You can finish the forest, there's another major boss there. You can calso take the key from the Capra demon and head down to the depths and Blighttown.
I agree that it's interesting that you had that choice. My run through that mission got hot. The NPC made a comment about it when I got back, but that was it. No consequences other than a line of dialogue. I don't know what I wanted to happen but I guess I wish it was more impactful.
It really whipped the llamas ass