After reaching the top of the waterfall area, to the left of the switch you pulled is a tall tree. Swipe at it with your sword until you make contact.. A ball will fall from its branches. Take the ball up the stairs, into the opened room, and drop it. You will notice tree arches between the two stairs going to the upper level of the room. Go to the middle arch and push on one side of it to make it revolve and reveal a secret room. Go back and take the ball (and Yorda) and enter the secret room . Hop into the idol pedestal with Yorda and a basket will appear. Take the ball and shoot it into the basket. A mace will fly through the window. It is more powerful then the sword and the 2x4. You can take out a standard Ghout in three swings.

To get the Mace, you do not need to do the "get the ball in the basket" routine. Before getting on the idol pedestal, actually place the ball in the square on the ground, where the basket will appear. When you step on the idol pedestal, the ball will fly up and land back in the basket.