Well, it is probably both. What they're actually doing is looking for certain defects, to determine whether the piece of stock is acceptable for their woodworking project.
What defects should you look for when you buy your lumber?
Keep in mind, however, that a defect isn't always a problem. Some defects are actually beneficial, as they can lend character to a finished woodworking piece.Case in point: a number of woodworkers like to recycle long-leaf pine stock from old barns and houses. Once any nails and screws have been removed and the stock has been planed, there are likely to be some old nail holes remaining in the stock. In many cases, these defects are left to be visible in the finished piece, as they lend a lot of character to the project.
In the end, the choice of whether to use stock with a defect is purely up to you.
Pressure-treated lumber was invented in the early 1900's as a way to try and make traditional (meaning inexpensive) softwoods more durable when installed in outdoor installations. This pressure-treatment allowed varieties of wood normally very susceptible to water damage to be used on outdoor projects such as patios and decks. 
If you walk through the lumber section of your local home center and take a look at most of the construction-grade lumber found therein, you're likely looking at various types of SPF Lumber.