"Making something up" means inventing or creating something like a story or a lie. Making things up as she goes (or more commonly in the UK "making it up as she goes along") means she has no plan, she is just acting from moment to moment. Often this is likely to lead the person into trouble. For example, a witness in court is lying but hasn't thought about how the lies all fit together in one story, so she might get caught contradicting herself. Or at work, you might see a colleague reacting to each new situation without thinking and without a plan. In the end, that will lead to a bad outcome.

Great sentence! So, let's think about how we normally 'make' things. Let's say we want to make an origami box. We sit down, we decide "I'm going to make an origami box" and maybe we google or look in a book as to how to do it, then we carefully follow the instructions, and hopefully at the end, the box is made and we have a lovely sense of accomplishment. If, instead of this planning and following of instructions, I said "I'm going to make an origami box" and then just started randomly folding a piece of paper, in whatever way I thought would work, I would be "Making up (the steps) as I go". So, if we have someone who is trying to achieve a goal, without properly planning on how to make that goal happen, we say "They are making it up as they go". The use of 'as' here is like the word 'while' or 'at the same time'. The phrasal verb 'to make up' in this case means to invent, or to create something in your mind. The literal translation of "She's making it up as she goes" would be "She is inventing the steps in the process at the same time as doing those steps", i.e. she is not pre-planning the steps. I hope that is clear!

Children tell stories. They don't plan them out in advance. They don't have a consistent plot. They don't know what the story will be until they start to tell it. A frequent tip-off is the phrase "Oh, I forgot to tell you that..." "So, the princess was being chased by robbers, and she was riding her horse, and, oh, I forgot to tell you that it was a magic horse and could fly, so they started to fly, and they flew and flew and flew away from the bad robbers, and oh, I forgot to tell you that this was the magic Land of Chocolate, and and everything there was made of chocolate, and they saw a chocolate castle, and when they landed at the chocolate castle, oh I forgot to tell you that a prince who lived there named Prince Googoo," They just make it up as they go along. They invent the story while they are in the middle of telling the story. Among adults, it can be an insult. "She says she has a plan, but really she's just making it up as she goes along."

It means that she is improvising. The question assumes that she should (or could) know more than she does.