I can tell the difference between a CD and an MP3 file in my S60's standard audio system.
Curious to know how you did A/B/X testing in your S60.
This is a can of worms, and a discussion on double blind testing, level matching, psychoacoustics, objective vs. subjective evaluations etc. would take this way off topic and is better suited to other forums.
I can tell you that any content I've listened to in my S60 via Bluetooth is very sibilant and bright without even comparing to the CD.
As for CD, my first experience noticing a difference was when my 5th Gen IPOD's battery bit the dust. I was surprised at how good a couple of my favorite CD's sounded after having gotten used to the IPOD for a couple years. The 5th Gen still had the wolfson dac so the ipod was not the weak link in the chain.
My experience a couple weeks back with USB and high bit rate mp3 was a bit of a letdown compared to CD.
You are NOT comparing CD vs MP3, you are comparing different sources to play the music. HUGE difference. The fact that you did not use the exact same source to play all the music makes all your listening test void. And for the record, BT is the worse way to transfer music.
The Gen 5 IPOD is well regarded as a great source given the quality of the onboard wolfson dac hence my comment regarding the IPOD not being the weak link. Unfortunately, absent the ability to play a flac file via USB I won't ever be able to do a blind test in my S60 like I can with my home systems.
But how is the iPod connected in the car?
Via the same USB slot the USB stick would be plugged into. This is the pre lightning 16 pin connector so I'm reasonably certain the IPOD's dac is doing the conversion to analogue.
I will (almost) agree with you. I see it happening one of two ways.
1) iPod DAC converts sound to analog, send to car stereo through cable, car now converts sound back to digital, then analog, then plays through speakers.
2) iPod bypasses DAC, sends digital signal to car through cable, car stereo converts to analog and play music through speakers.
I'm both scenarios the car is the final DAC. For scenario #1 I would be shocked that any car stereo has a pure analog path.
So no matter what you connect to the car stereo, it is still the 99 cent DAC inside the car stereo doing the final conversion to analog.
EDIT: Noticed you said its plugged into a USB port so #1 would have to pass a digital signal to the car's DAC which means its bypasses the iPod's DAC. If you used the headphone jack out to an aux-in then #1 would be appropriate. Either way, I still say the car's DAC does the final conversion.