In the example above, you use "it" to refer to the mistake that your coworker made. You can use "it" when you're talking about a situation or an event.

When you're talking about what the other person just said, you can use "that" instead:

A: I can't believe I made such a stupid mistake. Man, Kristen is going to flip out when she hears about this.

B: Aw, don't worry about that. She'll understand.