"Dårlig" is functioning as an adverb here, not an adjective, so it does not decline.
"Terrible/terribly" would be "fryktelig" or "forferdelig", which indeed have a stronger meaning.
Connor, the app won't let me reply directly, but I think it's because you're describing the behaviour not the children.
I think it's because it's an adverb (so yes, describing the verb – behaving) and not an adjective (describing children).
For listening exercises, only the sentence being read out will be accepted, which in this case uses "barna". I agree that the audio is a little ambiguous on this one though.