I don’t envy you this one. Though I don’t think it’s fair to say this isn’t about you. Sadly now, it is. You have to live with how you respond, and you have to live with the outcomes - how this affair affects both your friendship with your friend and your family friendship with her husband, and your relationship with her kids.
I don’t know the answer and haven’t experienced the exact situation but when someone close to me started an affair with a married man, then started a family with him, I judged it quite hard. I learned the hard way that this only affected our relationship, not that person’s behaviour. I learned to put aside my strong feelings about affairs (my mum had one when I was a teen and now I have little time for them - yes people’s lives are hard but make the tough choice and do something about the issue, not the easy, selfish choice and run away into a fantasy life. However, that’s for another topic...).
However, I didn’t have to face the other party and pretend everything was good.
I know I fear this situation (partner has affair), and my supposed friends saying nothing to me. I imagine if I found out the full picture they’d no longer be my friends. So I think that’s what you also have to consider. If he finds out you know, and they deal with it in counselling, I’d assume it’ll change how he feels about you and affect your family friendship.
I think the posts above offer great advice in trying to support her and find out why she’s doing it / why she’s told you. At the same time I don’t think that also requires a total opt out from being honest with her. If you’re really good friends then the hard chats are what real friendships are about.
There is an outcome where you accept you and your friend have different values but still love each other for many other things (that’s where I ended with my situation).
But regardless this is now also about you. You have to live with your decisions and the consequences.
Part of me thinks it could help to do an outcome comparison and see how you feel about each potential outcome - eg judge hard, loose friend, but keep her husband as friend; do nothing at all, he doesn’t find out, nothing appears to change (except your view of her maybe); do nothing he does find out, keep her, lose him, etc etc etc.