There really isn’t such a thing as a “correct” system setting. The correct setting is the one you like best. A better word is “recommended” setting. You might hate the recommended sound settings, and if you do, pick the one you like best.
The recommended sound settings should provide the best re-creation of what the movie and music studios had in mind. Each receiver manufacturer calls their sound settings something different, but the idea is the same. Your owner’s manual will tell you what they call it.
Here are the recommended sound settings:
Movie playback: Use the auto surround feature. It should pick the best surround sound format available. This setting should apply to movies from your cable box, satellite box, DVD player, Blu-ray player, etc.
Music playback: Use the 7 channel stereo setting. Some receivers will call it “All channel stereo” or “Extended stereo.” Some receivers, like Yamaha, will have a sound setting that makes compressed music (like from an iPod) sound better. Yamaha calls it a compressed music enhancer. If you are using an iPod, this setting will make your music sound better.