A custom audience is what Facebook would call a list of particular people who have been identified externally to create your target universe. Essentially there are a few ways to target on Facebook.
One is using Facebook's own targeting applications, for example, picking different likes that you want to target, or wanting to target people in Alberta but not Saskatchewan, that kind of thing. That doesn't involve specific lists of people. It just involves attributes, and then Facebook pulls people who match the attribute. In that process, you don't engage what is called PII, personally identifiable information.
The other way you can target ads on Facebook and other sites like Facebook is through custom audiences. This is where you have a list of people, for whatever reason, whether it's because of an algorithm or simply because of an observed attribute you want to target. You upload a list of specific individuals from your own database into Facebook, and then Facebook targets only those individual people. That directly involves the management of PII.