Try changing the output on the PS3 to bitstream (instead of LPCM). Then, you should be able to choose a sound mode on the receiver.
I'll have to look at your receiver's manual to see if bitstream is a good universal setting. LPCM is the best choice if your receiver can handle, but not decode, the newer lossless codecs (like Dolby TrueHD) because you wouldn't be able to listen to those if you used bitstream in that case.
For a CD, though, bitstream would transfer the audio just fine.
EDIT: I'm leaving right now for an hour or two, but I can check that manual if necessary when I get back.
EDIT 2: I forgot to mention - welcome to the forum!