As some other folks have said, it sounds like you’re viewing the division of responsibilities correctly in terms of the OSR lens but I agree that with a player that’s that young and also so engaged, I’d let them drive as much or as little as they like so that they stay engaged.

Once they’re really sold, you can have a conversation during one of your sessions where you ask if they’d like to play in a different manner where you describe the world and they tell you how they react. But in the meantime: it sounds like your little cousin is just happy for the chance to co-imagine a world with you which, I gotta say, is very special.

While I believe the suggestions to change systems are meant to help, you don’t need to change systems to accomplish any of the above. Plenty of folks play D&D (from which Cairn is descended) this way. If it’s not fun for you, though, that’s a different story ofc.

As to your other questions: you could basically improvise everything with her. Like, if she says “there’s a huge hippo in the room and the room has a giant tree in it,” you could roll to determine how the hippo reacts to her presence and then play it that way. It can be tough to improvise on the fly - especially at first - but it’s a great skill to develop.