I encountered similar error while using DOSBox to run SETMUSE to configure sound for Sam & Max Hit the Road. The error seems to be related to SETMUSE trying to create SETMUSE.CD at one level above the current directory, and the virtual/mounted drive from DOSBox did not have the access to create that new directory. I am using DOG DOSBox Frontend and the default mount letter appeared to be Y.
I happened to manually mount the letter C for my actual c: drive going through DOSBox directly instead of using the frontend, and somehow this allowed access, and SETMUSE was able to complete successfully, and the game ran properly after that. However the effect was only good for that session, and when I exited DOSBox and came back, I had to define the mounting all over again.
By chance I discovered that under DOG DOSBox Frontend I can define additional harddrive path and I placed the C drive mount definition there. This availability of a C path seems to allow the game to see SETMUSE.CD and SETMUSE.INI properly, even though the game is still mounted to the Y drive by the frontend.
Hopefully this will help you advance past the sound setup problem too.