Cheating refers to performing any action not in the way the developers of the game intended the players to. It commonly refers for obtaining items, earning extra coins, accessing unavailable or limited features (such as member-only features) and so on.
Cheating is strictly against the rules of Club Penguin and a player that cheats gets banned for 72 hours.
Cheating involves using third party programs such as trainers, which gives a player advantages (such as having large amounts of coins without earning it). The most well known cheating device is Penguin Storm. It is mostly used at parties by non-members. The consequences include being banned for 72 hours (first offense) and forever (multiple offenses).
The main two ways that people cheat on Club Penguin is through the use of trainers or through PCL, the Penguin Client Library. In addition, WPE Pro can be used to modify or inspect the packets being sent or received, which can be used to develop scripts, or to cheat directly. All cheats to get free memberships or old items have been blocked for a while now.
Cheat Engine is another hacking program that was used to get certain items. It has not yet been confirmed to not work on Club Penguin anymore.
Follow Bot is a new unknown one used to clone penguins into formations of bot penguins around the main user. They move, talk, and throw snowballs at the same time. This is the most common form of cheating.