Hello. I asked the same question to Joe from FiiO. This is his reply to me:
"It should affect the X5II both in DAP and DAC mode. The digital to analog converter (DAC) (of the X5, which operates whether in DAP or DAC mode) reconstructs the audio signal from the digital signals given (by the audio file being played by the X5, or the connected device in the case of DAC mode). At the end of this reconstruction, components of the output signal that are higher than half the sample rate must be discarded (filtered out). In an attempt to simply the explanation: those are spurious signals created by the converter that do not appear in the original signal that was digitized. And no, this is not a flaw of the DAC used in the X5: all DACs work like this.
The reconstruction lowpass filter is responsible for filtering out these spurious signals. The steep slope filter attempts to preserve as much of the digitized signal in the output as possible while filtering out all of the spurious signal; this is the "correct" filter, but if you play artificially generated square waves through the system, what comes out at the output (as measured by an oscilloscope) is square waves that have extra waves of overshoot before and after each step transition (google "Gibbs phenomenon").
People misinterpret these oscilloscope outputs to mean that the "correct" filter produces audible ringing artifacts, when in fact these "artifacts" occur outside of the audible range and in any case only occurs with artificial square wave input signals, in which case those are the mathematically correct output.
Nevertheless, a "gentle slope" filter may now be chosen, which will eliminate the ringing "artifacts" in the square waves. It does just as good a job at eliminating the spurious output signals, but also attenuates some of the high frequencies--it starts cutting off signal in a "gentle" slope between the high audible frequencies and the top frequency that can be digitized (at half the sample rate). The possibly audible effect of this is more "rounded" highs--somewhat comparable to how high frequencies are attenuated by the air between loudspeakers and your ears, except you can now apply this to headphones."
So the setting is your choice/personal preference.