I recently took the exam myself and much to my surprise, passed!
Yes, most of the questions are nonsensical and don't even follow the study material very well. The answers are often ambiguous and there is more than one correct answer. There's a lot of true/false, fill in the blanks, matching and multiple choice. DO study the laws and know them almost verbatim. There is no actual study material that comes from the department - study the pony club manuals D and HA. Know your anatomy and physiology, parts of the saddle and bridle and footfall sequences. The laws are the hardest because there's so much study material to download and commit to memory. You'll probably do better than you think - if you know your subject matter and the basics of horsemanship, you'll do alright with those sections. But I can't stress enough how much you need to study the laws because those are fill in the blank questions - know them COLD.
Also, some of the questions are in direct contradiction to what is in the Pony Club manuals. I really can't and shouldn't give actual examples - everyone needs to know their stuff and know it well. Licensing is a good way to make certain that there's a "standard" to which all riding instructors are held. There are a lot of freelancers out there, but you're far more credible with a license than not. Added to which, you can be fined for advertising or administering formal instruction without the license. Honestly, more states should look into the certification/licensing process, but the exams really need to be tailored to horse and horsemanship knowledge. The laws are important to know, but shouldn't make up the bulk of the material (at least they could be more specific about which laws to study rather than having you download 20+ pages of information).