So you are running py.test from /App. Are you sure /App/App is in your $PYTHONPATH?
If it's not, code that tries to import app will fail with such a message.
EDIT0: including the info from my comment below, for completeness.
An attempt to import app will only succeed if it was executed inside /App/App, which is not the case here. You probably want to make /App/App a package by putting __init__.py inside it, and change your import to qualify app as from App import app.
EDIT1: by request, adding further explanation from my second comment below.
By putting __init__.py inside /App/App, that directory becomes a package. Which means you can import from it, as long as it - the directory - is visible in the $PYTHONPATH. I.e. you can do from App import app if /App is in the $PYTHONPATH. Your current working directory gets automatically added to $PYTHONPATH, so when you run a script from /App, the import will work.