What happens when you enter diagnostic mode is the microprocessor outputs from a specific memory location a timing value based solely upon CPS position. This value is called different things here but the correct term is Initial Timing. The Initial Timing signal is output through a back up chip inside the ECU, a chip also used to start the engine, control it below 500 rpm, and allow it to run should the microprocessor inside the ECU fail. This "hand off" to the back up chip is also what disables the ESA (Electronic Spark Advance) system when the jumper is put in.
The simple answer to your question is only the ECU gets affected. The CPS does not, nor do other sensors. Course, the moment the CPS is moved the initial value in memory changes. There is one important thing to remember though: Initial Timing will not be sent to the igniter in diag mode unless the IDL contact in the TPS is closed. The system also uses it to set idle speed in preparation for timing. It's no different than the old days when timing involved setting idle speed and disconnecting vacuum advance except now the electronics do it for you.
That said even in diag mode the ESA system will be enabled when IDL becomes open. It's why you can drive the car in diag mode and not notice a performance change other than maybe in idle. Anyway, all this is why you should never attempt to time the engine without first verifying there isn't a code 51 being displayed on the MIL. Course, it's best to avoid timing with any codes present.