You're absolutely correct in teaching your children that service dogs in public are working and should be left alone; however, if that dog's handler invites you to "play" with the dog, that's not wrong of them. Dogs are incredibly smart and they do differentiate between "work" and "play," but it's also dependent on the handler to keep them in line AND let you know upon approaching if you can pet/play or if the dog is currently in work-mode. The couple you witnessed could have been doing it correctly, or they could have not been. To me, DL seems like a perfect place to train a dog as it opens them to a wide variety of tastes, smells, and sounds.
My best friend founded an organization that trains service dogs for a variety of uses (everything from physical disabilities to emotional disabilities ((big successes with persons with PTSD)) to mental disabilities and onwards..), and so throughout college we always had at least two dogs in our apartment, and often more who were taken out of their training program for a night or two at the vet or something. I like to say I trained them all just for those situations mentioned above

and I have witnessed them go from play to work and vice versa with a simple command. It's really quite amazing.
I think it's really a situation akin to (dare I say it) GAC abuse. You can't ask if the person needs it. You can't demand them to show proof of disability/service dog certification. But the benefits to those who truly do have a NEED far exceed the issues with abusers. Those who cheat the system will get theirs in time - maybe their untrained dog will do something incredibly embarrassing that they'll never risk it again.