The Type 4 engine, in all of it's applications, used a cooling configuration similar to it's smaller and older brother, the Type 3. This setup was used to keep the overall height of the engine to a minimum. The limited height was necessary for the original 411 station wagon (or Variant), as it allowed the rear cargo area to be utilized.
A fan was bolted to the end of the crankshaft. This fan also had a pulley groove bolted to it, so it could turn the alternator while running. An aluminum(?) fan shroud was bolted to the crankcase, and this was used to redirect the cooling air up and on top of the cylinder heads and cylinders. Sheet metal, commonly referred to as engine tin, also aided in guiding the air to the top and to the oil cooler bolted to the left of the fan, behind the fan shroud.
The shroud also housed two flaps, that were connected to a thermostat under the right hand side cylinders, on the oil sump. They were connected by a cable that pulled on the flaps and opened the shroud for cooling. This assisted in quicker warmups and long life.
It is critical in any air cooled engine that the air intake only receive cool air, not hot air that was expelled from the engine. It's that reason that there is engine tin all the way around the engine and a foam seal to fill the gap between the body and the tin.
This cool air was pulled in from the side or the top of the car. It entered the fan, was guided to both the oil cooler and the cylinders/heads and was expelled out the bottom. If you don't seal up the engine bay, the fan will take the hot air from under the engine, which is now no good for cooling purposes and try to use it to cool. This makes the cooling system ineffective.
At a later date, I will try to add some photos and diagrams to better understand how the cooling system works. Until then, I encourage you if you want to familiarize yourself with the cooling, find a complete engine and look for yourself. VW did a great job engineering the cooling system, so critically look at any change you make.