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I think I have a simple way of explaining some of these things...
Quartus II has a very simple auto-discovery algorithm for basic project setups. When searching for entity foo, it looks for foo.<hdl extension> in the project directory or in the directories defined by Settings -> Libraries. I think a better label for this menu item would be "Search Paths for Auto-Discovered Entities". Quartus II does not auto-find package, architecture, or any other type of file. You need to add those files to your Quartus II project explicitly.
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I have found exactly the same, meaning that it has, for me, just ignored library names in VHDL and just assumed everything is the work library, regardless of name. The auto discovery is useful, as I have been able to instantiate AHDL entities from VHDL and vice versa (legacy project with modern fixes, not the way I would recommend.).
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