I roll my own song and project data folders as well (instead of cake's 'per project function but the end is the same.
Yeah one massive folder would be pretty scarry.
- To the earlier question, the only time you get a chance to even see these save options is with save as'. Then there's the copy audio option box. So what happens if you don't change the name? I... guess you'll get the typical are you sure' response. Try it.

For me each project has it's own audio folder. But the "Clean Audio Folder" seems to completely ignore the path and search everywhere. It would be great if Cakewalk could make this work correctly. It seems broken.

Ancient thread alert! But to answer your question, Clean Audio Folder searches the whole system for projects that might reference the audio in the folder you're cleaning in case a project was moved without its audio or vice versa. Clean Audio Folder is just trying to save users from themselves.
 
I recommend you try using the Cakewalk Audio Finder (CWAF) utility instead. It's no marvel of modern software development, either, but it's far more flexible and powerful - and provides more info about how projects and audio are related - than CAF. The main difference is that it searches only one drive, and you can exclude folders from the search. Depending on how your file system is structured, it can be pretty easy to restrict it to just your per-project and Global audio folders.