You are correct. The red flag is an indication of the failure of the gyro slave system, IRL. I have no doubt that they will correct this with the few other minor issues.
Update:
I loaded up the Duchess tonight while preparing the upload file for my first Duchess repaint (Currently posted at Flight-Sim.org) and tested the Heading flag, and found that it actually works properly now. I recall it not working properly during the Beta test builds, however they must have corrected it before the final build was released. Please see below for the result of some basic testing that I ran...
Step 1 Normal State. AC Power applied, Nav 1 tuned to a local VOR with good signal. Gyros set to slave. NO FLAGS
Step 2 NAVCOM1 CB pulled. Nav signal lost. NAV Flag displayed
Step 3 NavCom1 CB reset. GYRO CB pulled. Gyros unpowered HDG Flag displayed
Step 4 Return to normal. All breakers reset, NAV 1 set to a active local VOR with good signal. No flags
All Breakers set, but NAV 1 set to an invalid frequency, so no VOR signal fromNavCom1. NAV flag is displayed
Now, HERE is one issue that does need to be rectified, and I will do all I can to see to it that it does get corrected...
All CBs are set, but AC Alternator off, No AC Power. Gyros set to FREE so the heading is drifting way off heading. Should have HDG flag but do not.
I hope that this helps :0)