okay this took me 2 days of sorting out, and 2 semi-helpful emails from apple support, essentially guiding me to the source, but not the solution to this problem, which was that apple id security questions have to be set on the computer not the mobile device.
here's what i found:
1. just downloading an app from the itunes store didnt magically make the 3 security questions box appear on my computer. now i have 4 ipad apps i don't need on my mbp.
2. going to the itunes store as instructed by apple a very long winded route to managing your apple id which is actually in appleid.appleid.com, unless you like entering in your itunes password 3 times to get there
3. i solved my problem by choosing 3 security questions and inputting answers one after the other from the drop down box, hoping for the best as no list of 3 appeared....
4. then when i went to the ipad the 3 security questions (which don't match the ones i selected in Step 3) all allowed me to select them and i am able to continue no problem.
5. returning back to apple id now has 2 of the 3 security questions i set from the ipad in Step 4, so there is some, tenuous, connection there !!
first time device setup blues ! hopefully these steps will work from you, but there seems to be more than one way to resolve this issue