about with you so that she sees as many people, dogs, places, sights as possible; be cheerful and reward with praise, titbits and play. We all find the unfamiliar threatening - barking is an anxiety reaction - and need to discover that it's OK. Your older dog will help her to overcome her anxiety more quickly if you take them out and about together.
Kate, Oliver and Aled