A cutless bearing is a tube with a fluted rubber lining that holds the propeller shaft where it leaves the boat, in a strut (P-bracket) or at the end of the stern tube. Water flows along the flutes and lubricates it, so it needs no grease.
People spell it cutlass too. Practical Sailor's article on it is titled "Cutless (not cutlass!)", and both spellings mean the same part.
What a surveyor checks
With the boat hauled, grab the propeller or shaft and shake it firmly up and down and side to side. Practical Sailor calls about 1/16 inch of movement borderline. A visible wiggle or a thunk means replacement. Uneven wear, on top at one end and the bottom at the other, points to shaft misalignment. The strut gets a hard knock too: it shouldn't move.
On the sea trial, vibration in gear is the other sign.
In the report
"Port shaft, cutless bearing, about 3 mm of play when shaken, wear heavier at the aft end. Replace at this haul-out and check alignment afloat." See worn cutless bearing.