I was finally able to get it to work. Took about 2 uninstalls and reinstalls of skype. After the final reinstall my audio stopped being detected and I did another restart and now its working.
Off Topic: I cannot or don't know how to copy & paste text from the skype app in my Lumia 521. I want to copy an address sent to me and paste it in Maps but it won't allow me to select/highlight the address. Did anyone got it to work on their phones? TIA.