I'd just tell the aunt what your daughter meant - that the cat smells the dog on your Aunt and freaks out.
If you have explained this to her, then I doubt there's anything more you can do but throw your hands up until she sees sense.
I don't really see this as an alcoholic AA/Al Anon issue Maggie.
I can't really see it as an honesty issue either - it's a silly misunderstanding and overreaction - it's just one of those ridiculous things that tends to get blown up out of all proportion in some families - like mine...
I hope peace reigns again soon
D