When AVRs, like the OP's Denon 3802, get analog signals, the first thing they do is digitize the signal. All the preamp functions, such as tone control, bass mangement, etc. are done digitally. After that, the digital signal is converted to analog and sent on to the amp section.
If a digital signal (such as PCM from a CD) is sent directly to the AVR, it stays digital through the various processing steps, and is then converted to analog as above. If this digital signal is first converted to analog by a DAC on a CD or DVD player, or through an external DAC, the AVR will re-digitize it, process it, and convert it again to analog. (Highfigh did mention this in his post.)
There is one exception to this, Pure Direct mode. Various makes of AVRs use different names for this, and I'm not sure if the Denon 3802 has it or not. They bypass digitizing an incomig analog signal, perform minimal processing, and send the analog signal on to the amp section with minimal processing.
Unless something like a Pure Direct mode is available, using an external DAC adds additional, unnecessary processing steps to the signal path.
Is there a reason why no one has mentioned this to the OP, or am I missing something?