So is the purpose of a clay saucer, or sand just to eliminate potential hot spots?
The "mass" (saucer, sand, water, whatever) is a "heat sink" -- by getting it hot, it helps to maintain a constant temp (water at 212*) regardless of the level of heat from the coals. No heat sink, you get temp variation based solely on the heat source (burning charcoal).
Is the foil only to make clean up easier?
Yes, and if you place another laver of foil across the top of the water pan with a depression of 1" or more, it will collect almost all grease drips. This is actually the only foil that I use -- regardless of heat sink.
Do you set the saucer right in the water pan?
I do. Some have a saucer covered in foil big enough to sit on top. A 14" saucer is near ideal, I think. Mine is smaller and fits down a couple of inches.
Edit: I've seen a recommendation to use a double layer of foil to catch grease as one layer will almost always leak. It's true that it can develop pin point holes and leak. Needless to say, the cost of the large Heavy Duty foil can get to be a real part of your cook cost.
Rich