Here's an article that addresses some consequences of IE cache overflow: Tune-Up Tips
. As you can see, it's not just a matter of worrying about how files get overwritten when you're at the limit.
It will delete the temporary internet files at shutdown only if you've configured the program to do that - otherwise they will remain and be there when you reboot. I personally delete them at shutdown myself.
But what IE would do would be as you say, to overwrite the oldest files with the newest ones within the assigned limits. I strongly suggest you don't test those limits. Either set up a process to clear out the temporary internet files regularly (my recommendation) or increase the allocated size (but that just delays the problem as you eventually reach the new size and making it too large will slow down IE noticeably). For size, I'd use what the system specifies as the recommended size and then do a cleanup every week or two (more if you do a lot of browsing) - caching doesn't really save that much time in terms of loading pages and keeping it clean is a better practice to adopt.
I hope this helps.