Well here's the thing.
If you're in the Apple camp, there are lots of possibilities.
If you're using a 30-pin Blue or Red collar AMI cable, then your FLAC file is converted to analogue using the iPod internal DAC, sent as analogue audio through the Audi AMI cable and system, it arrives at the MIB as analogue, converted to digital (ADC unknown) to be put onto the MOST bus to the amplifier, then converted back to analogue (DAC unknown) to get to the speakers.
If you're using Bluetooth to stream your audio, it's most likely that the apt-X codec is being used for the stream, so FLAC is converted to apt-X and then converted again to whatever the MOST bus codec uses.
If you're using a iPod/iPhone with Lightning connector, and using a Red collar AMI cable, then you must use the Apple Lightning to 30 pin adaptor, in which case the DAC is being done in the adaptor itself, using a Wolfson WM8533 DAC. This is then sent as analogue audio through the Audi AMI cable and system, it arrives at the MIB as analogue, converted to digital (ADC unknown) to be put onto the MOST bus to the amplifier, then converted back to analogue (DAC unknown) to get to the speakers.
If you're using a iPod/iPhone with Lightning connector, and using a Green collar AMI cable, then DAC is being done in the Green Collar Audi AMI cable itself (which explains the bulkiness, DAC unknown but likely to be a Wolfson WM8533 DAC). This is then sent as analogue audio through the Audi AMI cable and system, it arrives at the MIB as analogue, converted to digital (ADC unknown) to be put onto the MOST bus to the amplifier, then converted back to analogue (DAC unknown) to get to the speakers.
If however you've encoded your music onto one of the SD cards using a high quality, high sampling, high bitrate codec (say MP3 320 48k), then you've cut out much of the DAC-ADC-DAC process, I would suggest that music stored on the SD card will yield a "better" quality of sound, even though it didn't start out life as lossless.