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My daughter's British passport was granted by mistake (2014). I know because our son's passport application (two years later) was refused due to the lack of WRS (I have a registration cert but haven't reregistered when changing employers so I am short of 3 weeks to have completed a full year).
Last year I obtained the PR status (5 years after the WRS ended) of and can naturalise my son. I am not sure what I should do in the case of my daughter. Would it be strange to apply for naturalisation when she has a valid British Passport. I worry that in a few years time when it comes to renewing her passport it will be refused.
I'd appreciate any suggestions.

Unfortunately, a British passport does not confer British citizenship. It may be revoked, if it was issued in error.

Safest is to register child.

However, there may also be some questions about the lawfulness of WRS.

When you say "register" you're suggesting "naturalisation" right?

The lawfulness of WRS if decided in "our favour" will only move the date by 2 years (May 2009), our daughter was born in 2013 so won't change much for us.

Naturalisation is only applicable to adults.
For children, it's called registration.

Finally got round to sending the MN1 for my daughter. Would it be prudent to disclose the fact she has a british passport issued to her "by mistake"? not sure if this will not complicate her case.

Probably prudent to disclose.