It's an incredibly tedious but somewhat rewarding process and automated tools have never really been able to do this from start to end just because of the differences in how different material wants to be treated* (*this is 2008 falk speaking, and there have been some insane advancements in audio related shenanigans in the ~15 intervening years) keysounds vs clips not triggered by the player in that particular chart Keysounded rhythm game audio engines are essentially glorified samplers with a shit ton of different samples (up to 4 digits in some cases), you're lucky if there's any kind of real time volume or effect control even for e.g. inconsistent playing doesn't sound TOO disjointed by adding a little extra length +fade, to each individual clip, etc.

You're both correct, since essentially you're generally going to get stems from whoever did the music since that's something the music industry is familiar with, then someone internal usually has the job of chopping it all up and possibly (or not) going the extra mile to make sure e.g.

Beatmania iidx 3rd style soundtrack