I think there has been some confusion here about concepts of AVR, DACs, etc. Let me see if I can clarify them.
Most two channel amplifiers are analogue. They expect to be fed with only analogue signals. If you are using a digital input such as a CD, either the player or an external DAC must do the conversion.
An AVR is a different beast. Since it has to deal with multiple channels coded as Dolby, DTS etc., as well as video data, it expects to receive it's signals in digital format. Internally it decodes the data, separates the video from the audio signal, and processes each independently. The video data is sent to the TV, while the audio data is decoded, converted to analogue, amplified and sent to the speakers. Please remember there are multiple processing going on here on two major data streams - the audio stream and the video stream.
Some of the mid and high end AVRs also have what are called analogue inputs. These are 5 or 7 channels of audio signals that it receives in the analogue form, much like the two channel amp we spoke about above. When you feed an AVR with analogue signals, the DAC processing inside the AVR is skipped and the data goes directly for amplification.
When you set an AVR into Stereo or Pure Direct mode, in many cases, the data travels through a separate path inside. This path usually is shorter as compared to the path used by other audio data. In addition, more to save energy than anything else, the video circuitry and displays on the AVR are shut off. No other changes to the settings are made or needed. Not needed as the settings in any case have no effect on the data as it follows a different path. There is no processing inside other than simple amplification.
A DAC is not specific to any frequency. It converts ALL the audio digital signals it receives into analogue - it is as simple as that. And DACs can be beneficial at all budget ranges.
Cheers
