IMHO this woman is disrespectful, ignorant and bordering on rude. Honestly, I don't get some people. All they think about is themselves. I would NEVER just sit by and watch my dog, or my child for that matter, do something that isn't appropriate. I would definitely right the wrong and apologize profusely, and at the very least, address the issue. I wonder what she would do if the tables were turned?? Not that I'm suggesting that you do that, just saying. If you aren't so keen on the owner, and who could blame you if you aren't, I would nip it in the butt now before this person puts you in any more situations. I really dislike it when people take advantage of nice people like you!! I understand that this may be difficult thing for you to address, as you are accommodating, but do you really want/need to be at her next whim and beckon call??
I heard a quote once and it has come to mind in more than one situation, - "You can't change stupid". Perhaps it fits here?? All the best with this woman and the situation she has put you and yBF in.