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I have seen this scenario at my office I had installed sharepoint on a new machine at my office. After installing I tried to add a new user profile. When clicking on account name I can see that I can search anybody in my company.

Just wondering how is this possible.

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The behaviour you are experiencing is normal. User Profile configuration has nothing to do with the people picker performing look-in in Active Directory.

One very simple configuration you could do to restrict that is to use STSADM, as example

stsadm -o setsiteuseraccountdirectorypath -path "ou=OUPath,dc=domain,dc=com" -url http://MySite/sites/MySubSite

or for the Users part of the Site Collection only use 

stsadm -o setproperty -pn peoplepicker-onlysearchwithinsitecollection-url http://siteCollectionUrl -pv yes

More on this is explained here http://technet.microsoft.com/en-us/library/gg602075.aspx

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People Picker, in Entity Picker mode, will resolve users from the Root Organization which is made up of users imported by the UPA. So strictly speaking, the People Picker does perform a lookup of users in the UPA. – Trevor Seward Jun 12 '12 at 20:00
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I must contradict with your sentence as actually People-Picker works irrelevant of the UPA being present or not (except probably in Standalone mode when you configure it in a Workstation)! All queries are handed-over to AD when in Classic mode (or Windows Authentication). See more here technet.microsoft.com/en-us/library/gg602068.aspx#about – C. Marius Jun 12 '12 at 20:27
Yes, the People Picker does work independently of having the UPA set up, however, if the UPA is set up and you're using the Entity Picker (think Claims mode), the Entity Picker will resolve users from the UPA. See: sharepoint.nauplius.net/2012/03/… – Trevor Seward Jun 12 '12 at 20:28
It doesn't look like the case here or am I missing something? – C. Marius Jun 12 '12 at 20:31

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