Nothing else extra going on in the background. Tried after rebootin the phone, and same behavior. All I need to do to overcome this bug is go once to the preferences window and choose WAV as the preferred format and then change it back. It feels like the the codec choice is empty when the app starts (it shows the AAC, maybe because it cant show empty field) and I have to go and make one choice to get it working. After that it works as planned. I'm not sure if anyone else has this problem, it might be just my system and if it is, I think it is not worth investigating further.

And what comes to the volume rocker function, what I meant was what Estel described exactly. The muting causes the recording to record nothing and that might be a problem in some instances. I think the volumerocker should have no impact on the recorded sound level. I think this concern is somewhat to do with the Estel "do we record early enough" question and thinking that minimum number of system parts can alter/screwup/slowdown the recording.