By my maths, there are only four people living in the property, so it doesn't sound like a HMO to me! On the face of it, not an excessive number of people to be living in a normal two-bedroom house and sharing facilities.
However, the suitability of the rooms being let does sound questionable, as is the owner's benefit status, but I would not rush in with the automatic assumption that she is flouting the law.
Tread carefully and query this with the local council, as others have suggested - I imagine that if she is not abiding by any rules, they will take things from there, but she might not be doing anything wrong ... .