AVAudioSessionCategoryPlayAndRecord is designed for audio-centric apps, where the purpose of the app is to play music. When this category is set, audio will not be silenced by the mute switch or the screen lock. VOIP apps and music apps desire this behavior.
If you want audio to be silenced by the mute switch, you'll need to switch the category to AVAudioSessionCategoryAmbient or AVAudioSessionCategorySoloAmbient when not recording.
If you have access to the WWDC developer videos, I'd suggest watching "WWDC 2010 session 412 Audio Development for iPhone OS part 1".