What Shields do:
For starters, a projectile striking a soldier is treated the same no matter where it strikes. Head, chest, shield, foot, the calculations are the same. Source and explanation:

Originally Posted by
Jack Lusted
... Collision detection for projectiles has always been done against the soldier entity. We do not model whether the projectile has hit the actual shield or not ...

Originally Posted by
Jack Lusted
A 3d model check is out of the question, that kind of complex collision detection for individual soldiers just isn't feasible with the size of battles we have.
What shields do is add to armour if an attack comes from the front or left side (melee combat they also add to melee defence). There is no change to a units health and shields do not wear out under repeated impacts (amout of armour added is constant). Source: Testing (with 1 HP), database (shield stats), and Jack's explanations.

Originally Posted by
Jack Lusted
- Shields only apply against attacks from the front and left
- In melee they provide a bonus to melee defence and armour
- Against missiles they give a bonus to armour
Update:
Since Patch 5, shields have had an additional projectile defence which can entirely negate a projectile strike. All shields now have a fixed chance to block missile attacks from the front and left, greatly increasing a units durability under missile fire. This stat ranges from 5-10% for cavalry shields and pikemen, up to 50% for most heavy Infantry shields (hoplites, Roman Infantry, and the like), and 55% for tower shields (used by several spear units). Units with access to the testudo formation get bonuses to this stat while using the formation (85% total from Roman Infantry unmodded).
Damage and health:
Weapon damage in this game has been split into two types: Normal, and Armour piercing.
Normal damage is checked against the targets armour to see how much is applied. It is not a simple yes/no check, but a roll to see how much gets through. Source:

Originally Posted by
Jack Lusted
Armour is not a straight block on damage, we do a dice roll against the armour total, so for 40 armour you could get anything from 0 - 40, and then that is taken away from damage. Having higher armour will give you a much better chance of blocking all non-AP damage.
Increasing damage or decreasing armour increases the average normal damage that will be applied to a units health. This is what my first test was looking at. If a unit has a shield, missiles coming from behind or to the right of a soldier will have a greater average applied damage as the soldier will not recieve the bonus armour from the shield.
A slightly more in-depth explanation of how armour negates damage:Say that you are against a weapon damage of 25 (normal damage). If you have amour of 100, (avg 50 damage reduction), most of the time you will fall above the 25 damage reduction required for full negation of damage (75% chance), where if you have armour 50, you only have a 50% chance to take no damage.
Armour Piercing(AP) damage is a new concept that can only exist because of the health system. AP damage is
always applied to a soldiers health if a collision is detected. Source and reasoning:

Originally Posted by
Jack Lusted
In previous Total War games it has been perfectly possible for a soldier to be hit endless times and not die, the implementation of the health stat and weapon damage shows a soldier being worn down by multiple hits.

Originally Posted by
Jack Lusted
- Armour blocks normal damage but AP damage is always applied, this is true for both melee and missile combat.
Update:
The block chance added to shields means AP damage can now also be negated. Just not by armour.
The
health system is also the reason why the first few volleys of projectiles always cause significantly less casualties than subsequent volleys. Even if the full damage total is applied most projectiles have a lower total damage than each units health. The only casualties you will see on the first volley are from multiple projectiles striking the same soldier.
Summary:
Collision is done at an entity (soldier) level, not at an equipment level.
Armour is the chance to negate an amount of normal damage. AP damage ignores armour and is always applied to a soldiers health.
Shields increase armour and grant a block chance against missile attacks from the front and left. The bonus is constant.
Unit health is independent of armour and shield.