yeah it's bullshit.
anyone in the business knows that they hardly test that it starts up without crashing and that's about it.
logging in etc - too much trouble.
What they probably do, and I'm guessing here, is fire up an automatic UI testing tool that navigates through the app and clicks at stuff in order to provoke crashes and other bugs. In addition to that I would imagine they run the app description and the app icon through some sort machine learning system that tries to identify blatant ripoffs, re-submissions of apps that have been banned in the past, etc. Apps that don't pass these tests are looked at manually.
Again, these are my guesses.
They also do background checks on new App store accounts to try to tie them to people who have been banned for breaking their TOS.
The bad app makers are of course one step ahead of this at any given point in time. It's not hard to think of ways of probing the system by using fake accounts.