Ok, lets break it down, all the links are going to be to the source code.
wp_list_pages() only uses get_pages() to (sic!) get pages, walk_page_tree() does the hierarchical structuring inside it. The further course of the process goes Walker_Page – and the generic Walker of course -, unless a custom walker is used. Inside walk_page_tree() you will see, the walkers walk method is called, which subsequently calls the display_element method. Mainly in the display_element, but also in the walk, method you find the handling of the depth.
To make it short: the depth is handled by iterating, display_element calls itself until the end or the given depth parameter.