They are located in Mobile Documents folder in your user library, but it's hidden by default. In finder click Go, Go to Folder, and type ~/Library/Mobile Documents.
That is where the files actually exist if you have Documents & Desktop in iCloud enabled, but they are not nicely organised there.
EDIT: just checked my mine (MBA on 26.3.1 with D&D in Cloud enabled) and there is no longer a Mobile Documents folder in ~/Libary so it looks like Apple is doing some more jiggery pockery with shortcuts than I was aware of.
EDIT again: I normally use Path Finder and see that ~/Library/Mobile Documents appears in Path Finder, but if I turn off Path Finder and use Finder, there is no Mobile Documents folder. It looks like Apple have made it invisible from Finder even with user library enabled, and invisibles made visible.
There is a ~/Library/iCloud Drive/Documents visible in Finder with invisibles enabled. Somewhat puzzled!
EDIT again again: On my back up drive Finder does show ~/Library/Mobile Documents/....but not on my boot drive, so seems Apple is now hiding it with Finder on the boot volume.
In normal use I use these:
-the “iCloud Drive” shortcut Apple puts in the Sidebar in the Locations section.
“Documents” is still an item in the pop-up from your user directory in the Dock.
-by adding “Documents” to Favorites in the Sidebar.
Ironically if you navigate to your user directory on a backup there is a ~/Documents folder!