/etc/pluto/xine.conf is the right file. I verified it in the source code.
I also verified that the problem you're having because Xine_Player is reconfiguring that file on the fly based on the settings in web admin.
Go to Web Admin > Media Director and look at Audio Settings, it is currently set to Stereo.
Change this to Manual Settings, save, reload router.
Xine_Player will now respect the settings in this file, and your changes for plughw:1 should work.
This will be an okay work-around until I can make changes to handle USB sound cards more efficiently.
-Thom