Kids in an adult show and tragedy in the air. Two difficult series of choices.
What if there are kids in an adult show?
It is always difficult if you have a bunch of kids in an adult show. The magician has to fight the time-honored misconception that magic is primarily an entertainment for young kids at a birthday party. Never let the adults in the audience take the irritating and patronizing stance of merely watching the kids reacting to the magic show; make sure they realize that the adultsare the focus of your material.
The very worst thing that can happen in a situation like this is if the kids are ushered into occupying the front rows of the crowd. Generally speaking, if kids are seated with their parents scattered throughout the audience they behave just fine and you don’t have to adjust your show much. On the occasions when I have been stuck with a couple of rows of kids in front of my target audience of adults, I have a tendency to pretty much ignore the youngsters and quite literally work over their heads. Just bringing them into the action on one or two occasions eliminates any perceived insensitivity in this maneuver.
The major concession I make in these circumstances is to have a trick with me that I can add, that directly plays to the kid quotient in the crowd, and present it with a slight wink and a nod to the adults as if to say, “Let’s humor them a little!” I use either the Cards Across or the Six Card Repeat in this manner; both tricks I always have with me but seldom slot directly into the running order of my main show.
I probably don’t need to mention that you should cut any devastatingly unsuitable material if you find a contingent of kids out front. You might not offend the kids much, but you will almost certainly upset adults who are offended for kids in the audience who aren’t actually their own offspring.
Should I be funny if the group faces tragedy?
Yikes, questions don’t get much tougher than this. The answer is usually yes if that is what is requiredof you, but only after you 
have allowed the audience to appreciate that you understand the situation and have reservations about doing so. I performed to several hundred New Yorkers the day after 9/11 and I certainly had NO desire to do my comedy show. My employer made it clear that it was not my choice so after acknowledging that it didn’t seem right to be laughing, I did the funniest damn show I could. Somewhat to my surprise, it worked just great. I was amazed and touched by how many people, including several who had lost friends and loved ones, came up to me after the show and told me how much it meant to them to have got an hours escape from grim reality into laughter. On that occasion my employer was right and I was wrong, and in fact the comedy I performed truly proved cathartic. However, it was certainly not an easy call and in my opinion, it could have resulted in a psyche-scarring failure.
REMARKABLE MAGIC 
Thanks Nick for another essay on a subject almost NEVER addressed.
I have been in situations when there were only one or two children.
You advice is still relevant. In these cases, many performers totally ignore the children, play only to the adults, with adult style humor. One needs to be sensitive to these situations, even though parents are not! Today, they even ignore the rating system for films. (I remember seeing children brought in to a Buddy Hackett Show in Vegas! Someone was not THINKING!)
Keep up the great advice!
Yes indeed. It is a very real problem to solve!