We propose a fault-tolerant control scheme that deals with sensor and actuator faults through the use of a virtual actuator (VA) and a bank of virtual sensors (VSs). A novel feature of the scheme is that the VSs implicitly integrate both fault detection and isolation (FDI) and in conjunction with the VA controller reconfiguration tasks. The VA and the bank of VSs operate in closed-loop with an observer-based tracking controller designed for a nominal (fault free) model of the plant. A switching rule that reconfigures the VA and engages the suitable VS from the bank is based on sets defined for measurable residual signals constructed directly from the VS signals. Our method handles abrupt actuator and sensor faults of arbitrary magnitude including complete outage. The overall scheme is shown to guarantee closed-loop boundedness and setpoint tracking under all considered fault situations. Enhancements of the scheme to deal with errors in the fault detection and isolation are also proposed. Applications of the scheme to a winding machine and an interconnected tank system are presented.