The inquest previously heard she likely suffered schizophrenia and could have been in the grip of an "untreated psychosis" when she grabbed a knife from home and walked to the nearby shops.

Numerous passers-by reported she appeared agitated and behaved oddly, talking to herself as she clutched the knife in one hand and sipped a takeaway drink held in the other.

On Wednesday, the inquest continued to hear evidence from a string of witnesses who watched the deadly 41-second confrontation unfold.

Nathan Shelley told the court he noticed a woman behind a hedge then heard sirens and tyres screeching when he stopped for lunch at Hungry Jack's that morning.

He saw two police officers, one armed with a gun, get out of a car and approach Ms Topic, who he recalled was holding a long kitchen knife.

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She had appeared "fairly calm", he said.

Police shouted at her to put the knife down before a third officer fired capsicum spray at her from behind and she stumbled.

Mr Shelley then ducked down in his car because he realised the male police officer still had his gun drawn and he was "in the line of fire". "I thought it was escalating quite quickly."

Within seconds he heard a gunshot. He sat up and watched the woman stumble then slump to the ground.

But another witness, Michael Markodonatos, said he saw police raising their arms at Ms Topic and make actions he believed were an attempt to get her to put the weapon down.

"They were doing everything they could to calm her down."

He said Ms Topic had "looked angry" and tried to "attack" police before she started to run towards the road.

"As she lunged at him a couple of times he drew his gun and fired at her. The guy who shot her was in between the road and the lady."

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He said he didn't see Ms Topic's mouth move and didn't hear her say anything.

The inquest is scrutinising the circumstances that led the police officer to fire the fatal shot, and will examine whether police were adequately trained to respond to people with mental illness.

It will explore what police knew of Ms Topic's mental state before they arrived at the scene, what plans the officers made before they intervened and what safety risks they detected.  

Ms Topic's family has been in court for the hearing, her mother Leesa often sobbing loudly through parts of the evidence.

The inquest continues in front of Deputy State Coroner Liz Ryan.