There are a few "audio recording applications" on the Android market. I wasn't sure of which one to post...there are a lot - paid and free. Hop on over to your favorite market - you might find one to fit your needs. Best of luck. Happy Holidays.
I use "Tap-a-Talk". I've used it to record sermins at church to listen to later. It even records when the screen is locked. I believe it would record audio being played thru the external speaker on the phone as well. I'm not sure what format it records in though.