This doesn’t seem to be working for me. When I send an invite (which includes a group membership) I get the account creation link and after putting in the details I get an email with a link allowing me to activate the new account straightaway.
In my admin account I don’t get a notification to allow the user.
When the must approve users site setting is enabled, invites can only be sent from staff accounts. Any invite sent from a staff account is automatically pre-approved. This is why users that you invite are able to log into the site without having to be approved by a staff member.
Users who signup with a username/password will still need to be approved though.
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Perhaps the invite dialog should indicate that fact in the text it displays to the staff member, so there is less confusion, and less future support we have to deal with here on Meta? 
@techAPJ can you add this to your list?
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