I don't know anything about Australian law, but I suspect it's illegal for him to ignore your concerns like that. Talk to a lawyer--at very least, the company should transfer you to another department so you don't have to work with your current boss, if not fire him.
The heart of the issue is that she was shown something that she didn't want to see in the first place. Sexual Harassment isn't a "suck it up and get over it." Once you see something like that u can't unsee it. Seek legal help and charges filed against him. Apologize for that having to happen.
Speak your mind, but please try and be respectful.
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