Have you tried simply ignoring him when he is playing with his willy, or talking about bottoms and boobies?
This is a phase most children go through.
It sounds to me as if your grandson is desperately trying to get attention, and as he can't be good like his big sister, he is being deliberately naughty in the sense of doing what he knows you don't like.
Preventing this kind of behaviour is far, far better than scolding him. Let him play some fairly wild game, outside if possible WITH YOU for twenty minutes or so, after you get in from school, while his sister either sits and draws or reads or joins in.
Then go inside, taking him with you for milk and biscuits or whatever you give them. If willy is taking the air, request he is put back inside pants - then ignore.
In your house, you can make sure that treats are treats for good behaviour if you want, irrespective of what his parents do. How did you treat your own son when he was that age?
Static caravan purchase is it worth buying
Acute anxiety after death of my husband