I have a five year old boy and he is not allowed in my room or in my bed if I am not fully dressed. Boys and girls should not be sharing the same room past the age of five. There is a law, so I would say that he is passed the age to be co sleeping. She should wear a bra or a overly large Tshirt around him at all times. Where does the other boy sleep when they are with their mom?
WAYYYYY TO INAPPROPRIATE!!!! Immediately talk to him and make sure there is nothing he's not telling you (good touch bad touch stuff) also... honestly, I would call Child Protective Services and let them know of your findings and how inappropriate you think,... you will find they will probably feel the same way, Espically since you said "she tells him that he has to sleep in the bed with her." BAD FOR BUSINESS!!!
I would not recommend calling CPS unless you have a valid claim or concern of child abuse or neglect. I would suggest simply asking your son if he feels uncomfortable sleeping in the same bed with his mother. Other than that, I don't think it is inappropriate. Another thing to consider is his level of awareness. More than likely he has not entered into puberty yet. Once that happens, then he more than likely will object to sleeping in the same bed with her.
If it does make you uncomfortable, maybe offer his mother to buy a bed for him for her apartment. If space is an issue, possible a sleeper sofa, that way it will accommodate both boys.