I'd only use live encoding for games.
For CD's I'd make sure your avr receives 2 channel PCM, 44.1khz, bit perfect
For movies I'd leave it alone as well, let your AVR apply post processing. So if I have a movie that's in 2 channel PCM, DD or DTS, or even mono I leave it alone and let the Lexicon processor apply Logic 7 ontop of the signal.
You don't want to be converting/upscaling audio when it's not required.
One way of checking your audio is left alone is playback a DTS 2 channel CD. Or if your AVR has a HDCD chip, play HDCD 2 channel audio. If those two don't light up then you know re-sampling is being done.
For example if I play DTS CD on my CD player, the DTS light on the AVR lights up, and it shows 2 channel DTS, and whatever the khz is.