Truffles are located by their smell. When they ripen they emit a very powerful, fragrant, aroma which comes up through the soil.
The dog will mark the spot where a truffle is. The dog handler will then sniff the ground to confirm that the truffle has reached maturity before carefully digging it out of the ground.
Truffles can also be found by looking for truffle flies (in Europe) as well as suing female pigs.