<<<Also, when listening to your recorded audio, the audio will play on your computer speakers, not on your external speakers?>>>
If you're on a laptop, you plug your external speakers or sound system into the headphone connection. If you do this, it defeats the little laptop internal speakers. You only get one or the other. I know of no setting that will play both at once.
Are you using a USB sound device? Then some of the rules change.
SoundFlower provides multiple recursive sound pathways which is worse than an Agatha Christie novel to keep straight in your head. Assign SoundFlower to an output and the show magically appears at the input.
I would have bet a setting in the System Preferences let you hear what was going on, but I wouldn't be shocked if that wasn't the case.
This is the clear reason why Macs don't come with this craziness built in -- and a lot of newer Windows machines don't either. Have you been to the SoundFlower web site? They have a lot of good information about how to get the software to work including pictures.
http://cycling74.com/products/soundflower/
Koz