I just figured it out -If you have a pair of earbuds or headphones that have a mic, as soon as you plug into the Xperia, the External Monitor app switches from "audio = USB" to "audio = External Mic" - hence why when I was trying to monitor the audio coming from the camera/K3M, it wasn't picking it up - it was using the audio from the little mic on my headphones/earbuds. I wish the External Monitor app had a better audio preference menu