The generator uses a very wide bandwidth, low power AM RF signal with the tone. The receiver is basically a very insensitive radio receiver. The probe on the end of the receiver is a heavily carbon-impregnated piece of plastic connected as an antenna.
These are DC and AC isolated contacts so they can be used on powered lines that carry everything short of live AC line voltage. They CAN be used on AC lines that are dead though.
There are similar devices where the transmitter plugs into a live outlet and the receiver is then taken to the load center and passed along the breakers until a tone appears. This is great for locating unknown breakers tied to a particular outlet or fixture.
The toner system does not need access to the traced wire conductors. These are easily used to locate a wire in the middle of the bundle. The stronger the tone, the closer you are to the wire.