1. Relevance to content: This is the single most important Ad filtering criterion that is used by the Google AdSense program. In fact, it is this filtering concept that gives Google AdSense program an important edge over the other advertising programs. The Google AdSense program determines the main topics/subjects of the website content and serves the Ads that are relevant to the same. Since Google AdSense is a global program, the relevance of Ads is also checked with respect to geography and the language of the content on the website. Note that AdSense can actually be used in a number of languages not just English.
2. Appropriateness of content: Websites are based on varying themes. There are websites that are based strictly on Adult themes while the other sites are family friendly ones. Since Googles AdSense program is open to all website owners and advertisers (who comply with the AdSense program policy), Google also controls the content of Ads to prevent Offense to anyone who sees the Ads. Google does this by using sensitive language filters and language experts. Google uses strict rules and guidelines for conducting an editorial review on the content of Ads. It also asks you to provide information about what kind of Ads (e.g. sexually-oriented, war oriented etc) you deem as inappropriate for your website.
3. Competition filter: Since Google serves Ads based on the content of the websites, its quite possible that the Ads of competitors get displayed on a website that sells a particular product or service. To avoid this, Google provides a facility to the website owners wherein they can specify competitors or advertisers whose Ads should not be displayed on the website.
4. Choose your own: You can also choose default Ads to be shown in case Google AdSense program is not able to serve Ads to your website (due to unavailability of suitable Ads, etc)