Here's the printed circuit board of Controller II up close. The microphone never appeared in NES control pads.
While the Famicom is on, the microphone relays any sound it picks up directly to the TV speaker. The Legend of Zelda used this feature in a novel way: It allowed the player to shout into the controller to kill a certain monster.
The silver strips to the left of the mic are part of the volume slider assembly, which controls the volume of the microphone output through the TV speaker.