After an item has been submitted for review, a user that has item approval permissions can either approve, reject or return the item.
Rejecting and returning an item essentially do the same thing - they send the item back to be edited in draft state. However the idea is that an item will be returned to be modified slightly before being approved, whereas an item that is not suitable at all will be rejected.
Approving an item will allow it to be used in item sets.
Approving item sets will allow them to be used in exams, and approving assets will allow them to be used in items.
When an exam is waiting for approval it is marked as having a 'Pending' state.