Correct Response: C. A phoneme is the minimal unit in the sound system of a language. In English, /th/ and /t/ are distinct phonemes. In the scenario, the teacher assesses whether the students can discriminate between these sounds when the sounds are presented in isolated words and in sentences. A is incorrect because the students' comprehension of the meaning of the words is not being assessed. B is incorrect because grammatical competence relates to students' understanding of grammar, which is not being assessed. D is also incorrect because the assessment does not evaluate how the student processes sounds but rather focuses on the student's ability to distinguish between words that differ by only one phoneme.