My PS3 sounds the same as my $1000 Pioneer Elite DVD player (except for fan noise). As long as the bits are reaching the receiver correctly, all transports sound the same. So I know the PS3 can correctly handle CD audio.

The original Xbox on the other hand always sounded...odd. It used 44.1 to 48 kHz up sampling, that's probably the source of the problem.

Pioneer PDP-5020FD, Marantz SR6011
Axiom M5HP, VP160HP, QS8
Sony PS4, surround backs