My results differ.
OK, let's see if I can insert screencaps to help things out.
First, I have monitoring enabled at all times, not just startup:
Then, here's a snippet of my library. We're going to deal with the first song from Fjaak, and here's what their album looks like in my library:
If I select the first song and check its properties, it shows me the directory it lives in.
If I go to that directory (Linux subshell, Windows 10) and look, there it is. And if I delete that directory, there it isn't, just as expected:
BUT...when I go back to the library, the songs are all still listed. If I try to play the first track, it just skips all songs on down the list and turns them all grey:
And if I go select the first song and check the properties, the song is supposedly still in the same location. It's not deleted, it's not in the Recycle Bin, it's listed as still being there.
If I hit F5 or leave and come back from another playlist, the album is still there. Even if I quit and come back, the album is still listed in the library, even though it's unplayable.
The only way to delete the album from the library is...well...to do exactly that: delete it from the library. Auto-monitoring the directory only updates additions, it does not update subtractions.
Which brings us back to the original issue: why can't I just drag sound files from Windows Explorer directly into a playlist? The workaround seems to be "Make a smart playlist of everything added in the last day, and hurry up and get your work done before the day ends or stuff will slip out of the working playlist and stay unnoticed in your library with no housekeeping done on it at all."
It's not a showstopper, but it's been a capability of iTunes forever (and still is that way in the >10.7 world), so that's what I'm used to.