Maintaining safe and efficient operation in a single-phase pulse width modulation (PWM) rectifier that employs current sensors relies heavily on accurate sensor readings. However, several factors such as environmental conditions, aging, or damage can lead to sensor faults. Therefore, it is imperative to implement robust fault detection methods to ensure reliable system operation. The use of unknown input observer techniques is one such method that involves analyzing the differences between actual and estimated states to detect and identify faults in the system. This paper presents the development of a fault detection method that employs an unknown input observer with high sensitivity to faults and disturbance rejection to achieve robust fault detection. The method involves modeling the system as a state-space model and designing an observer to estimate the system’s state variables based on input and output measurements. The deviations between the actual and estimated states are then analyzed to detect and identify sensor faults, without the need for additional hardware, making it a cost-effective solution. Hardware-in-the-loop tests confirm the effectiveness of the proposed method.