One of the major challenges in protection of the inverter-interfaced islanded microgrids is their limited fault current level. This degrades the performance of traditional overcurrent protection schemes. This paper proposes a fault detection strategy based on monitoring the transient response of the inverter current waveform using a transient monitoring function. To enhance the ability of the proposed fault detection scheme, an auxiliary control system is employed in addition to the main control system of the inverter. The proposed scheme can also differentiate asymmetrical and symmetrical fault conditions from normal load switching events and is effective for various inverter topologies (i.e., three/four-leg), main current limiting strategies, and all reference frames of the multi-loop control system. The merits of the proposed fault detection scheme are demonstrated through several time-domain simulation case studies using the CIGRE benchmark low voltage microgrid network.