Yes the diagram is correct.
Though I've never had personal experience with that DAC, I read reviews that its analog outs are very good if not excellent. And yes potentially better sound because your music will only pass the DAC and the int amp.
In your first diagram, assuming you use speaker line converters to RCA in lieu of the preouts, the music will pass your AVRs DAC, ADC. preamp, amplifier and level conversion before entering your int amp. So much path for noise and distortion to get through.