The fact that the phone output is distorted would suggest that the fault is in that part of the circuit causing it to draw too much current. Possibly U7 is faulty or an electrolytic capacitor in that part of the circuit is inserted with it's polarity wrong and changing the DC conditions on U7. I would see if the voltage "VM" comes up to the correct level if you unplug connector H7C (Or remove U7 if it is in a socket.) The problem with the pots not working as expected could be due to the way the ground connections are done. (NOTE there are two different symbols used for ground.) The two parts of the ground path are only connected at one point - H2C / CN2J connector. Check that the two ground paths are connected. If this is not the cause then just use normal fault finding methods by tracing the signal from a signal generator through the circuit with an oscilloscope.
Les.