When the `SET` statement is used with the `BY` statement in the provided SAS program, it interleaves the two data sets (WORK.ONE and WORK.TWO) based on the common variable 'Id'. However, it's important to note that this is not a merge operation, so variables from the two data sets are not combined. Instead, the rows are ordered by 'Id' and taken as they appear in each data set sequentially. Here, the first row from WORK.ONE has 'Id' as 111 and 'Char1' as A, and this should be the first observation in the interleaved data set WORK.BOTH, making the correct answer option A.