Is there a compatibility issue with DAC's

Standard (redbook) CD is recorded with 16bit at 44.1kHz and that's what you got on the digital RCA output of your Parasound. DACs higest ratings only show top speed and numbers of bits they're capable of and will always work with your player. Digital output to DAC on your Parasound is 75 ohm RCA. You need 75 ohm digital cable with RCA plug on one end and whatever your DAC requires (most likely BNC) on the other end. DACs are usually 24bit/192kHz capable except toslink where they're often limited to 96kHz. You don't have toslink unless you have ADAM option but I wouldn't use it - coax is better.

Yes there is - some will not take some file types. You won't find many who will admit it but some gear does not work together well under some conditions and you in the worst case you can even get drop outs. Some DAC's have a reputation of being more robust than others. A good solid (robust) and reasonably priced product is the Benchmark line of DAC's.