I think "short" should be accepted. The sentence doesn't specify so I would assume it refers to a person. My understanding is that "Nein, er ist klein," could mean "No, he is short." I believe when referring to a person this is preferred over "Nein, er ist kurz." (However I am only a German learner, so I might be wrong!)
The sounds blend together slightly with naturally-paced pronunciation. The slower pronunciations (if you have that option) make it clearer if you ever need to check. But your increasing knowledge of grammar will improve your listening comprehension too ('esst klein' doesn't really make a lot of sense).
Because in German, like in french, russian, etc. they don't say "it" for all things. Choice of pronoun will depend of gender of a noun. F.e. "Ich habe ein Pferd. Es ist schön" - I have a horse. It is beautiful. Since "Pferd" is neuter, you use "es" "Sie hat einen Hund. Er ist schnell" - She has a dog. It is fast. Here "Hund" is masculine, so we use "er" though in english it stays "it". And similarly "Du hast eine Wohnung. Sie ist groß" - you have a flat. It is big. Since Wohnung is feminine, we use "sie"
er, sie, es can also refer to something that you mentioned before and that has masculine, feminine, or neuter grammatical gender, respectively.
Dies ist mein Löffel. Er ist klein. Dies ist meine Gabel. Sie ist spitz. Dies ist mein Messer. Es ist stumpf. "This is my spoon. It is small. This is my fork. It is pointy. This is my knife. It is blunt."
The German course does not use recordings of real people.
It uses a TTS (text-to-speech) engine, aka a "robot voice" -- an off-the-shelf product.
It pronounces most things decently, but the words where it has trouble, you can't just "fix it" or "re-record" them.
Ok cool, so if the current method doesn't do things properly it's still fine to leave it that way because "that's how it is", instead of creating a manual recording for exceptions like this or changing the program so it doesn't screw up the one job it has? If society in general took the approach of "It's broke but I can't be assed fixing it" to everything, we'd still be in the Dark Ages.