"Your application has been reviewed. Now you need to create your first ad unit and implement the ad code on your site for the full activation of your account. Only blank ads will appear at first until the final approval goes through. Once your site is fully activated, you'll receive a confirmation email and begin to see live ads. "
I've placed the test ads on my page as requested,
Does this mean that they've already viewed and approved my website and are now waiting to see if I know how to place ads on them before my final approval?
Or are they seeing if I know how to place ads on my website before they've even reviewed my website?
They probably want to see what the site looks like with the ads implemented. I am sure they are not trying to see if you know how to implement the ads code.
They will check the number of ads per page (keep it to one per page at first) and also that the ads don't contravene any of their terms of service. Position the ad so that it is clear to the viewer it is an ad and don't call attention to the ad on the page.
Impossible to say for certain because G dont give out that information.
But look at it like this, if your content was not acceptable you would be unlikely to have got to this stage. So probably they are happy with the content and now just want to check where / how you implement the ads.