No, that’s not *quite* true.
Selecting “digital” means that it passes through the audio track to whatever device it goes to. The device has to have the ability to DECODE that audio track. It’s quite possible your TV can’t decode a DTS or AC3 track you’re passing, in which case you would hear no sound.
Selecting “stereo” actually decodes the sound and sends it out “normally”. So, the first thing you need to make sure of is that whatever you are playing has a normal, stereo track. If it doesn’t (if it’s AC3 or DTS surround) you will not hear anything from your TV.
Or, try it this way – connect the HDMI only to your receiver (which apparently CAN decode properly) and choose “Digital” and if you hear sound then things are just fine.