If a DAC does USB in and S/PDIF out, what does it do?
If it's just relaying digital audio through, assuming there is no corruption (possible with S/PDIF if there is jitter/wander on the clock) then there is no magic, the information is exactly the same as connecting directly. If it sounds different, then it's doing some DSP (Digital Signal Processing) though I'd assume you should have some control over this.    

The actual DAC (Digital to Analogue Converter) is a chip inside your box and is only used for part of the whole function - the product itself is not a "DAC", it's a USB audio system as Chris says in the comments. The DAC is used for converting the digital audio on your PC back into analogue signals.
It will also have an ADC (Analogue to Digital Converter) to perform the reverse for the inputs (mic/line in) and a DSP capable microcontroller to apply any filtering, effects and suchlike.    

For reading of digital information, it either works perfectly or it doesn't, there is no in between. For example, a cheap CD drive will read a CD just as well as an expensive one, it's up to the DAC and output amplifier to recreate the signal correctly.