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Hi Dawn 🙂 My feeling is yes, dialogue is audio, but i think the idea is what the person is hearing in terms of the setting… the ripple of water over rocks or the wind in the trees. Setting is not just what we see, but what we hear, smell, even feel in relation to all of those things.
Doing the exercises is important because it trains you to do it naturally … like muscle memory .
I don’t think it matters whether it’s first person … although first person might cause you to think more like it’s you seeing, hearing, feeling.that’s my two cents worth 🙂