So here is (what I believe is) the correct answer.
This is actually a surprisingly tricky question.
What does the Law say about taking a PK ?
[LAWS]
Law 20
TAKING A PENALTY OR FREE-KICK
5 A penalty or free-kick must be taken without delay.
6 Any player from the non-offending team may take it, other than for a free-kick awarded for a mark.
7 The kicker must use the ball that was in play unless the referee decides it is defective.
8 The kicker may punt, drop-kick or place-kick (other than for touch) the ball.
9 The kicker may kick the ball in any direction.
10 Other than the placer at a place-kick, the kicker’s team must remain behind the ball until it has been kicked.
11 The ball must be kicked a visible distance. If the kicker is holding it, it must clearly leave the hands. If it is on the ground, it must clearly leave the mark. Once the kick has been successfully taken the kicker may play the ball again
[/LAWS]
Note there is no sanction for any of those Laws, so they are requirements rather than infringements.
So the answer appears to be
E Take the PK again
But now we have a problem as that answer clearly flies in the face of convention : we never call back a quick tap because players are in front of the ball.
So for me (and this one is clearly my opinion, not an official answer, as it is not supported by Law, indeed I am advocating that we ignore Law 20.9 . ) I am going to follow convention and play on
So my decision is now to choose one of
B Play on (but offside in general play applies)
C Play on, but blue players must retire until put onside
D Play on, but blue players must stand still until put on side
At this point it's probably worth mentioning that until quite recently the Law used to say C, players must retire. That's a possibility we must therefore take seriously, but I think we have to reject it : we can't penalise a non-retiring player for an offence that is not in the Law Book , and the same must go for D
So IMO the best answer is
B Play on, but players in front of the kick are Offside in general play so cannot interfere with play