To the best of my knowledge, it all depends on which, receiver or source, does a better job of processing the signal. The settings in the source should only have an effect if you connect the source's multichannel analog outputs to the receiver's multichannel analog inputs. The source is doing the decoding and digital-to-analog conversion thus bypassing the settings in the receiver.
If you use an HDMI or digital connection (optical or coaxial), you are bypassing the source's settings and the decoding and digital-to-analog conversion is performed in the receiver and it's settings are in play.
There should be a setting (or settings) in the source where you set which ouputs you are using (HDMI, digital, or analog).
"People generally quarrel because they cannot argue." - G. K. Chesterton